Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Econ Higher > Macro > Flashcards

Macro Flashcards

1
Q

What are the 5 macro-economic goals?

A
  1. Price stability 2. Reducing unemployment 3. Adequate rate of economic growth 4. Reduction in income inequality 5. External equilibrium or balance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What does price stability mean?

A

Lowering inflation and coming out of deflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why is deflation bad?

A

It decreases demand of inelastic goods and profits go down so there is less investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Example of a country that faced deflation?

A

Japan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why would you not want a fast rate of economic growth? Why adequate?

A

It leads to inflation as more demand is placed on resources.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does external equilibrium or balance mean?

A
  1. Refers to balance between imports and exports 2. Not always dependent on the country, but deals with trade relations between them 3. Rich can borrow more easily 4. More exports than imports
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What economic goals might clash with each other?

A
  1. Economic growth might trigger inflation, which is not price stability 2. Reduction in income inequality can affect growth. 3. Price stability might not be conducive to economic growth.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the two approaches to macro?

A

Neo classical and neo keynsian

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does the neo classical approach deal with?

A

• Supply side • Non-activists • Focuses on the long run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Who created neo classical approach?

A

Adam Smith

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does the neo keynsian approach deal with?

A

• Demand side • Activists • Focuses on the Short Run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

In the case of a deflationary gap, what would neo classicists suggest?

A

Self correcting mechanism will bring the economy back to equilibrium because of the wage price flexibility. Therefore people will work for less, so production gets cheaper, so short run aggregate supply increases. The economy will always go back to equilibrium in the long run. We come out of the gap at a lower price level. Graph: SRAS moving down and to the right.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is wage price flexibility?

A

It states that demand of labor is elastic.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

In the case of a deflationary gap, what would neo keynsians suggest?

A

Self correcting mechanism will not work because wage price flexibility does not work, as there is a lack of wage price stickiness. Also people’s expectations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is wage price stickiness?

A

When the nominal wage (not adjusted for inflation) is hesitant to change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Why is there a lack of wage price stickiness?

A

• Unions and minimum wages mean even if people are willing to be paid less they can’t be • Government intervention (subsidies, e.g. farmers) • Oligopoly is the predominant structure, which makes wage prices sticky

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How would neo keynsians suggest fixing the deflationary wage gap? How would you come out of the deflationary gap? Graph?

A

Increasing government spending or decreasing taxes. We would come out of the gap at a higher price level. Aggregate demand would move up to the right.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a deflationary gap?

A

Deflationary gap is the shortfall in aggregate demand from the level required to maintain full employment equilibrium in an economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is inflationary gap?

A

IDK An inflationary gap is the difference between the current level aggregate demand and the anticipated aggregate demand that would be experienced when an economy is at full employment, also referred to as the potential GDP.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What would a neo classicists approach to an inflationary gap be? Graph?

A

The economy will go back to equilibrium because of increase in costs. Graph: SRAS moves up to the left

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What would a neo keynsian approach to an inflationary gap be? Graph?

A

Same process as fixing a deflationary gap but shifting D to the left instead, so increasing taxes or reducing government spending. Graph: AD shifts down to the left

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is aggregate demand?

A

The sum of all goods and services in all the markets in the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How do you calculate aggregate demand? What is this?

A

Equal to spending by consumers, businesses, governments and net exports (exports minus imports). It is just GDP!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Why does aggregate demand slope downwards?

A

The income effect and the substitution effect

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the income effect?

A

If money income remains the same and and the price level decreases, aggregate demand will increase and visa versa.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is aggregate supply?

A

All the final goods and services which businesses plan to produce at different price levels.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is short run aggregate supply? What’s on the axes of the curve?

A

It assumes that factor prices do not change. Axes: real income vs price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is the Keynsian SRAS curve? What are the three parts to a Keynsian SRAS curve? What’s on the axes of the curve?

A

It is Keynes theory of the SRAS following a recession 1. Recession - flat 2. Normal 3. Physical limit of production - steep Axes: real income vs price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is the recession part of the Keynsian SRAS curve?

A

As production increases the price level changes very little because there are a lot of unused factors available. Once they are put into use, income increased but price level does not because the cost of production does not increase since you are using unused resources.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is the normal part of the Keynsian SRAS curve?

