Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

MACRO > exam 1 > Flashcards

exam 1 Flashcards

1
Q

Endogenous Variables

A

Variables the model explains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

exogenous variables

A

Variables the model takes as a given

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Differences between CPI and GDP deflator

A

1) GDP deflator measures the prices of all goods/services produced while CPI measures the price of only goods/services bought by consumers
2) GDP deflator only includes goods produces domestically
3) CPI is computed using a fixed basket of goods where the GDP deflator allows the basket of goods to change overtime as the composition of GDP chances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Reasons the CPI tend to overstate inflation

A

1) substitution bias. When relative prices change the true cost of living rises less rapidly then the CPI
2) Introduction of new goods
3) Changes in quantity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Money Supply

A

quantity of money available in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Monetary Base (B)

A

total amount of money held by the public as currency (C) and by the banks as reserves (R)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Monetary Base (B)=

A

B=C+R. Total amount of money held by the public as currency (C) + by the banks as reserves (R)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

The monetary base is directly controlled by who

A

The Federal Reserve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Reserve-deposite Ratio and formula

A

is the fraction of deposits (𝐷) that banks hold in reserve (i.e., π‘Ÿπ‘Ÿ=𝑅/𝐷). It is determined by business policies of banks and the laws regulating banks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Currency-Deposit ration (cr) and formula

A

is the amount of currency (𝐢) people hold as a fraction of their holdings of demand deposits (𝐷; i.e., π‘π‘Ÿ=𝐢/𝐷)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

M= and B=

A

M=C+D
Money supply = money held by the public as currency + the fraction of deposits that banks hold in reserve

B=C+R
Monetary base= money held by the public as currency + money held by banks as reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Money multiplier (m) formula

A

m=(cr+1)/(cr+rr)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Money Supply (M) formula

A

M=B*m
Money Supply=monetary base * money multiplier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Conclusions from the model of money supply

A

(1) The monetary base (𝐡) is proportional to the money supply (𝑀), and grows by the same percentage rate.
(2) As the reserve-deposit ratio (π‘Ÿπ‘Ÿ) decreases, the more loans banks make, and the more money banks create from every dollar of reserves. Therefore, a decrease in π‘Ÿπ‘Ÿ INCREASES π‘š and 𝑀.
(3) As the currency-deposit ratio (π‘π‘Ÿ) decreases, the fewer dollars of the monetary base the public holds as currency, the more base dollars banks hold as reserves and the more money banks can create. Thus, a decrease in π‘π‘Ÿ INCREASES π‘š and 𝑀.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Tightening or contractionary monetary policy

A

-Tightening or contractionary
-Increases the policy rate FFR and IOR
-If using OMO, quantitative tightening
-Increases market interest rate
-Reduces the money supply

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Easing or expansionary monetary policy

A

-Lowers the policy rate (FFR) and IOR
-If using OMO, quantitative easing
-Lowers market interest rates
-Increases the money supply

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is on the Fed’s Balance Sheet

A

Assets: securities and loans to financial institutions
Liabilities: Currency in circulation and reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

The Fed can influence the money supply (M) by

A

influencing the monetary base and influencing the reserve deposit ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Influencing the Monetary Base includes

A

open market operations, lender of last resort, and discount rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Open Market Operation

A

Influencing the monetary base (B; increase in B increases M (money supply))

Buying bonds -> selling currency -> B increases

Selling bonds -> buying currency -> B decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Discount Rate

A

interest rate the Fed charges on loans

if this rate falls its cheaper for banks to borrow from the Fed so B increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Reserve Requirements

A

Influencing the reserve-deposit ration (rr; increase in rr reduces money multiplier and money supply)

Banks have to have a minimum reserve amount

An increase in requirements tends to increase rr but is less effective when banks hold excess reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Interest on reserves

A

nfluencing the reserve-deposit ration (rr; increase in rr reduces money multiplier and money supply)

paid to banks for holding reserves

if the rate rises its more beneficial for banks to hold reserves so rr increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Floor vs Corridor System

A

In a floor system IOR (interest on reserves) becomes the policy rate

FFR=IOR, federal fund rate=interest on reserves

for floor the supply curves intersects the demand curve in its elastic portion causing plentiful reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Implications of Floor system vs Corridor system

A

much higher level of reserves in the system

swells the size of the CB balance sheet to undesirable proportions

loss of monetary policy control (Policy rate changes don’t induce monetary expansion or contraction as effectively as it did under corridor systems.)

26
Q

When do bank runs occur

A

occur when depositors fear that they won’t be able to access their money at the bank

27
Q

Illiquid

A

assets>liabilities, but does not have liquid assets (cash) on hand at a specific time. Illiquid banks can be saved

28
Q

Insolvent

A

assets<liabilities. β€œunderwater”. Most often happens when loans are defaulted on. If saved through a bailout, an insolvent bank cannot pay back the loan

29
Q

Sunspot Theory

A

Depositors run because other run. Can happen anytime, anywhere, to any bank, regardless of how financially sound it is. A run on an individual bank leads to contagion and a banking panic, where runs happen on more or all banks.

30
Q

Bad news Theory

A

Depositors run on a banks that are insolvent
Depositors watch bank activity to make sure their deposits are safe. If they think the bank is in a risky position (Too many bad loans, not enough reserves), they run.

