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Flashcards in Discussion Sheets Deck (120):
1

Money

Assets that people accept in exchange for goods, services, and debt payments

2

Functions of money

1. Medium of exchange

2. Unit of account

3. Store of value

4. Standard of deferred payment

3

Commodity money

A good used as money that has some intrinsic value independent of its use as money

ex. gold

4

Measurement of money (____________)

the money supply

5

M1

The narrowest (most liquid) definition of money

- currency in circulation (not held by banks of government)

- checking account deposits (demand deposits)

- holdings of traveler's checks

6

M2

-M1

- savings account balances

- small denomination time deposits

- balances in money market deposit accounts in banks

- non institutional money market fund shares

7

Bank Balance Sheets: Assets

Reserves

Loans

Securities

Buildings and Equipment

Other Assets

8

Bank balance sheets: Liabilities

Deposits

Short-term Borrowing

Long-term Debt

Other Liabilities

9

Reserves

Deposits that a bank keeps as cash in its vault of on deposit with the Federal Reserve

10

Required Reserves

Reserves that a bank is legally required to hold, based on its checking account deposits

11

Required reserves ratio (RR)

The minimum fraction of deposits banks are required by law to keep as reserves

12

Excess reserves

Reserves that banks hold above the legal requirement

13

Simple deposits multiplier:

The ratio of the amount of deposits created by banks to the amount of new reserves

Deposit Multiplier = 1/RR

RR = Required reserves ratio

14

Change in checking account deposits formula

Change in checking account deposits = Change in bank reserves x 1/RR

15

Monetary Policy

Actions taken by the Fed to manage the money supply and interest rates in order to pursue its macroeconomic policy goals

16

Goals of Monetary Policy

Price Stability

High Employment

Economic Growth

Stability of Financial Markets and Institutions

17

Interest rate goes up

effect on consumption

Save more ---- consumption down

18

Interest rate goes up

Effect on investment?

Investment goes down

19

Interst rate goes up

Effect on investing in U.S ?

Investing in U.S. is more profitable

20

Interest rate goes up

Effect of the demand of U.S. dollars?

Demand of U.S. dollars goes up

21

Interest rate goes up

Effect of value of U.S. dollars?

Value of dollars goes up

22

Interest rate goes up

Effect on X and IM and NX

X goes down

Imports go up

Net exports go down

23

Interest rate goes up

Effect on Aggregate Expenditure

AE goes down

24

Interest rate goes down

Effect on AE

AE goes up

25

Monetary Policy Targets:

Money supply and the interest rate

26

Money Demand (MD)

A downward sloping curve relating quantity of M1 demanded and the interest rate

27

Why does the MD curve slope downards?

Tradeoff between liquidity and interest

Recall: the interest rate represents the opportunity cost of holding money

28

Real GDP: GDP goes up

trade of goods and services goes up=> MD goes up

Shifts Money demand

29

Price level: CPI goes up =>

more $ needed to buy goods => MD goes up

Shifts Money Demand

30

Money Supply (MS)

A vertical line illustrating quantity of M1 supplied

31

Why is the MS curve a vertical line?

The Fed is able to completely control the money supply (via the RR, Open Market Operations, and the Discount Rate), which implies a constant supply of M1 regardless of the interest rate

32

Equilibrium Money Market

Equilibrium: MS = MD

33

What are models of the interst rate?

Loanable Funds Market vs. Money Market

34

The loanable funds model deals with _________________________

the long-term real interest rate (r)

35

The money market model is concerned with ____________________________

the short-term nominal interest rate (i)

36

Federal funds rate

The interest rate banks charge each other for short-term (overnight) loans

37

Monetary Policy and Aggregate Demand:

changes in i affect components of AD

38

Consumption: interest rate goes down =>

more spending on durables (cars, furniture) and less saving => Consumption up

39

Investment: interest rate goes down =>

Investment goes up

40

Net exports: interest rate goes down in U.S. relative relative to other countries =>

investing in U.S. assets less desirable => drop in demand for dollars => value of dollar down => exports from the U.S up / imports from other countries down => NX up

41

Expansionary Monetary Policy

Fed increases MS to increase real GDP

42

Contractionary Monetary Policy

Fed decreases MS to decrease inflation

43

Monetary Policy and Real GDP / Price Level (static AD-AS model)

