Exam 3 Flashcards
Tom buys a bond issued by Budweiser, which uses the funds to buy new machinery for one of it’s breweries.
Tom is saving, while Budweiser is investing
Other things the same, when interest rate rises
people would want to lend more, making the quantity of loanable funds supplied increase.
Unemployment rate affected by unmotivated unemployment?
decreases employment rate and labor-force participation rate decreases
medium of exchange function in money
purchase or exchange of goods between parties
Reserve Ratio formula
(loans/ deposits) x 100
Suppose congress were to institute an investment tax credit, what would happen to the market of loanable funds?
Demand for loanable funds would shift right
Reserve Requirement
(reserves/ deposits) x 100
- remember that if there is a holding in excess reserves, you must subtract excess from total reserves
Saving formula
Y-T-C —> (GDP - Consumption - GOV purchase)
Unemployment formula
(unemployed/ total force) x 100
Natural rate of unemployment?
is the amount of unemployment in the economy that we normally experience
- structural + frictional
Liquidity
The ease at which an asset can be turned into the economy’s medium of exchange
Labor force participation rate
(employed & unemployed/ total adult population) x 100
Present value formula
FV x 1/(1+g)^n
Future Value formula
PV x (1 + g)^n
Federal funds rate
the interest rate that banks charge each other to borrow or lend excess reserves overnight; the process of how money is made out of thin air
When the reserve requirement goes down, what happens to the money multiplier?
when the requirement goes down, the multiplier goes up (inverse relationship)
Frictional unemployment
unemployment is when one person is temporarily unemployed in the process of moving one job to another
Structural Unemployment
involuntary unemployment due to a mismatch of skills
cyclical unemployment
not enough jobs for those who want them due to recession
How to find public saving
T - G; total tax collected - total gov expenditures
How to find private saving
Y - T - C
Policy 1
FED buys bonds (rise in investment) which moves the money supply increase (equilibrium shifts right
Policy 3 (a budget deficit):
interest rate rises and investment falls (inverse relationship)
Duties of the FED
regulate banking system & act as a “banker’s bank” (ie making loans to banks)
Efficiency wage
an employer paying higher than minimum wage in order to retain more skilled workers, increase productivity, and increase loyalty.
Discouraged workers
unemployed persons who are not currently searching for a job
List 3 tools the FED uses to change money
- change in the reserve requirement
- change in the discount rate
- open market operations (buying & selling US gov bonds) [MOST FREQUENT]
Commodity money
Money in which it’s value is obtained from the resource it is made with
Fiat Money
a government-issued currency which is not a commodity
Demand Deposit
balanced in a bank account that people/ depositors can access on demand by writing a check/ debit card
T Chart Equations
Reserves = deposits x required reserve ratio
Loans = reserves - deposits
Deposits = reserves - loans
Money multiplier
amount of money the banking system generates with every dollar of reserves
- AS RESERVE REQUIREMENT INCREASES, MONEY MULTIPLIER DECREASES
Change in checkable deposit
initial deposit x money multiplier
Change in money supply
change in checkable deposit - initial deposit
Required reserves
Deposits x Reserve requirement
Excess reserves
reserves - required reserves
