Capure 25 Flashcards
Money
Money is an asset that people use to make and receive payments when buying and selling GS.
3 functions of money:
- Ti is a medium of exchange asset that can be traded for GS.
- It is a store of value, an
asset that enables people to transfer Purchasing Power intro the Future - It is a measure of relative value, or a unit of account.
It is single yardstick for measuring value.
Fiat money
refers to smth that is used as legal tender by government decree and is mot backed by physsical commodity like gold or siever.
It works because we developed enough trust to believe it will keep working (difficult and illegal to counterfeit).
money supply
The money supply adds together currency is circulation, checking accounts, savings accounts, travelers checks, and money market accounts.(M2)
nominal GDP
Nominal GDP is the total value of production (final goods and services)
Using price from the year in which the output was produced.
real GDP
Real GDP is the total value of production (final GS), using fixed prices takin from a particular base year.
inflation rate
Inflation rate is the growth rate of the overall price level in the economy .
What causes an increase in N GDP
Increase in nominal GDP: increase in price level
Increase in level of real GDP
Combination of the 2
Nominal GDP growth equation
Growth rate of NGDP= growth rate of P + growth rate of RGPP
= Inflation rate + growth rate of RGDP
THE QUANTITY THEORY OF MONEY
GROWTH RATE OF (M2) = GROWTH RATE OF NGDP
M2 and NGDP tend to grow at the same rate (only growth rate)
- the quantity theory of money assumes that the money supply and the growth rate NGDP are the same over the long -run.
- The growth rate of real GDP is the difference between the growth rate of money supply and the inflation rate.
nominal GDP growth equation
GROWTH RATE OF MONEY SUPPLY = INFLATION RATE + GROWTH RATE OF RGDP
inflation equation
INFLATION RATE = GROWTH RATE OF MONEY SUPPLY - GROWTH RATE OF RGDP
inflation, deflation
Inflation -> rate of increase of the price index
Deflation -> rate of decrease of the price index
when does inflation occur?
-inflation occurs when the growth rate of M2 exceeds the growth rate in real GDP.
effect of inflation on mortgages
Mortgage: if Inflation (felfelé nyíl) real r (lefelé nyíl) => lowering the real cost
THE SOCIAL COST OF INFLATION
- High inflation rate creates logistical cost
(Frequently change prices, “menu cost”) - Inflation sometimes leads to counterproductive policies like price controls ( Inflation generates voter anger => gov: destructive schemes) => ex: Venezuela (underground reselling)
THE SOCIAL BENEFITS OF INFLATION
- Government revenue ( seigniorage) is generated when the gov. prints currency (modest amount)
- printing to much can lead to hyperinflation - Sometimes inflation can stimulate economic activity (fall in real wage induces firms to hire more workers)
(by cutting real wages and cutting real interest rates)
- rise in P shifts LD -> because nominal wages remain fited, this rightward shift in the lab D cure increases employment and GDP
- inflation lowers real interest rate.
- real interest rate = nominal interest rate = N interest rate - inflation r (fischer equation)
- real interest rate is the inflation-adjusted cost of borrowing
Stimulates consumption and inwestment => increase GDP
Federal reserve
-Central bank is the government institution that monitors financial institutions, controls the money supply. These activities constitute:
Feds dual mandate:
Monetary policy:
- maximum (sustainable) levels of employment.
- low and predictive levels of inflation. (inflation targeting)
What are FR 3 types of activities?
- Regulation
- regulator of private banks
- credits the financial statements (reporting assets and liabilittes on balance sheets)
- object if it notices that a private bank is holding a portfolio of assets that is too risky.
- makes sure banks can safly absorb future losses (street test) - INTERBANK TRANSFERS
- bank for banks
- requires banks to keep a substantial amount of reserves on deposit to support interbank transactions. - MANAGEMENT OF MACRO FLUCTUATION BY MANIPULATING THE QUANTITY
- affects interest rate, inflation, unemployment.
- (felfele nyíl) bank reserves -> (lefelé nyíl) r , (felfele nyíl) inflation, (lefelé nyíl) unemployment
describe bank reserves and liquidity
~ to conduct transactions, private banks need a source of funds
~ liquidity refers to the funds available for immediate payment.
~ regulatory reserve requirements / excess reserve
What is the federal funds market?
- Federal funds market refers to the market where banks obtain overnight loans from one another. (r. In this market = federal funds rate).
Why is demand for reserves donward sloping?
- Demand for reserves is \ because ptimizing banks chouse to hold more reserves as the cost of holding those reserves fall.
When does a shift occur? D
- because of economic expansion or contraction, changing deposit base or changing liquidity needs ( ex: bank run), changing r paid by Fed for having reserves on deposit at Fed.
- change in ffr generate movements along the D cure.
How does fed influence bank reserves
~ if Fed wishes to increase the level of reserves that private banks hold, it buys government bonds from the private banks and in return it gives the private banks more electronic reserves.
~ if the Fed wishes to decrease the level of reserves that private banks, it sells government bonds to the private banks, and in return the private banks give back some of their reserves.
- controls the level of reserves -> open market operations.
It shift supply through open market operations by chaning regulatory reserves.
- ## —> (lefele nyil) reserves, interest r
What are the 3 basic policies?
3 BASIC POLICIES
- Changing the quantity of reserves supplied
- Changing the reserves requirement
- Changing the interest rate paid on reserves
Do credit cards satisfy all functions of money?
. No, because credit cards are not assets.
What is the significance of the real wage as it relates to inflation? (real interest rate)
Since an increase in inflation reduces the real wage that firms must pay, firms
are more willing to hire workers, thus stimulating economic activity.
Government policies to deal with inflation
Policies to deal with demand–pull inflation include the following:
Q Deflationary fiscal policy to reduce aggregate demand – for example, raising
both direct and indirect taxes to reduce consumption and/or lowering
government expenditure.
Q Contractionary monetary policy – for example, raising interest rates and/or
reducing growth of the money supply to limit consumption and investment
expenditure.
Q Supply-side policies to boost national output – for example, improving
productivity and/or labour relations in order to increase aggregate supply,
thus dampening the impact of inflation.
Q Import controls to reduce the chances of experiencing imported inflation
(caused by higher import prices of essential goods and services such as oil and
financial services).
Policies to deal with cost–push inflation include the following:
Q Negotiations with labour unions to match any annual wage rises with higher
productivity levels, thus limiting inflationary pressures by boosting aggregate
supply.
Q Government intervention to limit annual nominal wage increases, thus
preventing a potential wage-price inflationary spiral.
Q Subsidising production to moderate costs, and hence prices. Some countries,
such as Iran and France, have used subsidies for food and fuel to reduce price
inflation in the economy.
Q Revaluation of the currency on the foreign exchange market, as the higher
exchange rate helps to lower the cost of imported raw materials, components
and finished goods.
Governments are likely to use a combination of contractionary monetary policy, deflationary fiscal policy and supply-side policies to combat inflation.
Collectively, however, contractionary policies are likely to reduce the level of economic activity, thus possibly harming economic growth, employment opportunities and international trade.
Explain why it is good to target a “low, positive and stable” inflation rate.
see exam gyakorlás
What does monetary theory argue about inflation?
Monetary theory argues that a decrease in money supply causes recession.
