Term
|
Definition
• A) lower price ? more output will be purchased
• B) higher price level ? less output will be purchases |
|
|
Term
| aggregate demand/aggregate supply model |
|
Definition
• A schedule that shows the various amounts of real Domestic GDP which domestic and foreign buyers wll desire at each possible price level
• Shops level of output the economy will purchase at each possible price level |
|
|
Term
|
Definition
**relationship btw real GDP demanded and price level = an INVERSE (NEGATIVE) RELATIONSHIP
• its downward slope is NOT explained by the reasons that explain the downward slope of demand curve for good (like substitutes, complements, etc) |
|
|
Term
| wealth effect (real balances effect) |
|
Definition
** explains why the aggregate demand curve slopes downwards
o A) a higher price level reduces purchasing power of accumulated assets held by households’
• you will only be able to buy less with the money you have in ur savings account
• ***therefore, the public is worse off, will reduce spending
o B) a lower price level produces opposite effect
• Households will spend more |
|
|
Term
|
Definition
**explains why Agg demand curve slopes downward
• a) along a given AD curve, we assume a fixed money supply
• b) a fixed money supply means that a higher price will increase the demand for money AND THIS IN TURN will INCREASE interest rates
? if demand goes up and supply is fixed, the price rises, interest rate increases
• c) the higher interest rate will reduce interest-sensitive spending (spending by households on durable goods…appliances, homes, cars; spending by businesses on capital goods)
? result: reduction in amount of real output (Y) demand
• at a LOWER PRICE LEVEL, opposite effect occurs. Interest rates will fall, amt of money demanded will increase
o this will stimulate interest-sensitive spending |
|
|
Term
| interest sensitive spending |
|
Definition
| (spending by households on durable goods…appliances, homes, cars; spending by businesses on capital goods) |
|
|
Term
|
Definition
*explains why AD curve slopes downward
o a) higher price level—will reduce exports, will reduce real output demanded
o b) lower price level-will increase exports, increase real output demanded. |
|
|
Term
• 1. Decrease in the price level shifts the AE schedule UPWARD and increases Real GDP
• 2. Increase in the price level shifts the AE schedule DOWNWARD and reduces real GDP |
|
Definition
What does an increase/decrease in price level do to the AE schedule and gdp?
I THINK THIS MIGHT BE WRONG...#8. |
|
|
Term
• 1. Changes in consumer spending
• 2. Changes in investment spending
• 3. Change in govt spending
• 4. Change in net export spending |
|
Definition
| WHat are the determinants of AD (factors that shift the curve)? |
|
|
Term
| aggregate supply schedule |
|
Definition
: a schedule showing the level of real domestic output available at each possible price level
• a HIGHER price level creates an incentive for firms to produce and sell more output, while LOWER price levels reduce output
**three segments = horizontal, and intermediate (upsloping), vertical |
|
|
Term
| horiozntal segment of AS curve |
|
Definition
**part of AS curve
a) Price level is constant
o b) you have a constant price level, you can increase output w/o increases in price level d) (bc you have excess capacity)
o c) less than full employment |
|
|
Term
| intermediate (upsloping) segment of AS curve |
|
Definition
o a) increases in output are accompanied by increase in price level (as you increase output, you will increase price level
o prices are rising, but you are still not at full employment (bc economy doesn’t come into full employment all at once, it happens little by little
o b) per unit production cost rises
o c) this is where premature demand-pull inflation occurs |
|
|
Term
| vertical segment of AS curve |
|
Definition
| o a) economy has reached full employment (therefore can’t produce any more that this time…if we try to produce more, we will only cause an increase in price level/inflation) |
|
|
Term
• 1. Changes in input prices
• 2. Changes in productivity
• 3. Change in legal-institutional environment |
|
Definition
| What can cause AS curve to shift? |
|
|
Term
|
Definition
***govt tool for economic stabilization
use of govt purchases, transfer payments, taxes, and borrowing to influence aggregate economic activity |
|
|
Term
| discretionary fiscal policy |
|
Definition
most important
• deliberate manipulation of taxes and govt spending by congress to alter real GDP and employment to control inflation and to stimulate economic growth
**2 types: expansionary and contractionary |
|
|
Term
| expansionary: a type of discretionary fiscal policy |
|
Definition
o addresses the problem of recession
o purpose is to increase aggregate demand and real GDP.