A

As you produce more you use up more resources so price level increases as producers must be incentivised to make more.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What is the physical limit of production part of the SRAS curve?

A

Output reaches the Neoclassical Long Run Aggregate Supply Curve. There are no more goods to utilise, you cant increase output. It is perfectly inelastic because in the long run nothing is fixed so they can adjust to anything. If the PL decreases they produce more and their income remains the same.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is LRAS?

A

It assumes that factor prices adjust and shows the relationship between full employment, real income and price level.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Why does price level increase as you use up more resources?

A

Because resources become more scarce and people bid up the price for them.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What does the Keynsisan SRAS curve look like?

A

Curving upwards, starts flat. Eventually turns into LRAS curve which is perfectly inelastic, so it is a straight line down.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What is the long run?

A

A period when all markets are in equilibrium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What are the factors that shift AD?

A
  1. Fiscal policy 2. Monetary Policy 3. Foreign Income Changes 4. Expectations 5. External shocks
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Fiscal policy is:

A

Government spending and taxation. Actions by the government to stabilise the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Monetary policy is:

A

The use of money supplies and interest rates by the central bank to influence the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

How can fiscal policy shift AD?

A

If the government increases spending and/or decreases taxes AD will shift to the right. If they decrease spending AD will shift to the left.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Why will AD shift to the right if government increases spending?

A

AD = C + G + I + (X - m) G is government spending, so increased government spending equals increased AD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Why will AD shift to the right if government decreases taxes?

A

AD = C + G + I + (X - m) Decreased tax means more disposable income so C (consumer spending) goes up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

How will monetary policy shift AD?

A

If interest rates are raised then AD will shift to the left. If they are lowered then AD will shift to the right.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Why will higher interest rates shift AD to the left?

A

Higher interest rates mean less borrowing and more saving so there is less consumer expenditure.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

How will foreign income changes shift AD?

A

If foreign income increases then AD shifts right.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

How will currency devaluation shift AD?

A

AD will shift to the right

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Why will AD shift to the right if currency devalues?

A

Foreigners have more money in relation to your goods so there are more exports. Increased exports means higher AD because AD = C + G + I + (X - m)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Why will AD shift to the right if currency value increase?

A

Foreigners have less money in relation to your goods so there are less exports.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

How do external shocks effect AD?

A
  1. National and international events uncertainty, AD shifts downwards since people save more and there is less investment. 2. Social issues: Negative social environment will lower AD and vice versa. 3. Natural events: Disasters will lower aggregate demand and good events will raise it.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What is the multiplier effect?

A

An initial change in spending will set off a spending chain that is magnified in the economy so the multiplies shows how spending is magnified.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Real income is?

A

The purchasing power of your income adjusted for inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

How do you calculate real income?

A

Nominal income divided by the price level (?)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What is Keynes concept of the multiplier?

A

He states that any autonomous (independent, invisible hand) change in the economy impacts the economy by more than the amount of the change. E.g. an investment of 10 million will add more than 10 million to the real income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

What is marginal propensity to consume?

A

The amount by which any change in income leads to a change in consumption (on a national scale).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

How do you calculate mpc?

A

= ∆C/∆Y change in cost over change in income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What is marginal propensity to save?

A

The amount by which any change in income ;eads tp a change in saving.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

How do you calculate mps?

A

=∆S/∆Y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

mpc + mps =

A

1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

why does mpc + mps = 1?

A

Because you can either consume or save

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

How is the multiplier (K) determined?

A

By the marginal propensity to consume. The bigger it is, the more money will be multiplied.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

K =

A

K = 1/1-mpc = 1/mps

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

Why is the multiplier determined as it is?

A

Because of the ripple effect. More money means more consumption which means more money for others. If investment/money decreases, impact will be multiplied by k.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

According to Keynes, how do you get the economy out of a recession?

A

The government must spend money because nobody else will because they have negative expectations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

How do expectations shift AD?

A

If expectations are positive, AD is shifted to the right.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

Why do positive expectations shift AD to the right?

A

People spend more when they are positive about the future of the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

What is the accelerator?

A

It explains that the level of planned investment varies with changes in the rate of growth of demand which depends on the rate of growth of income or output.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

How does the accelerator work?

A

The rate of income growth will change the rate of the growth of demand which will determine investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

What are the differences between the multiplier and the accelerator?

A
  1. Cause Multiplier is autonomous and caused by investment. Accelerator is income led. 2. Comes from Multiplier comes from a change in autonomous expenditure and accelerator comes from the rate of change in Y
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

What are limitations of fiscal policy?

A
  1. Lags 2. Pork Barreling 3. Irreversibility 4. Crowding out
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

What kinds of lags are there?

A
  1. Recognition lag 2. Political lag 3. Implementation 4. Effectiveness
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

What is the recognition lag?

A

Time that it takes the government to recognize which phase of the business cycle the economy finds itself in.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

What is the political lag?

A

The time that it takes the politicians to reach an agreement, for example passing a bill.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

What is the implementation lag?

A

The time it takes the policy to be implemented.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
73
Q

What is the effectiveness lag?

A

The time it takes for an implemented policy to come into effect

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
74
Q

What is pork barreling?

A

Politicians do favours for each other and spend a lot hoping to get reelected. This is an inefficient and wasteful.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
75
Q

What is irreversibility?

A

It is impossible or wasteful to stop half way in a project so it may require a large amount of money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
76
Q

What is crowding out? Graph?

A
  1. Direct: government enters the market for a good and crowds out the private sector. 2. Indirect: Government borrows money to start businesses so demand for money increases so interest rates increase which crowds out people who need a loan. Graph: demand shifts to right, with the arrow being government borowing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
77
Q

What is the permanent income hypothesis?

A

Fiscal policy may not be effective in changing consumption habits if the tax changes are not permanent, if tax cut is temporary then money is saved for emergencies and in case taxes are implemented again.

78
Q

What is the life cycle hypothesis?

A

Studies showed that consumption tends to be relatively stable over time and depends on the part of the life cycle at which we are at/

79
Q

At what stage of life is mpc high?

A

According to Franco Modigliani, mpc is relatively high in the young adult stage and tends to decrease towards the middle stages and then increases towards retirement.

80
Q

Why is mpc high when you are a teenager and old?

A

When you are a teenager you dont think because its not your money. When you are old you think you deserve to treat yourself because you have worked hard your whole life. when you are an adult you dont spend as much because you relate every thing to the amount of hours of work it is worth.

81
Q

What factors can shift SRAS?

A
  1. Change in factor prices 2. Change in weather conditions
82
Q

What factors can shift SRAS and LRAS?

A
  1. Changes in quantity of capital (including technology) 2. Changes in quantity and quality of labour 3. Changes in supply side policies affecting incentives 4. Changes in legislation such as age for leaving school and for retirement
83
Q

How does changes in supply side policies affecting incentives shift the SRAS and LRAS?

A

Countries that allow people to keep more money encourage more entrepreneurship and therefore more supply.

84
Q

How does changes in legislation such as age for leaving school and for retirement shift SRAS and LRAS?

A

Lowering age for leaving school would provide more labour.

85
Q

What is money?

A
  1. A widely accepted medium of exchange (goods and services) 2. Stores value (investment) 3. Unit of account (it is a measuring tool for value) 4. It is a standard of deferred payment (serves for borrowing and lending)
86
Q

Types of money:

A
  1. Flat money 2. Bank money
87
Q

What is flat money? What are the types of flat money?

A

All forms of legal tender (medium of exchange) 1. Paper money 2. Commodity money

88
Q

What is paper money?

A

Usually worth more than the paper it’s printed on

89
Q

What is commodity money?

A

(metallic money such as coins) metallic content may be worth more than the denomination

90
Q

What does counterfeit money do in an economy?

A

Counterfeit money is known as “bad money” by Sir Thomas Gresham who says “bad money drives out good money” meaning good money becomes worth less, leading to inflation.

91
Q

What is bank money?

A

• Credit cards (substitutes for money) • Debit cards • Checks • Transfer funds etc.

92
Q

What are the types of interest?

A

Real and nominal

93
Q

What is nominal interest?

A

Numerical (e.g. 1.2%)

94
Q

What is real interest?

A

Numerical adjusted for price changes (e.g. 1.2% interests and 1% inflation = 0.2%)

95
Q

What is the relationship between interest rates and bond prices?

A

There is an inverse relationship between interest rate and bond prices. As interest rates go up bond prices go down.