31
Q

Costs of Bank Runs

A
  1. Depositors lose deposits
  2. Shareholders lose out
    - after the run, banks liquidate assets quickly to try and stay liquid
    - assets are sold at low prices to move them quickly in fire sale losses
  3. To borrowers: interrupts bank-borrower relationship
  4. For banking panics: money supply contracts and can cause recession in its own right
32
Q

Benefits of bank runs

A
  • runs on insolvent banks stop a β€œwealth destroying machine”
  • the threat of runs encourage banks to run a sound opperation
33
Q

Why are bank runs bad?

A

If a run is conducted on a solvent bank and it is forced to close, there is no benefit to offset the harm.
A solvent bank could become insolvent in a crisis due to fire-sale losses

34
Q

What are the intentions of FDIC?

A

It is intended to preserve public confidence in the banking system.

Therefore, mitigates large swings of the currency-deposit ratio (π‘π‘Ÿ), and allow the Fed to have more control over the money supply.

35
Q

Costs of FDIC

A

Bail out insolvent savings and loans institutions. Moral hazard because as the likelihood of being bailed out for risky behavior increases, the cost of engaging in risky behavior decreases

36
Q

Inflation

A

increase in the general level of prices

37
Q

Hyperinflation

A

inflation at an extraordinarily high level

38
Q

Quantity Theory of Money

A

MV=PT
-𝑀 is the quantity of money, and 𝑉 is the transactions velocity of money per period of time, so 𝑀𝑉 is also the number of dollars exchanged in a year.
-𝑇 represents the amount of transactions per period of time, and 𝑃 represents the price of a transaction, so 𝑃𝑇 represents the number of dollars exchanged in a year.

39
Q

The dollar amount of an economy’s output (PY) is only affected by what?

A

the money supply (M)

40
Q

Quantity Theory of Money with income instead of transactions

A

MV=Py
-π‘Œ refers to total income (output), and π‘ƒπ‘Œ refers to the dollar amount of output.
-𝑉 now refers to the income velocity of money, or the amount of times a dollar bill enters someone’s income in a given period of time.

41
Q

Nominal Variables

A

expressed in terms of money

42
Q

Real Variables

A

measured in physical units such as quantity or relative prices

43
Q

Assuming MV is fixed what is the relationship between Y and P

A

MV=number of dollars exchanged in a year
Y= nominal output
P= price level

If Y increase P decrease and vise versa. Real supply shocks affect scarcity and therefore prices

44
Q

Assuming Py is fixed what is the relationship between M and V

A

Py= dollar amount of output
M=quantity of money
V= income velocity of money or the amount of times a dollar bill enters someone’s income in a given period of time

If M increase then V decrease and vice versa. If more money is introduced to the economy the speed at which individual units circulate will decline

45
Q

Is inflation a tax?

A

Inflation is a tax on money holders.Government generates revenue at the expense of citizens
In a modern fully-monetized economy, that tax applies to everyone

46
Q

Political economy of revenue generating fiscal tools

A

taxation, seigniorage, and borrowing

47
Q

Fisher Equation

A

uses inflation to connect nominal and real interest rates

π’Š=𝒓+𝝅.
𝑖 is the nominal interest rate.
π‘Ÿ is the real interest rate.
πœ‹ is the inflation rate.

48
Q

Shoe-leather costs

A

the time and effort spent to minimize the effects of inflation on the eroding purchasing power of money.

49
Q

Menu Costs

A

the transaction costs of changing menu prices in response to inflation.

50
Q

Inflation and output in the short run

A
  • Shoe-leather costs:the time and effort spent to minimize the effects of inflation on the eroding purchasing power of money
  • menu costs:the transaction costs of changing menu prices in response to inflation.
  • complicated financial planning
  • unpredictability of relative prices
  • rigid tax laws
51
Q

Causes of Hyperinflation

A

Hyperinflation happens through excessive growth in the money supply.

Typically initiated to finance government debt.

Hyperinflation causes tax revenue to fall, as there is a delay between time taxes are issued and the time tax revenue is received.

Thus, there is a greater need for the gov’t to finance the debt by increasing the money supply.

Deadly Downward Spiral Ensues!!

52
Q

Consequences of Hyperinflation

A

Menu prices become incredibly large.

Extreme inconvenience and shoe-leather costs.

Hyperinflation could decrease revenue due to lags between the issuing of taxes and the retrieval of tax revenue.

Relative prices are distorted, affecting the ability to reflect relative scarcity.

Currency ceases to function, as barter becomes more feasible as a means of exchange.

53
Q

Natural Rate of unemployment

A

the normal rate of unemployment around which the economy fluctuates

54
Q

Frictional unemployment

A

The time it takes workers to search for a new job is frictional unemployment.

55
Q

Ways to reduce and increase frictional unemployment

A

Reduce: government agencies advising job opening, industry shifts, and offering career training

Increase: unemployment insurance and welfare schemes. By making unemployment less costly, people tend to remain unemployment longer

56
Q

Structural unemployment

A

Unemployment from sticky wages and job rationing

57
Q

Cyclical Unemployment

A

Cyclical movements of the unemployment that correspond to business cycle fluctuation

58
Q

Why are Wages Sticky?

A
  • minimum wage laws
  • higher minimum wages creates higher unemployment
59
Q

Sticky prices

A

When labor supplied exceeds labor demanded, firms must ration scarce jobs among workers.
Wages are sticky to downward movements

60
Q

European labor market vs US labor marker

A
  • higher unemployment
  • less hours works
  • caused by more unions, higher tax rates, and extensive welfare

MACRO (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions