econ 202 csusm macro final Flashcards
Money Growth
- if the federal reserve sells bonds then the money supply curve shifts left causing the price level to fall
- short-run decision making
- increase in money supply will lower interest rates and promote more investment/ spending (expansionary monetary policy)
Open Market Economy
- bonds bought and sold increase and decrease money
3 Fed Tools
- increase in money supply causes reserve requirement to decrease
- decrease in money is supply is the increase of reserve requirement
- lower discount rate equals higher money supply
- decrease money supply equals increase in discount rate
- if the fed buys bonds, money supply increases
- if the fed sells bonds, money supply decreases
Monetary Policy
- federal reserve lends out money
- shifting the supply curve to the right
- aggregate demand shift to the right
- increase money supply -> decrease interest rates -> increase investment & consumption -> increase AD
Reserve Requirement: lowered
Discount Rate: Lowered
Open Market Operations: buy bonds
Price level rises -> money demand(shift right) rises -> interest rate rises -> cost of borrowing/ return to saving rises -> consumption & investment decrease
Fiscal Policy (expansionary & contractionary)
EXPANSIONARY -> government spending/ taxes rises -> aggregate demand increases -> price level & output rise
CONTRACTIONARY: government spending falls -> aggregate demand decrease (sift left) -> price level & output decrease
Money appreciation
- Exchange rate rises money appreciates
Money Depreciation
- exchange rate falls, a currency is traded less so it depreciates
Money Depreciation
- exchange rate falls, a currency is traded less so it depreciates
3 Effects of AD Curve
- Wealth Effect (C)
- increase in price level -> real value falls -> consumers feel poorer -> AD quantity demanded decreases (vice versa) - Interest Rate Effect (I) (RISE, RISE, RISE)
- price level increase -> people need more $ to buy things -> interest rate increases -> cost of borrowing rises -> investment falls -> AD quantity decreases (vice versa) - Exchange Rate Effect (movement, not a shift)
- price level increase -> interest rate increase -> US real exchange rate appreciates -> US goods are more expensive than foreign -> US exports fall -> US imports rise -> AD quantity falls (vice versa)
Real Variable
Not affected by inflation or deflation like nominal variables
Examples:
- relative price
- real interest rate
- GDP
Nominal Variable
Adjusted to reflect the changing purchasing power of money over time (inflation/ deflation)
Examples:
- Wages
- Income
- Nominal GDP
Money Propensity to Consume (MPC)
- a fraction of extra income a household spends rather than saves
- as MPC rises, money multiplier rises too
Money Multiplier
1/ 1-MPC
(initial change in spending)x(spending multiplier) = overall change in AD
* USE IF C I G or NX DECREASES!
Tax Multiplier
-mpc/ 1-mpc
(initial change in taxes)x(tax multiplier) = overall change in AD
Crowding out effect
opposite of money multiplier; occurs when fiscal policy changes the interest rate and investment
Stagflation
shift to the left in SRAS -> stagnant economy with high unemployment and inflation
NCO = NX
NX = exports - imports
NCO = what we invest - what foreigners invest
Classic Economy (Real vs. Nominal)
- both are separate
- real variables are determined independently o f nominal variables such as money supply
Short Run Effect
- firms can only change the price through production adjustment
-both price level and output decline (aka recession)
Long run effect
- firms are able to adjust all costs
- seen solely by a drop in price level
- a nominal change (price level) but not a real change (output stays the same)
- AD SHIFT RIGHT: price level increase
Shift factors of Aggregate Demand
- taxes fall -> AD rises
- taxes rise -> AD falls
- expected price level drops -> short-run aggregate supply (SRAS) rises
-> shift right - net exports rise -> AD rises -> shift right
A decrease in the price level causes interest rates to..?
decrease -> dollar appreciates -> net exports increase
If US real exchange rate appreciates, U.S. exports then..?
decrease and US imports increase
2 factors that shift money demanded?
- price level & income
- movement caused by interest
How to find price level and GDP on AD-AS graph?
Exports vs. Imports
- an import is a good bought from another country
- an export is when a company provides a good or service for another country
When shopping you notice that a pair of jeans costs $20 and that a t-shirt costs $10. You compute the price of jeans relative to t-shirts (find nominal and real variables)
Nominal: dollar price in jeans
Real: relative price of jeans
If a US shirt maker purchases cotton from Egypt, U.S. net exports..?
decrease, and the U.S. net capital outflow decreases
Changes in expected price shift in the SRAS graph?
shifts in actual price level move along SRAS curve
An increase in the expected price level shifts short-run aggregate supply to the..?
LEFT, and an increase in the actual price level does not shift short-run aggregate supply
Money supply and Interest?
go against each other
Money demand and Interest?
goes together
How FED controls changes in money supply
MONETARY POLICIES
- increase in money supply -> decrease in reserve requirement -> lend out more money
- can also change short-term interest rates by lowering or raising the discount rate that banks pay
Multiplier Process
- changes in spending (1/1-MPC)
- Initial change in spending x Spending multiplier = overall change in AD
- Initial change in taxes x tax multiplier = overall change in AD
(-MPC/1-MPC)
Other things the same, an increase in the price level induces people to hold..?
more money, so they lend less, and the interest rate rises
Sticky wage theory of short-run aggregate supply curve when the price level rises more than expected..?
production is more profitable and employment rises
Decrease in price level causes interest rates to..?
decrease, the dollar depreciates, and net exports increase
