Econ 201 Flashcards
Study of Macroeconomis
Definition of MPC
Marginal Propensity to Consume
The fraction of EXTRA income that households consume rather than save.
Formula for MPC
(Increased Consumer Spending)/(Increased Income)
Multiplier Effect
The additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending
Formula for the Multiplier
1/(1 - MPC)
Functions of Money
a) Medium of Exchange
b) Unit of Account
c) Store of Value
Central Bank
An institution designed to oversee the banking system and regulate the quantity of money in the economy
When Open Market Sales occur…
The money supply decreases
When Open Market Purchases occur…
The money supply increases
Money Multiplier
The amount of money the banking system generates with each dollar of reserves
Formula for the Money Multiplier
The reciprocal of the reserve ratio. 1/RR
In banking the assets and liabilities on a bank’s balance sheet must be…
Equal. Assets include reserves, loans and securities while liabilities & owners’ equity includes deposits, debt, & capital
The tools the Fed uses for controlling the money supply
Open Market Operations
The Discount Rate (Fed lending to banks)
Reserve Requirements
When the Fed decreases the discount rate, the MS…
Increases
When the Fed increases the discount rate, the MS
Decreases
When the Fed increases the reserve requirement the MS…
Decreases
When the Fed decreases the reserve requirement the MS…
Increases
Commodity money vs. fiat money
Commodity money has intrinsic value while fiat money does not
In the long run, what adjusts to bring money supply and money demand into equilibrium?
The price level. When the central bank increases the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation.
What is inflation tax?
When the government prints money in order to pay for things, and this results in the decrease in the value of the money that everyone holds.
What are the costs of inflation?
Shoeleather costs associated with reduced money holdings, menu costs associated with more frequent adjustment of price, increased variability of relative prices, unintended changes in tax liabilities, confusion and inconvenience resulting from a changing unit of account and arbitrary redistribution of wealth between debtors and creditors.
Quantity Equation
MV = PY
In order to achieve zero inflation (assuming velocity is constant) the money supply should…
Be equal to the growth of real GDP in the economy.
In the long run, an increase in the money supply results in what changes to P and Y?
Y remains stable while P increases
When does the MD curve on the liquidity preference graph shift?
When price level changes.
