MORE to DO Flashcards
WHAT are the Four stages of the business cycle?
THE four stages are:
(1) trough
(2) recovery
(3) peak
(4) recession
HOW do you calculate gross domestic product (GDP), under the income approach?
Net Domestic Product (NDP) plus Capital consumption allowance (e.g. Depreciation) for the year
WHAT is an effective fiscal policy program to help reduce demand-pull inflation?
INCREASING taxes and DECREASING Government spending
i.e. Demand-pull inflation results when demand for goods and services exceeds supply, thereby pulling prices upward
Hence, increasing taxes and decreasing government spending will decrease aggregate demand
WHAT is an instrument of monetary policy used as a means to control the money supply?
Open market operations
WHY? - Because Open market operations permit the Federal Reserve to control the money supply
i.e. through the buying and selling of government securities to increase or decrease, respectively, the excess reserves of commercial banks
WHAT are three functions of money?
As a medium of exchange
As a unit of account; and
As a store of value
WHAT is the Federal Reserve System’s reserve ratio?
THE percentage of a commercial bank’s deposit liabilities that must be deposited in the central bank or kept on hand
i.e. customer deposits that banks must keep on hand or deposit with the Fed
HOW would you best describe Deflation?
A general decline in prices for goods and services and in the level of interest rates
It can be caused by;
A fall in demand unaccompanied by a contraction of supply; or
An increase in output unaccompanied by an increase in demand
WHAT is the discount rate of the Federal Reserve System?
THE rate that the central bank charges for loans granted to commercial banks
WHAT is the purpose of Expansionary policy?
To make more money available for banks to lend out
e.g. The Fed may purchase Treasury securities (called “open market operations”) which makes funds available to commercial banks
HOW do you calculate the Money Multiplier?
1 ÷ RR
That is 1 divided by the Reserve Requirement
i.e. The money multiplier is the reciprocal of the reserve ratio
WHAT is a Federal Reserve policy that would increase the money supply?
Reducing the discount rate
WHY? - Because reducing the discount rate makes borrowing from the Fed more attractive for a bank
i.e. more funds are available for loans to customers, which increases the money supply
WHAT is the relationship between the Money supply and interest rates?
Money supply and interest rates are inversely related
i.e. WHEN the Money Supply rises interest rates go down (WHEN money supply drops interest rates go higher)
WHAT measures would be an effective way to dampen the economy and prevent inflation?
Reduce government spending, increase taxes, reduce money supply, and increase interest rates
HOW do you calculate the M1 (aka the narrow money stock) money supply?
BY using coins, currency, and checking deposits
WHAT concept is associated with the phrase “too many dollars chasing too few goods?”
THIS describes what happens when the demand for goods rises and the supply cannot keep pace
i.e. the prices of existing goods rise, called demand-pull inflation