• Shifting agg demand curve can be done through taxing, increase spendin
o Y = c + Ig+G+XN ag expend/agg demand |
|
|
Term
o 1. Increase govt spending
• If you increases G, Y increases, but by a greater amount than the initial increase G bc multiplier effect
o 2. Decrease taxes
• if you Decrease Tx, Y Increases but by a greater amount that initial decrease “Tx” bc of mu |
|
Definition
| What are the policy options for expansionary fiscal policy and what will they result in? |
|
|
Term
| contractionary: a type of discretionary fiscal policy |
|
Definition
| designed to address demand pull inflation….trying to buy more than we can produce at that given point in time “too much money chasing too few goods” |
|
|
Term
o 1. Decrease govt spending (purchases)
o 2. Increase taxes
o 3. Combination |
|
Definition
| what are the policy options for contractionary fiscal policy? |
|
|
Term
| non-discretionary fiscal policy |
|
Definition
• reflects what economists call “automatic stabilizers” or “built-in stablizers”
• structural features of govt spending and taxation that smooth fluctuations in disposable income, and hence consumption, over business cycle
• institutional features that have been built into budget process, will change automatically with business cycle
o will not solve problems of recessions, but when a downturn in economy (recessio) occurs, these built-in (automatic) stabilizers will make it less severe |
|
|
Term
o 1. Federal income tax (progressive)
o 2. Unemployment compensation
o 3. Public assistance
• **these won’t SOLVE your problems during recessions, but it will make them less servere |
|
Definition
| three elements of nondiscretionary fiscal policy |
|
|
Term
|
Definition
| o The deficit caused by recession and the resulting decline in tax revenues. |
|
|
Term
|
Definition
| o (you can also have deficit when economy is at full employment)…this is the extent to which expenditures exceed tax revenues when the economy is at full employment |
|
|
Term
|
Definition
• Also called the standardized budget
• Measures what the deficit or surplus would be if the economy were at full employment throughout the year
• If there is a deficit with it, it is a structural deficit
• gives info as whether the govt’s fiscal policy is expansionary, neutral, or contractionary |
|
|
Term
| timing problems (recognition lag, administrative lag, and operational lag), political problems (other goals, state and local finance, expansionary bias, political business cycle), and the crowding out effect |
|
Definition
| What are the inherent problems of fiscal policy? |
|
|
Term
| problem of crowding-out effect |
|
Definition
when an expansionary fiscal policy (deficit spending) increases the interest rate and reduces private spending, and thereby reduces private spending with the result being the weakening or canceling of the fiscal policy stimulus
o ex: Consumer spending on Durable goods goes down ? I decreases |
|
|
Term
|
Definition
**timing problem of fiscal policy
***it takes us awhile to figure out we are in a recession (“two consecutive quarters where real GDP declines”….will take you at least 6 months to know!) |
|
|
Term
|
Definition
o the time btw the need for fiscal policy and the action…needs to go through congress
**timing problem of fiscal policy |
|
|
Term
|
Definition
you don’t see a positive response the next day or next week…it takes at least 18 months
**timing problem of fiscal policy |
|
|
Term
| state and local finance political problem |
|
Definition
the problem is that is often “pro-cyclical” (fed govt cannot tell state and local govts what to do with respect to fiscal policy).
• Ex: federal govt lowers taxes to stimulate economy, but state and local govt raise taxes at same time (bc they need more revenue) This cancels out the federal govt effects.
**political problem of fiscal policy |
|
|
Term
|
Definition
as a politican, it is easier to get support for tax decrease over a tax increase
**part of political problems of fiscal policy |
|
|
Term
| political business cycle problem |
|
Definition
prior to election time, policitians often take fiscal policy action solely to get re-elected
*part of political problems of fiscal policy |
|
|
Term
|
Definition
fed govt cannot tell state and local govts what to do with respect to fiscal policy).