96
Q

Why is there an inverse relationship between interest rates and bond prices?

A

When interest increases, money is put into the banks so demand of bonds decreases. When interest rate increases then the government increases interest on new bonds so old ones are sold. Supply of bonds increases so the price of bonds decreases.

97
Q

What is the fisher equation for exchange?

A

MV = PQ M = money supply V = velocity of circulation of money P = price level Q = quantity of goods and services produced in the economy

98
Q

In the fisher equation for exchange, what does M stand for?

A

Money supply

99
Q

In the fisher equation for exchange, what does V stand for?

A

Velocity of circulation of money

100
Q

In the fisher equation for exchange, what does P stand for?

A

Price level

101
Q

In the fisher equation for exchange, what does the Q stand for?

A

Quantity of goods and services produced in the economy

102
Q

In the fisher equation for exchange, what is the problem with PQ?

A

It assumes that all goods and services produced in the economy are bought

103
Q

What is MV equal to?

A

Total GDP on expenditure side, which is equal to aggregate demand

104
Q

How is MV equal to the total GDP on the expenditure side?

A

In theory this should just be money supply, but there are some assets within the set of money supply that remain unspent such as real estates since it is relatively rare they get bought and sold and they do not serve as income for others: they are not liquid. Therefore, you need to multiply money by the velocity of circulation to see the actual aggregate demand.

105
Q

What is price level?

A

The current weighted average of the price of all the goods and services in an economy.

106
Q

Why is price level weighted?

A

If a country produces a lot of one cheap good, and a little of an expensive good, if it is not weighted the price level will be far too high. It is weighted because it depends how much a country produces of one good.

107
Q

What does price level indicate about a country?

A

It indicates essentially how expensive it is to live there. E.g. Norway has a very high price level, Guatemala has a much lower one.

108
Q

How is PQ the GDP from the demand side?

A

Assuming all goods and services produced are bought, the price level is an average price of all goods and services produced so this would equal the amount of money provided by consumers to suppliers.

109
Q

What does the fisher equation for exchange state?

A

In the short run, velocity of circulation of money is constant and quantity of goods bought and sold is fixed. Since MV = PQ, any change in money supply will change price level in the same direction and proportion.

110
Q

What are limitations to the fisher equation for exchange and who came up with them?

A

Milton Friedman said that the velocity of money is not necessarily constant (during an inflationary period or a recession for example) and quantity of goods bought and sold could be increased in the short run if there are unused resources. Fishers equation for exchange assumes that the economy is on the PPF line but in real life no economy works on the PPF line. If not you can increase quantity of goods bought and sold without a proportional decrease in price level.

111
Q

What is the conclusion to Milton Friedman’s limitations to the fisher equation for exchange?

A

Changes in the money supply lead to changes in price level in the same direction but not the same proportion.

112
Q

What does the supply of money depend on?

A

The definition of money.

113
Q

How many definitions of money are there?

A

3: M1, M2 and M3

114
Q

What is M1?

A

The narrowest definition of money. Including currency, chequable deposits and traveller’s cheques

115
Q

What is liquidity?

A

The ease at which an asset can be converted into cash without much loss of value.

116
Q

What is M2?

A

M1 + savings deposits and less easily transferrable forms of money

117
Q

What is M3?

A

M2 + large time deposits and less liquid forms of money but NOT stocks and bonds

118
Q

What changes from M1 to M2 to M3?

A

The forms of money get progressively abstract and less liquid

119
Q

What does M3 not include?

A

stocks and bonds and even less liquid things

120
Q

What is demand of money?

A

According to keynes it is the liquidity preference which is most acceptable.

121
Q

Why would you want forms of money that is more liquid?

A
  1. Precaution 2. Transactions 3. Speculations
122
Q

Why does precaution cause you to want money that is more liquid?

A

In case of emergencies such as inflation or run on the banks, it is better to have easily exchangeable money

123
Q

Why does “transactions” cause you to want money that is more liquid?

A

Real estate for example holds value, but is not useful because it cannot carry out transactions, where as liquid money can.

124
Q

Why does speculation cause you to want money that is more liquid?

A

if you speculate that your currency will increase in value, you want more of it

125
Q

What is the opportunity cost of holding money?

A

The interest rate

126
Q

What factors will shift the demand (or liquidity preference) for money according to keynes?