Expansionary Monetary Policy: Fed increases MS to increase real GDP

Contractionary Monetary Policy: Fed decreases MS to decrease inflation

44

Monetary Policy and Real GDP/Price Level (dynamic AD - AS model)

Using expansionary policy to get the economy to full employment

Using contractionary policy to prevent high levels of inflation

45

Taylor Rule

How the Fed chooses a target for the federal funds rate

46

Federal funds target rate formula

Current Inflation rate + Real equilibrium federal funds rate + (0.5 x Inflation gap) + (0.5 x Output gap)

47

Real equilibrium federal funds rate

Adjusted for inflation federal funds rate, which is consistent with real GDP being equal to potential real GDP

48

Inflation gap

Difference between current inflation and a target inflation rate

49

Output gap

Percentage difference between real GDP and potential real GDP

50

Money Demand slopes downwards due to ____________

opportunity costs of holding money

51

Holding all other variables constant, expansionary monetary policy raises _____________

the price level

52

What kind of line is MS

vertical

53

An open market operation that increases the money supply increases ____________________________

the holdings of government bonds held by the Federal Reserve

54

A contraction of the money supply tends to _______________

increase the interest rate, but decrease aggregate expenditures

55

If policy makers wanted to use monetary policy to stimulate demand and reduce a high rate of unemployment, what would be appropriate?

The purchase of securities in the open market

56

If the Fed anticipates the economy to be above potential output, it should ___________________

sell U.S. treasury bonds on the open market

57

Suppose that potential real GDP grows from 14.9 to 15.3 from 2009 to 2010, while real GDP grows from 14.9 to 15.2 during the same time span. What is the likely action of the Fed (what policy)?

Expansionary monetary policy

58

What will lead to a decrease in the equilibrium interest rate in the economy?

A decrease in GDP

59

The Fed can increase the federal funds rate by __________________________

Selling Treasury billls, which decreases bank reserves

60

An increase in the interest rate should _________ the demand for dollars and the value of the dollar, and next exports should ____________

increase

decrease

61

The money demand curve is downward-sloping because __________________________________

the opportunity cost of holding money rises as the interest rate increases

62

All of the following factors will shift the money demand curve, except:

Changes in the institutions

changes in real GDP

Changes in the aggregate price level

chages in the interest rate

Changes in the Interest Rate

63

The federal funds rate is the interest rate on _________________, and is controlled by the _____________

reserves that banks lend to each other

Federal Open Market Committee

64

Sequence of events in the conduct of contractionary monetary policy using open market operations

The Fed sells bonds, which decreases the supply of federal funds, which raises the interest rate, which leads to a decrease in intended investment spending, aggregate demand and output

65

The major shortcoming of a barter economy is.....

Requirement of double coincidence of wants

66

Ted has an orange and wants a peach

Alice has a peach and wants an orange

What does this show?

Double coincidence of wants

67

In an economy with barter, there are __________ prices than in an economy with money

more

68

Demand deposits

Currency

Money market mutal funds

List them from most liquid to least liquid

Currency, demand deposits, money market mutual funds

69

What is something included in M2 but not in M1

Money market mutual funds

70

Wealth =

currency + checking + saving + Total Assets - debt

71

If I withdraw $5000 from my savings account and put it in my checking account, M1 will ________ and M2 will ____________

Increase

Not change

72

If a person withdraws $500 from their checking account and holds it in currency, M1 will _______ and M2 will ______

Not change

Not change

73

A bank will consider a car loan to a customer as a _____________ and a customer's checking account as a ___________________

Asset

Liability

74

Imagine that John deposits $10,000 of currency into his checking account deposit at Bank A and that the required reserve ratio is 20%. Bank A's reserves immediately increase by ______________. Required Reserves increase by _________

10,000

2,000

75

Short-run Phillips Curve

A downward sloping curve, which represents the short-run trade-off between unemployment and inflation

76

Long-run Phillips Curve

Vertical. Means that inflation has no effect on the unemployment rate. The LR Phillips Curve is set permanently with the natural rate of unemployment which corresponds with potential GDP

77

Shape of the Phillips Curve depends on what?

Expected Inflation

78

If the price level is lower than expected, real wages ____________________________

are higher than expected, and firms will hire less people than they would have otherwise. Then, we have higher unemployment in the short-run (hence the downward-sloping SR curve)

79

Why the vertical long-run phillips curve?

