Question

Explain the following terms.

a. Crowding out

b. Ricardian equivalence

c. Twin deficits

d. Hyperinflation

e. Quantity theory of money

f. Taylor rule

Answer 1

Ans.a- The crowding out effect is an economic theory arguing that rising public sector spending drives down or even eliminates private sector spending.

b- Ricardian equivalence is an economic theory that suggests that when a government tries to stimulate an economy by increasing debt-financed government spending, demand remains unchanged. This is due to the fact that the public saves its excess money to pay for expected future tax increases that will be used to pay off the debt.

C- Economies that have both a fiscal deficit and a current account deficit are often referred to as having "twin deficits."

D- Hyperinflation is a term to describe rapid, excessive, and out-of-control price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation.

E- The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer, therefore, pays twice as much for the same amount of the good or service.

F- Taylor's rule is essentially a forecasting model used to determine what interest rates will be, or should be, as shifts in the economy occur. Taylor’s rule makes the recommendation that the Federal Reserve should raise interest rates when inflation is high or when employment exceeds full employment levels. Conversely, when inflation and employment levels are low, interest rates should be decreased.