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Macroeconomics > Discussion Sheets > Flashcards

Discussion Sheets Flashcards

1
Q

Money

A

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

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2
Q

Functions of money

A
  1. Medium of exchange
  2. Unit of account
  3. Store of value
  4. Standard of deferred payment
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3
Q

Commodity money

A

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

ex. gold

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4
Q

Measurement of money (____________)

A

the money supply

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5
Q

M1

A

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
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6
Q

M2

A
  • M1
  • savings account balances
  • small denomination time deposits
  • balances in money market deposit accounts in banks
  • non institutional money market fund shares
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7
Q

Bank Balance Sheets: Assets

A

Reserves

Loans

Securities

Buildings and Equipment

Other Assets

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8
Q

Bank balance sheets: Liabilities

A

Deposits

Short-term Borrowing

Long-term Debt

Other Liabilities

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9
Q

Reserves

A

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

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10
Q

Required Reserves

A

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

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11
Q

Required reserves ratio (RR)

A

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

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12
Q

Excess reserves

A

Reserves that banks hold above the legal requirement

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13
Q

Simple deposits multiplier:

A

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

Deposit Multiplier = 1/RR

RR = Required reserves ratio

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14
Q

Change in checking account deposits formula

A

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

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15
Q

Monetary Policy

A

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

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16
Q

Goals of Monetary Policy

A

Price Stability

High Employment

Economic Growth

Stability of Financial Markets and Institutions

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17
Q

Interest rate goes up

effect on consumption

A

Save more —- consumption down

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18
Q

Interest rate goes up

Effect on investment?

A

Investment goes down

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19
Q

Interst rate goes up

Effect on investing in U.S ?

A

Investing in U.S. is more profitable

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20
Q

Interest rate goes up

Effect of the demand of U.S. dollars?

A

Demand of U.S. dollars goes up

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21
Q

Interest rate goes up

Effect of value of U.S. dollars?

A

Value of dollars goes up

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22
Q

Interest rate goes up

Effect on X and IM and NX

A

X goes down

Imports go up

Net exports go down

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23
Q

Interest rate goes up

Effect on Aggregate Expenditure

A

AE goes down

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24
Q

Interest rate goes down

Effect on AE

A

AE goes up

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25
Q

Monetary Policy Targets:

A

Money supply and the interest rate

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26
Q

Money Demand (MD)

A

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

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27
Q

Why does the MD curve slope downards?

A

Tradeoff between liquidity and interest

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

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28
Q

Real GDP: GDP goes up

A

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

Shifts Money demand

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29
Q

Price level: CPI goes up =>

A

more $ needed to buy goods => MD goes up

Shifts Money Demand

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30
Q

Money Supply (MS)

A

A vertical line illustrating quantity of M1 supplied

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31
Q

Why is the MS curve a vertical line?

A

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

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32
Q

Equilibrium Money Market

A

Equilibrium: MS = MD

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33
Q

What are models of the interst rate?

A

Loanable Funds Market vs. Money Market

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34
Q

The loanable funds model deals with _________________________

A

the long-term real interest rate (r)

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35
Q

The money market model is concerned with ____________________________

A

the short-term nominal interest rate (i)

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36
Q

Federal funds rate

A

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

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37
Q

Monetary Policy and Aggregate Demand:

A

changes in i affect components of AD

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38
Q

Consumption: interest rate goes down =>

A

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

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39
Q

Investment: interest rate goes down =>

A

Investment goes up

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40
Q

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

A

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

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41
Q

Expansionary Monetary Policy

A

Fed increases MS to increase real GDP

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42
Q

Contractionary Monetary Policy

A

Fed decreases MS to decrease inflation

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43
Q

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

A

Expansionary Monetary Policy: Fed increases MS to increase real GDP

Contractionary Monetary Policy: Fed decreases MS to decrease inflation

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44
Q

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

A

Using expansionary policy to get the economy to full employment

Using contractionary policy to prevent high levels of inflation

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45
Q

Taylor Rule

A

How the Fed chooses a target for the federal funds rate

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46
Q

Federal funds target rate formula

A

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

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47
Q

Real equilibrium federal funds rate

A

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

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48
Q

Inflation gap

A

Difference between current inflation and a target inflation rate

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49
Q

Output gap

A

Percentage difference between real GDP and potential real GDP

50
Q

Money Demand slopes downwards due to ____________

A

opportunity costs of holding money

51
Q

Holding all other variables constant, expansionary monetary policy raises _____________

A

the price level

52
Q

What kind of line is MS

A

vertical

53
Q

An open market operation that increases the money supply increases ____________________________

A

the holdings of government bonds held by the Federal Reserve

54
Q

A contraction of the money supply tends to _______________

A

increase the interest rate, but decrease aggregate expenditures

55
Q

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

A

The purchase of securities in the open market

56
Q

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

A

sell U.S. treasury bonds on the open market

57
Q

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)?

A

Expansionary monetary policy

58
Q

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

A

A decrease in GDP

59
Q

The Fed can increase the federal funds rate by __________________________

A

Selling Treasury billls, which decreases bank reserves

60
Q

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

A

increase

decrease

61
Q

The money demand curve is downward-sloping because __________________________________

A

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

62
Q

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

A

Changes in the Interest Rate

63
Q

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

A

reserves that banks lend to each other

Federal Open Market Committee

64
Q

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

A

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
Q

The major shortcoming of a barter economy is…..

A

Requirement of double coincidence of wants

66
Q

Ted has an orange and wants a peach

Alice has a peach and wants an orange

What does this show?

A

Double coincidence of wants

67
Q

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

A

more

68
Q

Demand deposits

Currency

Money market mutal funds

List them from most liquid to least liquid

A

Currency, demand deposits, money market mutual funds

69
Q

What is something included in M2 but not in M1

A

Money market mutual funds

70
Q

Wealth =

A

currency + checking + saving + Total Assets - debt

71
Q

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

A

Increase

Not change

72
Q

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

A

Not change

Not change

73
Q

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

A

Asset

Liability

74
Q

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 _________

A

10,000

2,000

75
Q

Short-run Phillips Curve

A

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

76
Q

Long-run Phillips Curve

A

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
Q

Shape of the Phillips Curve depends on what?

A

Expected Inflation

78
Q

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

A

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
Q

Why the vertical long-run phillips curve?

A

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

80
Q

Phillips Curve and AD-AS

Interaction

A

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
Q

When the SR Phillips Curve intersects LR phillips curve

A

Inflation = expected inflation

82
Q

Expected Inflation Formula

A

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

83
Q

Real wage =

A

(Nominal wage / Price Level) x 100

84
Q

If inflation is greater than expected inflation

A

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

85
Q

There is a different SR Phillips Curve for every __________________

A

expected inflation rate

86
Q

An increase in inflation decreases unemployment only if ________________________

A

the increase in inflation is unexpected

87
Q

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 ___________________________

A

rational expectation

no effect on the unemployment rate

88
Q

Low inflation (below 4 percent)

A

firms and workers generally ignore it

89
Q

Moderate but stable inflation (4-5 percent)

A

Unable to ignore it; generally use adaptive expectations

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

90
Q

High Inflation (above 5 percent)

A

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
Q

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

A

Real wages will rise

92
Q

Stagflation occurs when the ________________________

A

the price level increases and real GDP decreases

93
Q

The Phillips curve shows the relationship between the __________________

A

unemployment rate and the inflation rat

94
Q

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, _______________________

A

real GDP increases above potential GDP

95
Q

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

A

The expected inflation rate

96
Q

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

A

an upward shift of

97
Q

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

A

not change unemployment rate

98
Q

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

A

Firms and workers will overestimate the inflation

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

99
Q

Balance of Payments (BOP)

A

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

100
Q

Current account

A

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
Q

Financial (capital) account

A

records transfers of assets

Transactions in this account create liabilities

102
Q

Account balance =

A

cash inflows - cash outflows

103
Q

Current account balance =

A
  • Financial account balance = - Net capital inflows
104
Q

If net factor income and transfers are zero:

A

CA = NX = -NCI

105
Q

Exchange rate is a price on:

A

the market for foreign exchange

106
Q

The Real Exchange Rate

A

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
Q

Real exchange rate =

A

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

108
Q

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

A

The U.S. dollar appreciates against another currency

109
Q

Floating currency

A

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
Q

Fixed exchange rate

A

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

ex. gold standard, bretton woods system

111
Q

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

A

buy dollars and sell foreign currency

112
Q

To keep exchange rate below equilibrium, the United States can

A

sell dollars and buy foreign currency

113
Q

Mix of two exchange rate regimes

A

target zone

managed exchange rate

114
Q

Net capital inflows refers to the purchase of:

A

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

115
Q

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

A

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

116
Q

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 _________

A

decreases; rises

117
Q

A budget deficit raises interst rates, which raises ________

A

exchange rates

118
Q

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

A

The demand cor dollar will increase

The foreign exchange value of the dollar will rise

119
Q

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 __________

A

imports

falls

120
Q
A

Macroeconomics (26 decks)

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