• Ex: federal govt lowers taxes to stimulate economy, but state and local govt raise taxes at same time (bc they need more revenue) This cancels out the federal govt effects. |
|
|
Term
|
Definition
• Simultaneous high levels of unemployment and inflation
• How to fix it:
• a) Supply-side fiscal policy (supply-side economics)—increase aggregate SUPPLY (kind of reflected Say’s Law and Keynesian)
• b) govt deregulation |
|
|
Term
|
Definition
anything that is generally accepted as a medium of exchange
o Functions:
• A) medium of exchange—most imp function
• B) unit of account—standardized way to quote prices and therefore measure relative worth
• C) store of value—you can transport purchasing power from one period to another
Danger: when price level rises, purchasing power falls |
|
|
Term
|
Definition
| standardized way to quote prices and therefore measure relative worth |
|
|
Term
|
Definition
you can transport purchasing power from one period to another
Danger: when price level rises, purchasing power falls
**Funciton of money |
|
|
Term
|
Definition
• items used as money that have an intrinsic value in some other use
• ex: salt, wheat, tobacco, etc (No longer used) |
|
|
Term
|
Definition
• items designated as money that are intrinsically worthless
? ex: a coin and paper money has no value except to buy
• it's status is given to it by govt, govt assures that it will not engage in currency debasement
**it is legal tender |
|
|
Term
|
Definition
taking actions that will intentionally make the money worth less than it is
**govt makes promises not to do this |
|
|
Term
|
Definition
money MUST be accepted in the settlement of debt, even if agreement was made for diamonds)
• |
|
|
Term
|
Definition
most narrowly defined money supply
o Money can be directly used for transactions
o Standard measure of the money supply
o At end of 2006: $1, 371 Trillion
• Made of currency held outside of the bank, checkable deposits, and non-bank issued travelers checks |
|
|
Term
|
Definition
o Includes M1 plus “near monies”—close substitutes for transactions money
o Near monies can be readily converted to M1 money
o At end of 2006: $6, 977 T
o Components of this money:
• 1. Savings deposits
• 2. Time deposits (certificate of deposits) less than $100,000
• 3. Money Market Mutual Funds—limited check writing |
|
|
Term
|
Definition
| close substitutes for transactions money |
|
|
Term
|
Definition
includes M2 plus time deposits of 100,000 or more
o $10, 155 T |
|
|
Term
|
Definition
includes M3 PLUS:
o 1. Commercial paper
o 2. US savings bonds
o 3. Short-term treasury securities |
|
|
Term
|
Definition
• not considered part of money supply
• considered a short-term loan |
|
|
Term
|
Definition
• accumulate funds from savers and lend them to borrowers
• most are depository institutions (such as commercial banks and thrift institutions), which accept deposits and make loans |
|
|
Term
• a) savings and loan associations
• b) credit unions
• c) mutual savings banks—functions similar to a credit union |
|
Definition
| What are the different types of thrift institutions? |
|
|
Term
| • the promise of the US government not to engage in Currency Debasement (doing anything to erode purchasing power) |
|
Definition
| What backs the Money supply in the US? |
|
|
Term
• The value of Money is its purchasing power (The goods and services that you are able to buy with that money)
• Therefore, the value of money varies INVERSELY with the price level
o If the price level increases, the Value of money decreases
o If the p |
|
Definition
| What is the value of money and how does it vary with the price value? |
|
|
Term
|
Definition
| the goods and services you are able to buy with your money |
|
|
Term
|
Definition
o main reason to hold money.
