Econ 102

Question 1

Federal Funds Rate

Answer 1

interest rate at which banks borrow from each other, decreased by fed to increase borrowing

Question 2

money velocity equation

Answer 2

MV = PQ
money*velocity = price level* output

Question 3

things that shift money demand

Answer 3

increase in price level = increase MD
increase in rGDP = increase MD
increase technology (ATM) = decrease MD

Question 4

how fed uses money supply

Answer 4

1. Fed buys t-bills, money base increases instantly
2. excess reserves rise and banks issue loans
3. MS curve moves right, interest rate falls

Question 5

When fed shifts MS out

Answer 5

1. AD shifts out - some amount
2. MD shifts out - same amount as AD
3. self correcting mechanism, SRAS adjust to new LR level
4. price level increases - same amount as MS and MD

Question 6

3 goals of the fed

Answer 6

1. full employment
2. stable prices
3. moderate long-term interest rates

Question 7

monetarist policy

Answer 7

let the economy work itself out

Question 8

expansionary monetary policy always leads to

Answer 8

inflation

Question 9

Okun’s law

Answer 9

Actual U = Natural U - 1/2 (Output Gap)

modified for each economy

Question 10

short run phillips curve

Answer 10

short-run tradeoff between inflation and unemployment, shifted by AS, found by plugging Okun’s law into SRAS

Question 11

adaptive expectations

Answer 11

firms shift SRAS by the change in inflation of previous period, expected inflation always leads to inflation

Question 12

rational expectations

Answer 12

firms shift SRAS immediately to new long run level

Question 13

NAIRU

Answer 13

fed basically picks the rate of inflation, LRPC

Question 14

classical model

Answer 14

wages and prices and perfectly flexible, like always being in the long run

Question 15

hyperinflation

Answer 15

inflation of 50% in a month, real wages fall very quickly, people unwilling to make contracts

Question 16

inflation tax

Answer 16

reduction in the real purchasing power of money holdings, caused by monetary policy

Question 17

seignorage

Answer 17

change in the money supply

Question 18

real seignorage

Answer 18

change in money supply / price level X 100

Question 19

problems with deflation

Answer 19

reallocates wealth away from borrowers, debt deflation, money illusion, liquidity trap

Question 20

debt deflation

Answer 20

reallocates value away from people who are already poor

Question 21

money illusion

Answer 21

people don’t want to see their nominal wages fall

Question 22

the liquidity trap

Answer 22

nominal interest rate will never fall below 0

Question 23

slope of the PPF

Answer 23

-Px/Py

Question 24

ToT

Answer 24

(Pt export / P1 export) / (Pt import / P1 import)

Question 25

countries will trade as long as…

Answer 25

price level is between their autarkic opportunity costs

Question 26

justifications for trade restrictions

Answer 26

national security, job creation, infant industry, anti-dumping (dumping: selling below cost of production to run out competitors)

Question 27

Heckscher-Olin Theorem

Answer 27

US will specialize in industries that use lots of high-skilled workers, enhances inequality

Question 28

balance of payments identity

Answer 28

current accounts = - financial accounts

Question 29

dollar has appreciated if it

Answer 29

buys more ruble

Question 30

real exchange rate

Answer 30

(Dollars / P us) / (Euros / P eu)

Question 31

monetary rules

Answer 31

money targeting: hold money supply constant or increase supply by same percent every year
output targeting: keep output constant, use monetary supply only when supply is affected negatively
inflation targeting: keep prices stable
the taylor rule: ffr = 1 + 1.5 (inflation) + 0.5 (output gap)