Discussion Sheets Flashcards
1
Q
Money
A
Assets that people accept in exchange for goods, services, and debt payments
2
Q
Functions of money
A
- Medium of exchange
- Unit of account
- Store of value
- Standard of deferred payment
3
Q
Commodity money
A
A good used as money that has some intrinsic value independent of its use as money
ex. gold
4
Q
Measurement of money (____________)
A
the money supply
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
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
7
Q
Bank Balance Sheets: Assets
A
Reserves
Loans
Securities
Buildings and Equipment
Other Assets
8
Q
Bank balance sheets: Liabilities
A
Deposits
Short-term Borrowing
Long-term Debt
Other Liabilities
9
Q
Reserves
A
Deposits that a bank keeps as cash in its vault of on deposit with the Federal Reserve
10
Q
Required Reserves
A
Reserves that a bank is legally required to hold, based on its checking account deposits
11
Q
Required reserves ratio (RR)
A
The minimum fraction of deposits banks are required by law to keep as reserves
12
Q
Excess reserves
A
Reserves that banks hold above the legal requirement
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
14
Q
Change in checking account deposits formula
A
Change in checking account deposits = Change in bank reserves x 1/RR
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
16
Q
Goals of Monetary Policy
A
Price Stability
High Employment
Economic Growth
Stability of Financial Markets and Institutions
17
Q
Interest rate goes up
effect on consumption
A
Save more —- consumption down
18
Q
Interest rate goes up
Effect on investment?
A
Investment goes down
19
Q
Interst rate goes up
Effect on investing in U.S ?
A
Investing in U.S. is more profitable
20
Q
Interest rate goes up
Effect of the demand of U.S. dollars?
A
Demand of U.S. dollars goes up
21
Q
Interest rate goes up
Effect of value of U.S. dollars?
A
Value of dollars goes up
22
Q
Interest rate goes up
Effect on X and IM and NX
A
X goes down
Imports go up
Net exports go down
23
Q
Interest rate goes up
Effect on Aggregate Expenditure
A
AE goes down
24
Q
Interest rate goes down
Effect on AE
A
AE goes up
25
Monetary Policy Targets:
Money supply and the interest rate
26
Money Demand (MD)
A downward sloping curve relating quantity of M1 demanded and the interest rate
27
Why does the MD curve slope downards?
Tradeoff between liquidity and interest
Recall: the interest rate represents the opportunity cost of holding money
28
Real GDP: GDP goes up
trade of goods and services goes up=\> MD goes up
Shifts Money demand
29
Price level: CPI goes up =\>
more $ needed to buy goods =\> MD goes up
Shifts Money Demand
30
Money Supply (MS)
A vertical line illustrating quantity of M1 supplied
31
Why is the MS curve a vertical line?
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
32
Equilibrium Money Market
Equilibrium: MS = MD
33
What are models of the interst rate?
Loanable Funds Market vs. Money Market
34
The loanable funds model deals with \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the long-term real interest rate (r)
35
The money market model is concerned with \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the short-term nominal interest rate (i)
36
Federal funds rate
The interest rate banks charge each other for short-term (overnight) loans
37
Monetary Policy and Aggregate Demand:
changes in i affect components of AD
38
Consumption: interest rate goes down =\>
more spending on durables (cars, furniture) and less saving =\> Consumption up
39
Investment: interest rate goes down =\>
Investment goes up
40
Net exports: interest rate goes down in U.S. relative relative to other countries =\>
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
41
Expansionary Monetary Policy
Fed increases MS to increase real GDP
42
Contractionary Monetary Policy
Fed decreases MS to decrease inflation
43
Monetary Policy and Real GDP / Price Level (static AD-AS model)
Expansionary Monetary Policy: Fed increases MS to increase real GDP
Contractionary Monetary Policy: Fed decreases MS to decrease inflation
44
Monetary Policy and Real GDP/Price Level (dynamic AD - AS model)
Using expansionary policy to get the economy to full employment
Using contractionary policy to prevent high levels of inflation
45
Taylor Rule
How the Fed chooses a target for the federal funds rate
46
Federal funds target rate formula
Current Inflation rate + Real equilibrium federal funds rate + (0.5 x Inflation gap) + (0.5 x Output gap)
47
Real equilibrium federal funds rate
Adjusted for inflation federal funds rate, which is consistent with real GDP being equal to potential real GDP
48
Inflation gap
Difference between current inflation and a target inflation rate
49
Output gap
Percentage difference between real GDP and potential real GDP
50
Money Demand slopes downwards due to \_\_\_\_\_\_\_\_\_\_\_\_
opportunity costs of holding money
51
Holding all other variables constant, expansionary monetary policy raises \_\_\_\_\_\_\_\_\_\_\_\_\_
the price level
52
What kind of line is MS
vertical
53
An open market operation that increases the money supply increases \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the holdings of government bonds held by the Federal Reserve
54
A contraction of the money supply tends to \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
increase the interest rate, but decrease aggregate expenditures
55
If policy makers wanted to use monetary policy to stimulate demand and reduce a high rate of unemployment, what would be appropriate?
The purchase of securities in the open market
56
If the Fed anticipates the economy to be above potential output, it should \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
sell U.S. treasury bonds on the open market
57
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)?
Expansionary monetary policy
58
What will lead to a decrease in the equilibrium interest rate in the economy?