o Involves use of money to make purchases (to buy G&S)
o this demand varies DIRECTLY w/ nominal GDP
• decrease nominal GDP, decrease demand
o **independent of interest rate |
|
|
Term
? Interest rate is opportunity cost of holding money
o When interest rate rises, money becomes more expensive to hold,
• **when R increases, Da decreases
• **when R decreases. Da increases |
|
Definition
| Why does the asset demand for money vary inversely with the interest rate? (Unlike Dt, which is independent of the interest rate) |
|
|
Term
|
Definition
o relates money’s use as store of value (you can transport purchasing power from one period to another)
o this demand for money varies INVERSELY w interest rate |
|
|
Term
|
Definition
• combination of Transactions Demand and Asset Demand
o = Dt + Da
• Varies INVERSELY with interest rate |
|
|
Term
|
Definition
• 1. NOT dependent on the interest rate
• 2. dependent on the federal reserve system (FED)—it sets supply of money based on its monetary policies
• 3. If it changes, the interest rate changes |
|
|
Term
o if FED wants to change interest rates, it has to change money supply
o increase Sm, decrease R
o decrease Sm, increase R |
|
Definition
| How does increasing the money supply affect the interest rates? |
|
|
Term
1. you move up or down the curve if interest rate changes
2. Shift if:
o a) nominal GDP changes
o b) number of transactions in economy changes
o c) change in the price level
• increase price level, increase Dm (u will need more money for transaction |
|
Definition
| How is the money demand curve affected if interest rate changes? |
|
|
Term
o a) nominal GDP changes
o b) number of transactions in economy changes
o c) change in the price level
• increase price level, increase Dm (u will need more money for transactions
• decrease price level, decrease Dm (less money for same amt of transac |
|
Definition
| What factors cause a shift in the money demand curve? |
|
|
Term
|
Definition
| will not change unless FED changes this directly |
|
|
Term
| federally chartered commercial banks |
|
Definition
your right to start a bank comes from Federal govt (can use National in name)
o must join federal reserve system
o 1. under Monetary control of Federal Reserve (even if you haven’t joined)
o 2. can use services of Federal Reserves (borrow money, use check-clearing services, etc) |
|
|
Term
| state chartered commercial banks |
|
Definition
your right to start a bank comes from state govt
o have option to join or Not join federal reserve system
o 1. under Monetary control of Federal Reserve (even if you haven’t joined)
o 2. can use services of Federal Reserves (borrow money, use check-clearing services, etc) |
|
|
Term
|
Definition
financial intermediaries,
• a) savings and laoan associations
• b) credit unions
• c) mutual savings banks—functions similar to a credit union
• ***not permitted to join federal reserve system, but subject to:
o a) monetary control from Fed Reserve
o b) but can use services of Fed Reserve |
|
|
Term
|
Definition
| consists of vault cash plus the bank's deposit with the Federal Reserve Bank |
|
|
Term
|
Definition
the dollar amt of reserves that banks and thrift institutions are legally required to hold.
**based on a percentage of checkable deposits
**they are met by vault cash and the deposit with the federal reserve bank (this only applies to checking accounts/ deposits--they don't have this w/ CDs, etc) |
|
|
Term
|
Definition
**caluclated as actual reserves minus required reserves
**reserves in excess of required reserves
**a bank can safely lend up to this amount |
|
|
Term
|
Definition
fraction of reserves to checkable deposits that banks and thrift institutions are required by regulation to hold.
**this dictates the minimum amt of checkable deposits that must be held in reserve |
|
|
Term
|
Definition
• The interest rate banks charge one another for overnight borrowing of excess reserves
• Also, target interest rate for monetary policy |
|
|
Term
o If you have negative excess reserves. Interst rate u pay is federal funds rate
**Banks and thrifts must balance profitability and liquidity (profitable to meet expectations of investors but also they have to be liquid enough to meet depositors’ demand |
|
Definition
| why would you need to borrow excess reserves overnight? |
|
|
Term
|
Definition
| shows assets on right, liabilities and Net worth left at a certain point in time.) Only applies to checking accounts |
|
|
Term
|
Definition
valuable resources owned by business
o Include:
• Cash
• Deposit with Fed Reserve Bank
• Loans |
|
|
Term
| liabilities (debts or obligations) |
|
Definition
debts or obligations
**include: demand deposits and Net worth |
|
|
Term
|
Definition
|
|
Term
| fractional banking system |
|
Definition
| when only a portion of deposits are held as reserves |
|
|
Term
| when banks and other depository institutions make loans |
|
Definition
|
|
Term
|
Definition
| . For the banking system as a whole, the potential to create money is based on this |
|
|
Term
|
Definition
**7 members apptd by the president and **Confirmed by the senate, serve one 14 year term, president designates one chair-person.