A
  1. Expectation (of inflation) 2. Higher price level now 3. Changes in real income
127
Q

How will expectation (of inflation) shift the demand for money?

A

If inflation is expected to go up there will be more expenditure today shifting liquidity preference to the right and vice versa.

128
Q

How will higher price level now shift the demand for money?

A

It will shift liquidity preference to the right since more money is needed to buy the same goods and services.

129
Q

How will changes in real income shift the demand for money?

A

More income means more expenditure which will shift LP to the right. If you have more money, you want to spend more money although proportionally you spend less.

130
Q

What factors will shift the demand for money according to Friedman?

A
  1. Total wealth 2. Preferences 3. Cost of holding money
131
Q

How will total wealth shift the demand for money?

A

For example if you win the lottery or a relative leaves you money this will shift liquidity preference to the right as you want to spend it. Not the same as income though.

132
Q

How will preferences shift the demand for money? Example?

A

Certain cultures save more and spend less which shifts liquidity preference to the left. For example Japanese people tend to save more money. Also certain people just prefer not to carry cash for safety reasons particularly with the introduction of money substitutes.

133
Q

How will the cost of holding money shift the demand for money?

A

If the opportunity cost of holding money is high then you will not hold money. For example if real estate is appreciating you will buy real estate, or if interest rates are high.

134
Q

What are other, alternative factors that shift the demand for money?

A
  1. Nominal interest rate 2. Real interest rate
135
Q

What is the difference between nominal and real interest rate?

A

Nominal is the interest rate before inflation and real is adjusted for inflation.

136
Q

What is a bank?

A

A financial intermediary that borrows money from savers and lends money to borrowers.

137
Q

What are the three major advantages of banks?

A
  1. High liquidity 2. Cost reduction 3. Risk reduction
138
Q

How do banks have high liquidity?

A

There is a large amount of money available because they collect money from savers.

139
Q

Why do banks reduce costs?

A

There is economies of scale, meaning a division of labour and borrowing and lending in large amounts.

140
Q

Why is there reduced risks with banks?

A

Banks spread the risk since there are many savers and investments not just one. • Banks can research credit checks on savers • There are many banks so savers can research credibility.

141
Q

What do banks need?

A
  1. Capital 2. Charter (permission from the government) 3. Physical infrastructure 4. Depositors 5. Balance sheet with assets and liabilities (what the bamk owns vs what it owes)
142
Q

What decisions are involved in banking?

A

How much money will be kept in the bank in the form of reserves in order to: 1. Meet the requirements of the central bank 2. Meet customers requirements with vault cash (cash kept on hand day to day) 3. Meet the reserve ratio requirement

143
Q

What is the reserve ratio requirement?

A

A fraction of money that commercial banks have to keep in the central bank

144
Q

How does a bank make a profit?

A
  1. By investing 2. By the interest rate spread
145
Q

What is the interest rate spread?

A

It is lending. The profit comes from the difference between the interest charged to people when the bank lends and the interest paid to depositors.

146
Q

What are islamic banks?

A

They make profit by lending to business and receiving part of the profits since they cannot charge interest. Part of this profit is distributed to the depositors.

147
Q

How do banks guarantee that money is safe?

A

Banks are insured, usually by the government

148
Q

How much does the FDIC insure up to in the US?

A

250,000 dollars

149
Q

What is a central bank?

A

It controls the monetary base

150
Q

What is the monetary base?

A

The sum of reserves of commercial banks on deposit at the central bank, as well as vault cash as well as the money in circulation. It is legal tendr.

151
Q

Why is the monetary base smaller than money supply?

A

The monetary base is smaller than the money supply because money supply includes bank money created by commercial banks.

152
Q

How do commercial banks create bank money?

A

By monetizing the debt.

153
Q

What is monetizing the debt?

A

The creation of money by lending. When banks lend they introduce money because it is not their money that they are lending (it is other depositors money).

154
Q

How much money can banks create?

A

Only an amount equal to their excess reserves.

155
Q

What are excess reserves?

A

Actual reserves - required reserves

156
Q

What is a run on the bank?

A

When depositors lose trust in the bank and ask for their money back at the same time.

157
Q

What is a monopoly bank?

A

idk

158
Q

monopoly bank?

A

idk

159
Q

monopoly bank?

