Final Exam Flashcards
In the Equation of Exchange, What is constant in the short run
M x V = P x Q
V is constant in the short run.
What value is the Inflation rate in the
M x V= P x Q
P is the inflation rate
What is the inflation rate equation from the
M x V = P x Q
and why
Inflation rate = Growth rate in money supple - growth rate in real GDP
P= M - Q
Because velocity is constant
What is GNP
Gross National Product is the value of all goods and services produced in 1 year by labor and property supplied by the citizens of a country.
Crowding Out
describes the effect of a government budget deficit on investment spending
-when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending.
Stagflation
when there is high inflation (high prices) and high employment
Demand pull inflation
When aggregate demand outpaces aggregate supply
Main cause of inflation
Money supply grows faster than real GDP
Too much money to buy few goods and services
What causes a movement along the MD
What happens when it increases
Interest rates
High interest rate mean low money demand (people keep less cash)
Low interest rates mean high money demand (people keep more cash)
What causes MD to shift
and what happens when they increase.
Price level and Income
Increase in P = MD increase (you need to hold more cash)
Increase in Income = increase in MD
In an expansionary monetary policy MS
MS increases
What does the BOC do in an expansionary monetary policy to affect the MS
- Buys bonds
- decrease reserve ration
- decrease target overnight rate
What does the BOC do in a contractionary monetary policy to the MS
MS decreases
- BOC sells bonds
- target overnight rate increases
- reserve ration increases
What does the MS curve graph look like
Interest and Qm on the Y and X axis and its a straight line
What does the D curve and graph look like
Interest and Qm on the Y and X on a diagonal sloping down.
What happens when bank rate decreases
It is less costly to borrow from the central bank, so banks keeps less reserves and gives more loans
MS increases
What happens when the price level increase
Increase in the MD
What type of policy do you use to close a recessionary gap and what does this do to the M_
use an expansionary Monetary policy
Increasing the MS
What does the Goods market curve graph look like (hint it has LRAs and SRAs and AD)
P and Y on the Y and x axis AD sloping down LRA straight line and SRA sloping up
What type of policy do you use in an inflationary gap and what does this do to the money supply
Contractionary monetary policy and it decreases the MS
What does the phillips curve tell us
It shows us an inverse “negative” relation between inflation rate and unemployment rate in the short run.
Increasing one decreases the other.
Balance of Payment
Record that summarizes all international transactions of a country with the rest of the world during a certain period
What does the credit component do
Records any transaction that brings money to our economy
What does the debit component do
Records the money that goes out
Where are the capital inflows and outflows recorded
Capital inflows are recorded in the credit side
capital outflows are recorded in the debit side
what is recorded in the current account
grants and aid, and investment income
What is recorded in the capital account
loans and direct and indirect investments
Any transaction that brings money into the country is recorded where
credit side
Any transaction that takes money out of the country is recorded where
in the debit side.