We are able to adjust completely for inflation in the long run

80

Phillips Curve and AD-AS

Interaction

Higher levels of AD imply higher levels of GDP

As GDP rises, unemployment falls, and inflation rises

The Phillips Curve corresponds to shifts in the AD curve

81

When the SR Phillips Curve intersects LR phillips curve

Inflation = expected inflation

82

Expected Inflation Formula

(Change in Price / Price level) raised to expected level

83

Real wage =

(Nominal wage / Price Level) x 100

84

If inflation is greater than expected inflation

actual real wage is lower than expected => firms higher more workers => Unemployment Rate decreases

85

There is a different SR Phillips Curve for every __________________

expected inflation rate

86

An increase in inflation decreases unemployment only if ________________________

the increase in inflation is unexpected

87

If workers and firms form _______________ using all available information, including the effect of Fed policy, the SR Phillips curve would be vertical, which implies that even in the SR, inflation will be completely expected and inflation has ___________________________

rational expectation

no effect on the unemployment rate

88

Low inflation (below 4 percent)

firms and workers generally ignore it

89

Moderate but stable inflation (4-5 percent)

Unable to ignore it; generally use adaptive expectations

i.e. assume inflation will follow the same pattern it has in the recent past

90

High Inflation (above 5 percent)

Workers and firms are unable to ignore inflation, but are also unable to adjust appropriately and thus real wages/profits fall; use rational expectations

91

What will happen to real wages if actual inflation is less than expected inflation?

Real wages will rise

92

Stagflation occurs when the ________________________

the price level increases and real GDP decreases

93

The Phillips curve shows the relationship between the __________________

unemployment rate and the inflation rat

94

Suppose that the economy is at full employment an daggregate demand increases by more than it is anticipated to increase. Other things remaining the same, _______________________

real GDP increases above potential GDP

95

What is held constant when moving along a short-run Phillip's curve?

The expected inflation rate

96

An increase in th expected inflation rate leads to ____________ the short-run Phillips curve

an upward shift of

97

If workers and firms have rational expectations, then the expansionary monetary policy would:

not change unemployment rate

98

If firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and Phillips curve?

Firms and workers will overestimate the inflation

Unemployment rate will eventually come back to the natural rate and Phillips curve will shift downward

99

Balance of Payments (BOP)

An accounting of a country's international transactions for a particular time period

100

Current account

deals with international trade in goods and services and with earnings on investments

includes:

- trade in goods (trade balance)

- trade in services

- factor incomes (interest payments, dividends, wages)

- Unilateral transfers (gifts, foreign aid)

101

Financial (capital) account

records transfers of assets

Transactions in this account create liabilities

102

Account balance = 

cash inflows - cash outflows

103

Current account balance =

- Financial account balance = - Net capital inflows

104

If net factor income and transfers are zero:

CA = NX = -NCI

105

Exchange rate is a price on:

the market for foreign exchange

106

The Real Exchange Rate

The value of one country's currency in terms of another country's currency corrected for changes in the price of goods and services

107

Real exchange rate = 

Nominal exchage rate x (Domestic price level / Foreign price level)

108

If it takes more of the other currency to buy the same amount of dollars

The U.S. dollar appreciates against another currency

109

Floating currency

A currency that uses a floating exchage rate is known as a floating currency. A type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market

110

Fixed exchange rate

A system under which countries agree to keep the exchange rate among their currencies fixed

ex. gold standard, bretton woods system

111

To keep exchange rate above equilibium, the united states can:

buy dollars and sell foreign currency

112

To keep exchange rate below equilibrium, the United States can 

sell dollars and buy foreign currency

113

Mix of two exchange rate regimes

target zone

managed exchange rate

114

Net capital inflows refers to the purchase of:

domestic assets by foreign residents minus the purchase of foreign assets by domestic residents

115

An increase in the U.S. real interest rate induces:

foreigners to buy more U.S. assets, which increases U.S. capital inflow

116

The real exchange rate of British punds to U.S. dollars will increase if the U.K. price level ______ and the nominal exchange rate of pounds to the dollar _________

decreases; rises

117

A budget deficit raises interst rates, which raises ________

exchange rates

118

If the Fed is using policy to combat inflation, what will happen in the foreign exchange market?

The demand cor dollar will increase

The foreign exchange value of the dollar will rise

119

A country that imports a significant proportion of its consumer goods can avoid inflation by adopting a fixed exchange rate because it can avoid the price increases of _______  that occur when the value of the domestic currency  __________

imports

falls

120