A

idk

160
Q

Why does this happen with monopoly bank?

A

IDK

161
Q

What is a money multiplier?

A

Measures the increase in money supply for every dollar increased in the monetary base.

162
Q

What are required reserves?

A

The minimum amount of deposits the bank must hold by law (10% in US)

163
Q

What is the functions of the central bank?

A
  1. Currency exchange 2. Lending to certain regions of sectors (usually in developing countries) 3. Setting Monetary Policy
164
Q

How can the central bank control monetary base?

A

They can control it directly by printing or withdrawing money from the market.

165
Q

How can the central bank control money supply?

A

It is not as easy as monetary base, quantitive and qualitative instruments are needed.

166
Q

What are quantitative instruments?

A

Designed to affect the quantity of money supply in the economy such as the amount of loans.

167
Q

What are the quantitive instruments used?

A
  1. Reserve ratio 2. Open Market operations 3. Discount rate 4. Change in liquidity ratio (not in notes?)
168
Q

What is the point of the reserve ratio?

A

To reduce inflation/deflation

169
Q

How does the reserve ratio reduce inflation?

A

In order to reduce inflation the central bank will increase the reserve ration. Then excess reserves decrease and the commercial bank cannot create as much money.

170
Q

Why is using the reserve ratio regularly not a good idea?

A

It is too strong an instrument. Canada, Australia and New Zealand do not have a reserve ratio.

171
Q

What are open market operations?

A

When the central bank goes into the money markets and buys or sells government bonds, certificates and securities.

172
Q

What is the point of open market operations?

A
  1. To reduce inflation 2. To combat deflation
173
Q

How will open market operations combat inflation and deflation?

A

To reduce inflation the government sells bonds because then it obtains cash which reduce excess reserves which reduces the central banks ability to make money. (I kind of get this but how does it reduce excess reserves) They will buy back bonds to put more money into the market.

174
Q

Evaluate open market operations as an instrument to modify money supply:

A

They effect the monetary base precisely by putting money in and out of circulation. They are flexible, so easily reversible, and powerful because they effect money supply. All in all good.

175
Q

What is a discount rate (in terms of a quantitive instrument)?

A

The rate at which the central bank lends money to private banks. It goes hand in hand with federal fund rate.

176
Q

What is federal fund rate?

A

The interest rate at which commercial bank lend to each other.

177
Q

How does the discount rate reduce inflation?

A

If the central bank increases the discount rate it is more expensive for commercial banks to borrow so less money is in circulation, decreasing monetary base and supply.

178
Q

Evaluate it:

A

Something to do with government, ask leo

179
Q

Of the three quantitive instruments, which is favoured?

A

Economists usually favour open market operations most.

180
Q

What are qualitative instruments?

A

They affect the purpose for what loans are made

181
Q

What are the qualitative instruments used by the central bank?

A
  1. Moral suassion 2. Regulation on specific deposits and loans 3. Margin requirements
182
Q

What is moral suassion?

A

The central bank has power so they suggest who to loan to

183
Q

Why do commercial bankers listen to the central bank in moral suassion?

A
  1. The central bank is the last resort lender 2. The central bank has the best economic information
184
Q

What is regulation on specific deposits and loans?

A

An order from the central bank to increase or decrease specific interest rates for certain sectors to encourage growth in these sectors.

185
Q

What are margin requirements?

A

Requirements set by the central bank specifically for loans to purchase stock in the stock market. The loaner must pay a certain percentage with their own cash, as a guarantee, effecting the amount of money lent.

186
Q

What is the monetary transmission mechanism?

A

It describes how policy induced changes in the nominal price and interest rate impacts real variables such as employment rate and aggregate output. Changes in the MS and MD curve changes the MD curve.

187
Q

monetary transmission mechanism graph

A

monetary transmission mechanism graph

188
Q

stages of monetary transmission mechanism:

A
  1. A change in the money supply or money demand changes the interest equilibrium rate. 2. This changes desired investment. 3. This changes desired expenditure, shifting the AD curve.
189
Q

monetary transmission mechanism graph

A

monetary transmission mechanism graph

190
Q

monetary transmission mechanism graph

A

monetary transmission mechanism graph

191
Q

monetary transmission mechanism graph

A

monetary transmission mechanism graph

Econ Higher (23 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions