LM 3&4: Monetary & Fiscal Policy Flashcards
What is the difference between monetary policy and fiscal policy?
Monetary policy is used by the central bank to influence the quantity of money and credit.
Fiscal policy relates to the government’s taxation and spending to impact the economy
What is the difference between Keynesian and monetarists?
Keynesians: believe fiscal policy can greatly affect aggregate demand, output, and employment
Monetarists: believe that fiscal policy has only a temporary impact on aggregate demand and that monetary policy is the most effective means of addressing inflationary pressures.
What is the difference between expansionary policy and contractionary policy?
expansionary policy: boost the economy by increasing spending
contractionary policy: slow down economy by cutting back on spending
What is government deficits?
difference between government revenues and expenditures over a time period
What is a barter economy?
pay for goods and services with other goods & services
What 3 important functions does money fulfill? MSM
- Medium of Exchange (used to purchase goods and services)
- Store of Value (money is valuable)
- Measure of Value (measure value of all goods & services)
What is a promissory notes?
promissory note is a written promise by one party to make a payment of money at a date in the future
What is fractional reserve banking?
practice of lending money based on assumption all customers wont want their money back at the same time (if so leads to bank runs)
What is the total deposits formula?
initial deposit / reserve requirement = total deposits
What is the money multiplier formula?
MM = 1 / reserve requirement
What is the formula for total money available at the end using the money multiplier?
total money available at end = initial deposit * money multiplier
What is the quantity theory of money and formula?
general price level of goods and services is proportional to the money supply in an economy
M×V=P×Y
M: is the quantity of money
V: is the velocity of money
P: is the average price level (average price of transactions)
Y: is the real output (total number of transactions)
What are 3 reasons people hold money? TPS
- Transactions-related balances
- Precautionary balances
- Speculative balances
What is nominal rate of interest formula?
refers to the interest rate after taking inflation & real interest rate into account
i = (1+real interest rate) * (1+inflation rate) -1
By increasing money supply it allows people to:
buy more goods & services
What is the fisher effect and formula?
Fisher effect states the real rate of interest is stable. Changes in the nominal interest rate are a function of expected inflation
Rnom=Rreal+πe
What are the 7 roles of central banks? SBLRCSM
- Supplier of Currency
- Banker to Government and Bankers’ Bank (commercial banks)
- Lender of Last Resort (print money)
- Regulator of Payments System
- Conductor of Monetary Policy
- Supervisor of the Banking System
- Maintain Foreign Currency Reserves and Gold Reserves