Review answers

FISCAL AND MONETARY POLICY

REVEIW

inflation

1. Define Inflation: ______________________

_______________________________

•rising price levels

•falling buying power of money

2. What are the macro-economic signs of an inflationary economy?

c)___________________________

production (GDP) up

prices (CPI) rising

employment (LFS) improvedb)___________________________

a)__________________________

3. How would most governments respond to inflation with their fiscal policies?

a) ________________________________________________

__________________________________________________

b) ________________________________________________

__________________________________________________

•increase tax rates - (i.e. income taxes on the

wealthy to decrease their ability to spend.)

• decrease gov’t spending - ( i.e. cut back on

funding to schools and infrastructure development.c) What type of budget would this be heading toward?

___________________surplus budget

4. How would the Bank of Canada respond to inflation with their monetary policies?

a) ________________________________________________

__________________________________________________

b) ________________________________________________

__________________________________________________

d) ________________________________________________

__________________________________________________

c) ________________________________________________

__________________________________________________

• increase interest rates (make borrowing more

expensive - discourage spending.)

• sell government bonds on the open market (give

consumers the chance to invest rather than spend.)

• increase the reserve ratio at banks decreasing the

funds they have available for loans.

a tight money policy.

• use moral suasion to encourage the banks to use

unemployment

1. Define Unemployment:

___________________________________________________

2. What are the macro-economic signs of a declining/recessionary economy?

c)___________________________

production (GDP) downprices (CPI) falling

employment (LFS) fallingb)___________________________a)__________________________

_________________________•members of the labour force

currently without work but actively looking.

3. How would most governments respond to a recession with their fiscal policies?

a) ________________________________________________

__________________________________________________

b) ________________________________________________

__________________________________________________

•decrease tax rates - (especially on low-income

earners as it will increase their ability to spend.)

• increase gov’t spending - (i.e.in areas such as

infrastructure development thus creating jobs.)c) What type of budget would this be heading toward?

___________________surplus deficit

4. How would the Bank of Canada respond to a recession with their monetary policies?

a) ________________________________________________

__________________________________________________

b) ________________________________________________

__________________________________________________

d) ________________________________________________

__________________________________________________

c) ________________________________________________

__________________________________________________

• decrease interest rates (make borrowing cheaper

- encourage spending.)

• buy government bonds on the open market (putting

money back in the hands of consumers to spend.)

• decrease the reserve ratio at banks (increasing the

funds they have available for loans.)

an easy money policy.

• use moral suasion to encourage the banks to use

types of inflation

demand-pullincreased demand drives prices up.

Fiscal policy?

Pros and cons?

cost-pusha general rise in price levels due to increased costs of wages and/or raw materials.

Fiscal Policy?

Pros and cons?

imported inflationinflation due to an increase in the price of imports.

Pros and cons?

Fiscal Policy?

stagflationinflation and rising unemployment occurring at the same time.

Fiscal Policy?

Pros and cons?

Types of unemployment

frictional

when workers are transitioning from one job to another - usually to improve their position.

Fiscal Policy?

Pros and cons?

structural

workers lack the skills to get a job in a technologically changing work place.

Pros and cons?

Fiscal Policy?

Cyclical

unemployment occurs due to the movement of the business cycle.

Pros and cons?

Fiscal Policy?

insurance induced

it’s simply too good not working - the government will look after you.

Pros and cons?

Fiscal Policy?

Youth

unemployment due to lack of experience.

Pros and cons?

Fiscal Policy?

other key terms and concepts

MPC

MPS

Stagflation

expansionary

contractionary

multiplier effect

economic indicators

leading/lagging/coincident indicators

recessionary/inflationary gap

paradox of thrift

debt/deficit

leakages/injections

automatic/discretionary