**have authority over federal reserve banks
**major responsibility: setting monetary policy |
|
|
Term
| federal open market committee |
|
Definition
**12 members (7 board governors and 5 federal reserve bank presidents --president of NY bank is always one of the five)
**makes decisions based on "open-market operations" which is most important tool of monetary policy |
|
|
Term
|
Definition
| involves the purchase and sale of US govt securities for the purpose of influencing the money supply and therefore promoting economic stability |
|
|
Term
| open-market desk of new york federal reserve bank |
|
Definition
| executes open-market operations as directed by FOMC |
|
|
Term
| federal reserve banks and branches |
|
Definition
12 federal reserve banks and 25 branch banks
**serve as banks for member banks, nonmember banks, and thrift institutions |
|
|
Term
| federal advisory committee |
|
Definition
**consists of 12 prominent commercial bankers (one from each fed. res. district)
**meet periodically with board of governors to advise them on banking matters
**purely advisory committee, the board doesn't have to listen |
|
|
Term
|
Definition
| either state or federally chartered, 6000 banks, have about 70% of the bank deposits in US |
|
|
Term
|
Definition
| 9000 banks, have not elected to join Fed Reserve system; can use Fed's services, but are subject to Fed's monetary control |
|
|
Term
|
Definition
• a) savings and loan associations
• b) credit unions
• c) mutual savings banks—functions similar to a credit union
**CANNOT join federal reserve, but can use Fed's services, but are subject to Fed's monetary control |
|
|
Term
|
Definition
the regulation of the money supply in order to influence aggregate economic activity
• goal is to move us to potential GDP (we want Y to = potential GDP (full employment GDP)
• goal is to promote economic stability
• this is the main responsibility of the federal reserve |
|
|
Term
|
Definition
| open market operations, required reserve ratio, discount rate, and monetary policy actions |
|
|
Term
| open market operations (a tool of monetary policy) |
|
Definition
o most important tool of monetary policy
o involves the purchase and sale of govt securities (bonds) by the federal reserve
o if country is in inflation, you want to raise interest rates
**composed of buying and selling govt securities |
|
|
Term
o when the fed purchases govt securities, this increases bank reserves and increases the money supply
• when Sm increases, interest rate decreases
• **changes the next day
o this would reflect an EASY monetary policy
o Problem: UNEMPLOYMENT |
|
Definition
| What happens when the government buys government securities, what monetary policy does it represent, and what is the problem that accompanies it? |
|
|
Term
o When the fed sells govt securities, this reduces bank reserves and decreases the money supply.
o (when the fed sells, other banks have to pay for them, and when the check clear, those banks lose excess reserves
• When Sm decreases, interest rate incr |
|
Definition
| What happens when the government sells government securities, what monetary policy does it represent, and what is the problem that accompanies it? |
|
|
Term
|
Definition
| Target interest rate for open market operations |
|
|
Term
|
Definition
target interest rate for open market operations
• the interest rate banks charge one another for the overnight borrowing of reserves
o FED does this for you
• When this rate increases, banks are going to try and avoid having negative excess reserves
• **to change the interest rates, you need to change money supply |
|
|
Term
|
Definition
• The interest rate a commercial bank charges its most credit-worthy (select) corporate customers
• Once federal funds interest rate changes, this rate changes, and then others begin to change |
|
|
Term
| advantages of open market operations |
|
Definition
• 1. Precision—you can make big changes, small changes in interest rate (precise…you can do it a quarter of a point if you want)
• 2. Flexibility—you can make small/large changes and then reverse position. (Lower then raise)
• 3. Predictability—you know that if you decrease money supply, interest rates will rise. And the opposite. |
|
|
Term
|
Definition
• percentage of demand deposits that must be in reserves
• (only is a reserve on demand deposits)
• raising or lowering this IMPACTS a bank’s ability to make loans and thus create money
• board of governors can change this |
|
|
Term
? decrease excess reserves, decrease potential for banks and thrifts to make loans and create M1 money
o A TIGHT MONETARY POLICY |
|
Definition
| What happens when you inrease required reserve ratio and what kind of monetary policy is this? |
|
|
Term
this will increase excess reserves, increase potential for banks and thrifts to make loans and create money
o AN EASY MONETARY POLICY |
|
Definition
| What happens when you decrease required reserve ratio and what kind of monetary policy is this? |
|
|
Term
| current required reserve ratio |
|
Definition
btw 3 and 10%. (ever since April 1992)
• Overall, considered to be an ineffective tool
• Why? Results not very predictable
o Can decrease potential for banks and thrifts to make money
o Can get around this by selling off other assets, which will build back up their excess reserves (ex: they can sell govt securities)
• While this increases potential for banks and thrifts to give out loans, this does not guarantee they will make money |
|
|
Term
|
Definition
• the interest rate federal reserve banks charge on loans they make to commercial banks and thrift institutions
• ***Problem: results are unpredictable, NOT used today
They do, however, change it periodically, but only to keep it in line with other interest rates |
|
|
Term
| decreasing the discount rate |
|
Definition
| if you did this to the discount rate, it could increase/encourage borrowing and thus the M1 money supply |
|
|
Term
| increase in the discount rate |
|
Definition
| if you did this to the discount rate, it could discourage/decrease borrowing and therefore decrease in money supply |
|
|
Term
|
Definition
official statements and urgings by chairperson of board of governors. More of a qualitative action.
**types: easy (expansionary) and tight (contractionary) |
|
|
Term
| easy (expansionary) monetary policy |
|
Definition
• Designed to address the problem of recession (economy is at less than full employment)
• Designed to increase aggregate demand (shift to right)
• Increases the money supply
Options
o 1. Reduce the reserve ratio
o 2. buy govt securities
o 3. lower the discount rate |
|
|
Term
o 1. Reduce the reserve ratio
o 2. buy govt securities
o 3. lower the discount rate |
|
Definition
| What are the easy monetary policy option, which are designed to increase aggregate demand (shift to right)? |
|
|
Term
|
Definition
• Addresses the problem of inflation
• Goal is to reduce aggregate demand (shift to left)—you want to shift it to the left to hit equlibrium at full employment
• Decreases the money supply
• Ex: selling of govt securities
OPTIONS
• 1. INCREASE the reserve ratio
• 2. Sell government securities
• 3. Raise the discount rate |
|
|
Term
• 1. INCREASE the reserve ratio
• 2. Sell government securities
• 3. Raise the discount rate |
|
Definition
| What are the options for tight monetary policy options, which are designed to reduce aggregate demand (shift to the left)? |
|
|
Term
| things you can do to shift the AD curve RIGHT |
|
Definition
o G Increases, --fiscal policy option
o Tx decreases-fiscal policy option
o Sm increases—monetary policy option |
|
|
Term
| Things you can do to try and shift the AD curve left (try to reduce inflation) |
|
Definition
o G decrease
o Tx increase
o Sm decrease |
|
|
Term
| goal of monetary and fiscal policy |
|
Definition
|
|
Term
| expansionary fiscal policy |
|
Definition
• Govt spending (G) increase—goal to increase Y move to y* (full employment GDP)
• Tx increase-- goal to increase Y move to y* (full employment GDP)
• If G increases, Y increases by multiplier effects (Y will go up more than initial increase in G bc of mult effect)
• If Dm goes up, and Sm is constant, we move to a higher interest rate SEE GRAPH)
• IF Dm goes up, R increases, I will decrease
o Net result is Increased Y, but by reduced amt |
|
|
Term
| contractionary fiscal policy |
|
Definition
• G dereases, Tx Increases (goal decreases)
• G derease, Y decreases by multiplier effect ?Dm decreases, R decreases,Investment Increases -? net result is Y decreases, but by reduced amt |
|
|
Term
| expansionary monetary policy |
|
Definition
• Sm increasees—goal increase Y move to y*
o If sm increase, R decrease ? I increases ? Y increases. Dm increases. Because this R decreases less than it otherwise would. |
|
|
Term
| contractionary monetary policy |
|
Definition
• Ms decrease—goal is to decrease Y
• Sm decreases, R increases, I will decrease, Y will decrease? Dm decreases, then this R drops to some degree |
|
|
