Term
| What is the difference between discretionary policy and rule-based policy? (4/18 & 4/23) |
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Definition
| Rule-based policy says to pick one rule and stick with it. For example, have only 1 interest rate. |
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Term
| How is discretionary policy like driving a car while only looking in the rearview mirror? (4/18 & 4/23) |
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Definition
| Discretionary policy relies on figures from the past, such as GDP Q2 report, whose final number we don't get until months later, end of Sept. Basing policy on those things is like driving a bit, stopping, turning, etc.—like making driving decisions as if you are *only* able to see through the rearview mirror. |
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Term
| What was the average annual GDP growth rate for the last ~50 years? (4/23) |
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Definition
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Term
| What is the "Business Cycle"? and what do economists want to do with it? (4/23) |
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Definition
| The Business Cycle is the up and down wave of the economy—the actual GDP. Economists want to "flatten" it as much as possible—closer to potential GDP—normal rate of growth. |
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Term
| Describe the time lag problem of Keynesian discretionary-based policy. (4/23) |
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Definition
| Recognition Lag = time it takes to realize an effect on the economy (i.e. recessionary gap). Decision Lag = time it takes for gov't to respond. Implementation Lag = time to enact the decisions. Effectiveness Lag = by the time gov't enacts, effect may no longer be needed. i.e., if they step on the gas during a Recessionary Gap, the economy may already be growing again. |
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Term
| If rule-based economist, what type of rule do you pick? (4/23) |
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Definition
| targeting a rule that stabilizes the GDP, closer to potential GDP; such as target M (targeting r not recommended) |
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Term
| Define exchange rate (5/2) |
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Definition
| the price of one currency expressed in terms of another currency |
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Term
| How are exchange rates determined? (5/2) |
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Definition
| supply & demand. Except when central banks (i,.e. Fed) will enter the market to manipulate the price |
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Term
| What is a "floating system" of exchange rates? (5/2) |
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Definition
| based purely on supply & demand. (floats it up or down); central bank does not get involved. |
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Term
| What is a "fixed system" of exchange rates? (5/2) |
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Definition
| based on supply & demand with action by a central bank, which "fixes" it |
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Term
| What determines supply in a floating system of exchange rates? (5/2) |
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Definition
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Term
| What determines demand in a floating system of exchange rates? (5/2) |
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Definition
| 1) Goods & services (demand for) 2) Financial assets 3) Real Estate |
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Term
| How do goods & services determine demand in a floating system of exchange rates? (5/2) |
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Definition
| Foreigners will hold onto currency of a country if they want to buy goods or services from that country. Increases demand for those foreign dollars. Otherwise, they first have to buy USD and may lose in exchange. |
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Term
| How do financial assets determine demand in a floating system of exchange rates? (5/2) |
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Definition
| Demand for foreigners to invest in U.S. companies, buy U.S. bonds, or a U.S. business. Could also be checking accounts |
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Term
| How does real estate determine demand in a floating system of exchange rates? (5/2) |
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Definition
| Foreigner wants to buy U.S. property, they must pay in USD. |
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Term
| Draw a graph to show appreciation of a foreign currency (causing ER to change) (5/2) |
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Definition
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Term
| Draw a graph to show depreciation of a foreign currency (causing ER to change) (5/2) |
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Definition
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Term
| What is the difference between appreciation and depreciation of a foreign currency? (5/2) |
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Definition
appreciation means its value increases
depreciation means its value decreases |
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Term
| Describe a how a Short Run (immediate future) change in demand will determine Exchange Rates (5/2) |
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Definition
| predicts change in ER by looking at r. ~ 1 years |
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Term
| Describe a how a Middle Run change in demand will determine Exchange Rates (5/2) |
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Definition
| predicts change in ER by looking at countries' relative growth rates. 2-5 years |
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Term
| Describe a how Purchase Power Parity change in demand will determine Exchange Rates (5/2) |
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Definition
| ~ 5-10 years. If you live somewhere that has low r, but you find another country's central bank has done something (such as sell bonds) which took money out of system, which boosts interest rates. You would put your money in that other bank. To do so, you would have to buy their currency, so demand & value for that currency goes up (appreciation.) |
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Term
| How does a country's relative growth rate determine demand, impact ER? (5/2) |
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Definition
| r does not predict er for > ~ 1 year, countries that have higher expected growth rates have higher ER. so if you want to invest in financial assets, so you want to invest on country with high growth rate. riskier, but higher return. |
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Term
| What are some ways the gov't can get us out of a recession? (4/23) |
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Definition
| Increase gov't purchases, cut taxes, transfer payments, the Fed can buy bonds. |
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Term
| According to the Quantity Theory of Money, how would an increase in MS would result in an increase in GDP (PS#4) Use the monetary transmission mechanism. (Hint: Use the money market graph, the 45-degree line diagram and AD/AS, in that order.) (PS#4) |
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Definition
| M*V=P*Y. Under the quantity theory of money, velocity grows at a constant rate and is aligned with real output (Y). Therefore, if the Fed increases M it will have the effect of increasing P. Since, P*Y is equal to Nominal GDP. The increase in P results in an increase in Nominal GDP. |
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Term
| Assume equilibrium R in money market is 5%. Assume actual GDP is at full employment and that equilibrium price level in the AD/AS graph is 100. Shift AD to the right. Show how money market graph will adjust. Then show what happens in money market if the Fed targets interest rate at 5%. Would this be procyclical or countercyclical? (PS#4) |
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Definition
| Money demand shifts right because shift in AD cause P to increase and I/Y to increase. To maintain interest rates at 5% , the Fed increases MS by buying government bonds from banks. This shifts MS curve right. Pro-cyclical: govt policy going in same direction as biz cycle. Notice as AD shifts right the econ grows on its own. Due to r rate rule, Fed reacts by increasing MS, which increases output even more. |
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Term
| Does the monetary policy (Fed) have any time lags? (4/23) |
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Definition
| Monetary policy has shorter lags in Decision & Implementation phases, but a longer Effectiveness lag of affecting GDP |
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