Econ 102 Flashcards
Federal Funds Rate
interest rate at which banks borrow from each other, decreased by fed to increase borrowing
money velocity equation
MV = PQ money*velocity = price level* output
things that shift money demand
increase in price level = increase MD increase in rGDP = increase MD increase technology (ATM) = decrease MD
how fed uses money supply
- Fed buys t-bills, money base increases instantly
- excess reserves rise and banks issue loans
- MS curve moves right, interest rate falls
When fed shifts MS out
- AD shifts out - some amount
- MD shifts out - same amount as AD
- self correcting mechanism, SRAS adjust to new LR level
- price level increases - same amount as MS and MD
3 goals of the fed
- full employment
- stable prices
- moderate long-term interest rates
monetarist policy
let the economy work itself out
expansionary monetary policy always leads to
inflation
Okun’s law
Actual U = Natural U - 1/2 (Output Gap)
modified for each economy
short run phillips curve
short-run tradeoff between inflation and unemployment, shifted by AS, found by plugging Okun’s law into SRAS
adaptive expectations
firms shift SRAS by the change in inflation of previous period, expected inflation always leads to inflation
rational expectations
firms shift SRAS immediately to new long run level
NAIRU
fed basically picks the rate of inflation, LRPC
classical model
wages and prices and perfectly flexible, like always being in the long run
hyperinflation
inflation of 50% in a month, real wages fall very quickly, people unwilling to make contracts
