Final Exam Review - Extras Flashcards
What is the current inflation target?
2%
What is the equation of exchange and its relationship to the Quantity Theory of Money?
MV = Py (M=M1, V=velocity of money, P=GDP deflator, y=real GDP)
(money to buy stuff = nominal GDP)
The theory comes from assuming V is constant
Explain very briefly how Irving Fisher (Quantity Theory) believed inflation is determined by the growth rate of the money supply over economic growth
%𝚫P = inflation = %𝚫M^s - %𝚫Y
Inflation is a monetary phenomenon ⟹ money growth causes inflation (after taking account of economic growth rate)
Name the 3 motives for holding money in the Keynesian Theory of Money Demand
Transactions motive
Precautionary motive
Speculative motive
If interest rates rise in the Keynesian Theory, why does money demand fall?
The opportunity cost of money rises (buy bonds instead of holding money)
Write out the Federal Government’s Budget Constraint
DEF = G - T = 𝚫MB + 𝚫B
Hyperinflation definition = 50% per month is a country currently exhibiting it
When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then
both inflation and aggregate output will be unchanged.
Nonactivists of the policies believe that
government action is unnecessary, ages and prices are very flexible, the self-correcting mechanism is very rapid
Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.
demand; more
The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for
nonactivists.
Complete Milton Friedman’s famous proposition: “Inflation is always and everywhere a ________ phenomenon.”
monetary
Not enough reserves (balance sheets)? Here are four things to do:
Borrowing, sell securities, borrow from the Fed, sell loans
