Final

Question 1

Bater

Answer 1

Trading goods for goods
requires “coincidence of double wants”

Question 2

Commodity Money

Answer 2

has an intrinsic use
shells, wheat, precious metals

Question 3

fiat money

Answer 3

has no intrinsic value, paper money

Question 4

functions of money

Answer 4

1. medium of exchange
2. unit account
3. store of value
4. standard of deferred payment (pay over time)

Question 5

M1 =

Answer 5

currency, checking accounts, savings accounts

Question 6

M2 =

Answer 6

M1 + bank CD’s, time-deposits, money market mutual funds

Question 7

banks creating money

Answer 7

When banks take deposits in, they loan out much of that money to borrowers. Borrowers spend, and the money gets deposited elsewhere, increases money supply

Question 8

reserves

Answer 8

money bank has on hand or at federal reserve

Question 9

deposit multiplier =

Answer 9

1 / reserve ratio

Question 10

Creation of federal reserve, bank runs

Answer 10

Fed was designed as a “bank for banks”
The lender of last resort
Goal is to prevent bank panics

Question 11

discount loans and discount rate

Answer 11

Relevant when banks borrow directly from the fed, and the discount rate is the interest rate banks would pay for this borrowing

Question 12

monetary policy tools

Answer 12

old and new tools, before and after 2008

Question 13

Quantity of theory of money

Answer 13

M x V = P x Y

Question 14

Inflation and money supply

Answer 14

Derives that there is a directly relationship between M and P (inflation)

Question 15

Monetary policy

Answer 15

Actions taken by the federal reserve
Fed = our central bank

Question 16

Two monetary policy targets

Answer 16

Money supply
Interest rates

Question 17

Interest rates

Answer 17

FFR (federal funds rate)
Rate at which banks can borrow from each other

Question 18

Four goals, dual mandate of the Fed

Answer 18

Price stability
Full employment
Stability of financial markets
Economic growth

Question 19

two most important (dual mandate)

Answer 19

Price stability
Full employment

Question 20

Monetary policy tools (old)

Answer 20

O.M.O (open market operations), discount policy, reserve requirements

Question 21

Monetary policy tools (new)

Answer 21

interest on reserves, reverse repurchase agreements, FFR is just a chosen administered rate

Question 22

Money demand

Answer 22

Graph on phone
Interest = price of money

Question 23

Federal funds rate

Answer 23

Interest rate when banks borrow from each other

Question 24

Discount rate

Answer 24

Interest rate when banks borrow directly from Fed

Question 25

As interest rates go up, AD goes down

Answer 25

Interest rates up, consumer, net exports, and investment decrease, AD shift left (decrease)

Question 26

As interest rates go down, AD goes up

Answer 26

Interest rates down, consumer, net exports, and investment increase, AD shift right (increase)

Question 27

Expansionary monetary policy

Answer 27

Producing interest rates to get AD up, done to increase output, GDP, get out of recession

Question 28

Contractionary monetary policy

Answer 28

Interest rates increase to get AD to decrease, done to fight inflation because left AD shift result in lower equilibrium price levels

Question 29

Data lags

Answer 29

Policy can be tough to “time” property, due to data delays Good forecasting is necessary

Question 30

Inflation targeting

Answer 30

2% target

Question 31

Fiscal policy

Answer 31

Done by president and congress Changes in Government Purchases or Taxes

Question 32

Automatic stabilizers

Answer 32

Unemployment insurance and progressive income taxes

Question 33

Federal expenditures

Answer 33

Includes purchases, also + transfer payments like social security

Question 34

purchases include

Answer 34

the G

Question 35

Government revenue sources

Answer 35

Taxes, income tax, payroll taxes, corporate taxes, tariffs and fees

Question 36

Problems with social security and medicare

Answer 36

Becoming unsustainable Few paying in many taking money out

Question 37

Expansionary fiscal policy

Answer 37

G increase or T decrease to get AD increase T decrease (consumer increase or investment increase) Creates government budget deficit

Question 38

Contractionary fiscal policy

Answer 38

G decrease or T increase Rarely done for purposes of fighting inflation Mainly done for budget considerations

Question 39

Government purchases multiplier =

Answer 39

change in equilibrium GDP / change in G > 0

Question 40

Tax multiplier =

Answer 40

change in equilibrium GDP / change in T < 0

Question 41

Crowding out in short run

Answer 41

G increase and investment decrease In long run, we have more debt, and G is a larger % of GDP

Question 42

Costs of government spending

Answer 42

In long run, we have more debt

Question 43

tax wedge

Answer 43

Difference between pre-tax and post-tax wage