ECO201 Exam 3 (March 26, 2024) Flashcards
The Fed funds rate increases when the Fed sells _____ ____
treasury bonds
The Fed sells treasury bonds which decreases the ____ ____
money supply
What happens to wages if equilibrium GDP is greater than full-time employment GDP?
The wages will rise and aggregate supply will fall
What happens to wages if equilibrium GDP is less than full-time employment?
The wages will fall and aggregate supply will rise
What causes change to potential (full-time employment) GDP?
-more people -better technology -more education
The proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it (the change in consumption in relation to the change in income)
marginal propensity to consume
The proportion of an aggregate raise in pay that a consumer saves rather than spending it on goods and services (the change in saving in relation to the change in income)
marginal propensity to save
measures how GDP increases/decreases when the government increases/decreases spending in the economy
spending multiplier
any increase/decrease in tax affects consumption only
tax multiplier
money being loaned out and put back in
money multiplier
amount of money at the bank (required amount + excess reserves)
total reserves
deposits the bank can loan out
excess reserves
deposits that the bank has to keep on hand
required reserves
percentage of deposits that the bank has to keep on hand and can’t loan out
reserve requirement ratio
MD/MS graph
y axis = interest rate
x axis = money
MD is downward sloping
MS is straight vertical line
only the Fed can ____ the money supply
change
What shifts MD?
income, wealth, spending needs, safety, trust in bonds, interest, prices
How can the Fed change the money supply?
-by lowering reserve requirement, buying bonds
-by raising the reserve requirement, selling bonds
What shifts aggregate demand?
any change in C, I, G, NX ; not related to price
What shifts aggregate supply?
better technology, change in wages, skill of labor force, costs of inputs, anything that could affect political policy
What relationship is shown by the aggregate demand curve?
the price level and the quantity of real GDP demanded by households, firms, and the government
What relationship is shown by the aggregate supply curve?
the price level and the quantity of real GDP supplied by firms
the ___ ____ refers to the effect that a change in the price level has on wealth and, therefore, consumption. An increase int he price level decreases the real value of household wealth, which decreases consumption
wealth effect
The ___-____ ____ refers to the effect that a change in the price level has on interest rates and, therefore, consumption. An increase in the price level raises interest rates, which decreases investment spending and consumption spending, particularly on durable goods.
interest-rate effect
The ____-____ ____ refers to the effect that a change in the price level has on spending on exports and imports. An increase in the domestic prive level makes U.S. exports more expensive and foreign imports less expensive, which decreases net exports.
international-trade effect
a good used as money that also has value independent of its use as money
commodity money
paper currency is ___ ___, which has no value except as money
fiat money
the buying and selling of Treasury securities by the Federal Reserve
open market operations
the ________ ____ _____ shows the relationship between the price level and the level of planned aggregate expenditures by households, firms, and the government
aggregate demand (AD) curve
the ___ ___ ______ ____ shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
short-run aggregate supply (SRAS) curve
The ___ __ _____ ___ is a vertical line because in the long run, real GDP is always at its potential level and is unaffected by the price level
long-run aggregate supply (LRAS) curve
a combination of inflation and recession, usually resulting from a supply shock
stagflation
the Fed’s 4 monetary policy goals
price stability, high employment, stability of financial markets and institutions, economic growth
the interest rate banks charge each other for overnight loans
federal funds rate
this policy lowers interest rates to increase consumption, investment, and net exports; increases real GDP and the price level
expansionary monetary policy
this policy raises interest rates to decrease consumption, investment, and net exports; reduces both real GDP and the inflation rate below what they’d be in the absence of policy
contractionary monetary policy
links the Fed’s target for the federal funds rate to economic variables
the Taylor rule
price level doesn’t matter to
long run growth
effects of the SRAS curve shifting to the left
HIGHER COSTS; productivity decreases, input prices rise, regulatory and tax costs increase, higher expected inflation
effects of the SRAS curve shifting to the right
LOWER COSTS; productivity increases, input prices fall, regulatory and tax costs fall, lower expected inflation
the number of times in a year that an “average” dollar gets spent on goods and services
velocity
