Final Flashcards
Bater
Trading goods for goods
requires “coincidence of double wants”
Commodity Money
has an intrinsic use
shells, wheat, precious metals
fiat money
has no intrinsic value, paper money
functions of money
- medium of exchange
- unit account
- store of value
- standard of deferred payment (pay over time)
M1 =
currency, checking accounts, savings accounts
M2 =
M1 + bank CD’s, time-deposits, money market mutual funds
banks creating money
When banks take deposits in, they loan out much of that money to borrowers. Borrowers spend, and the money gets deposited elsewhere, increases money supply
reserves
money bank has on hand or at federal reserve
deposit multiplier =
1 / reserve ratio
Creation of federal reserve, bank runs
Fed was designed as a “bank for banks”
The lender of last resort
Goal is to prevent bank panics
discount loans and discount rate
Relevant when banks borrow directly from the fed, and the discount rate is the interest rate banks would pay for this borrowing
monetary policy tools
old and new tools, before and after 2008
Quantity of theory of money
M x V = P x Y
Inflation and money supply
Derives that there is a directly relationship between M and P (inflation)
Monetary policy
Actions taken by the federal reserve
Fed = our central bank
Two monetary policy targets
Money supply
Interest rates
Interest rates
FFR (federal funds rate)
Rate at which banks can borrow from each other
Four goals, dual mandate of the Fed
Price stability
Full employment
Stability of financial markets
Economic growth
two most important (dual mandate)
Price stability
Full employment
Monetary policy tools (old)
O.M.O (open market operations), discount policy, reserve requirements
Monetary policy tools (new)
interest on reserves, reverse repurchase agreements, FFR is just a chosen administered rate
Money demand
Graph on phone
Interest = price of money
Federal funds rate
Interest rate when banks borrow from each other
Discount rate
Interest rate when banks borrow directly from Fed
As interest rates go up, AD goes down
Interest rates up, consumer, net exports, and investment decrease, AD shift left (decrease)
As interest rates go down, AD goes up
Interest rates down, consumer, net exports, and investment increase, AD shift right (increase)
Expansionary monetary policy
Producing interest rates to get AD up, done to increase output, GDP, get out of recession
Contractionary monetary policy
Interest rates increase to get AD to decrease, done to fight inflation because left AD shift result in lower equilibrium price levels
Data lags
Policy can be tough to “time” property, due to data delays
Good forecasting is necessary
Inflation targeting
2% target
Fiscal policy
Done by president and congress
Changes in Government Purchases or Taxes
Automatic stabilizers
Unemployment insurance and progressive income taxes
Federal expenditures
Includes purchases, also + transfer payments like social security
purchases include
the G
Government revenue sources
Taxes, income tax, payroll taxes, corporate taxes, tariffs and fees
Problems with social security and medicare
Becoming unsustainable
Few paying in many taking money out
Expansionary fiscal policy
G increase or T decrease to get AD increase
T decrease (consumer increase or investment increase)
Creates government budget deficit
Contractionary fiscal policy
G decrease or T increase
Rarely done for purposes of fighting inflation
Mainly done for budget considerations
Government purchases multiplier =
change in equilibrium GDP / change in G > 0
Tax multiplier =
change in equilibrium GDP / change in T < 0
Crowding out in short run
G increase and investment decrease
In long run, we have more debt, and G is a larger % of GDP
Costs of government spending
In long run, we have more debt
tax wedge
Difference between pre-tax and post-tax wage