A decrease in GDP
59
The Fed can increase the federal funds rate by \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Selling Treasury billls, which decreases bank reserves
60
An increase in the interest rate should _________ the demand for dollars and the value of the dollar, and next exports should \_\_\_\_\_\_\_\_\_\_\_\_
increase
decrease
61
The money demand curve is downward-sloping because \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the opportunity cost of holding money rises as the interest rate increases
62
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
Changes in the Interest Rate
63
The federal funds rate is the interest rate on \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, and is controlled by the \_\_\_\_\_\_\_\_\_\_\_\_\_
reserves that banks lend to each other
Federal Open Market Committee
64
Sequence of events in the conduct of contractionary monetary policy using open market operations
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
The major shortcoming of a barter economy is.....
Requirement of double coincidence of wants
66
Ted has an orange and wants a peach
Alice has a peach and wants an orange
What does this show?
Double coincidence of wants
67
In an economy with barter, there are __________ prices than in an economy with money
more
68
Demand deposits
Currency
Money market mutal funds
List them from most liquid to least liquid
Currency, demand deposits, money market mutual funds
69
What is something included in M2 but not in M1
Money market mutual funds
70
Wealth =
currency + checking + saving + Total Assets - debt
71
If I withdraw $5000 from my savings account and put it in my checking account, M1 will ________ and M2 will \_\_\_\_\_\_\_\_\_\_\_\_
Increase
Not change
72
If a person withdraws $500 from their checking account and holds it in currency, M1 will _______ and M2 will \_\_\_\_\_\_
Not change
Not change
73
A bank will consider a car loan to a customer as a _____________ and a customer's checking account as a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Asset
Liability
74
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 \_\_\_\_\_\_\_\_\_
10,000
2,000
75
Short-run Phillips Curve
A downward sloping curve, which represents the short-run trade-off between unemployment and inflation
76
Long-run Phillips Curve
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
Shape of the Phillips Curve depends on what?
Expected Inflation
78
If the price level is lower than expected, real wages \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
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
Why the vertical long-run phillips curve?
We are able to adjust completely for inflation in the long run
80
Phillips Curve and AD-AS
Interaction
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
When the SR Phillips Curve intersects LR phillips curve
Inflation = expected inflation
82
Expected Inflation Formula
(Change in Price / Price level) raised to expected level
83
Real wage =
(Nominal wage / Price Level) x 100
84
If inflation is greater than expected inflation
actual real wage is lower than expected =\> firms higher more workers =\> Unemployment Rate decreases
85
There is a different SR Phillips Curve for every \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
expected inflation rate
86
An increase in inflation decreases unemployment only if \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the increase in inflation is unexpected
87
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 \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
rational expectation
no effect on the unemployment rate
88
Low inflation (below 4 percent)
firms and workers generally ignore it
89
Moderate but stable inflation (4-5 percent)
Unable to ignore it; generally use adaptive expectations
i.e. assume inflation will follow the same pattern it has in the recent past
90
High Inflation (above 5 percent)
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
What will happen to real wages if actual inflation is less than expected inflation?
Real wages will rise
92
Stagflation occurs when the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the price level increases and real GDP decreases
93
The Phillips curve shows the relationship between the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
unemployment rate and the inflation rat
94
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, \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
real GDP increases above potential GDP
95
What is held constant when moving along a short-run Phillip's curve?
The expected inflation rate
96
An increase in th expected inflation rate leads to ____________ the short-run Phillips curve
an upward shift of
97
If workers and firms have rational expectations, then the expansionary monetary policy would:
not change unemployment rate
98
If firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and Phillips curve?
Firms and workers will overestimate the inflation
Unemployment rate will eventually come back to the natural rate and Phillips curve will shift downward
99
Balance of Payments (BOP)
An accounting of a country's international transactions for a particular time period
100
Current account
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
Financial (capital) account
records transfers of assets
Transactions in this account create liabilities
102
Account balance =
cash inflows - cash outflows
103
Current account balance =
- Financial account balance = - Net capital inflows
104
If net factor income and transfers are zero:
CA = NX = -NCI
105
Exchange rate is a price on:
the market for foreign exchange
106
The Real Exchange Rate
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
Real exchange rate =
Nominal exchage rate x (Domestic price level / Foreign price level)
108
If it takes more of the other currency to buy the same amount of dollars
The U.S. dollar appreciates against another currency
109
Floating currency
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
Fixed exchange rate
A system under which countries agree to keep the exchange rate among their currencies fixed
ex. gold standard, bretton woods system
111
To keep exchange rate above equilibium, the united states can:
buy dollars and sell foreign currency
112
To keep exchange rate below equilibrium, the United States can
sell dollars and buy foreign currency
113
Mix of two exchange rate regimes
target zone
managed exchange rate
114
Net capital inflows refers to the purchase of:
domestic assets by foreign residents minus the purchase of foreign assets by domestic residents
115
An increase in the U.S. real interest rate induces:
foreigners to buy more U.S. assets, which increases U.S. capital inflow
116
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 \_\_\_\_\_\_\_\_\_
decreases; rises
117
A budget deficit raises interst rates, which raises \_\_\_\_\_\_\_\_
exchange rates
118
If the Fed is using policy to combat inflation, what will happen in the foreign exchange market?
The demand cor dollar will increase
The foreign exchange value of the dollar will rise
119
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 \_\_\_\_\_\_\_\_\_\_
imports
falls
120
