Quiz 4 Flashcards
recessionary gap
- actual RGDP < potential RGDP
- actual to the left of LRAS
- U > 5
inflationary gap
- actual RGDP > potential RGDP
- actual to the right of LRAS
- U < 5
Fix recessionary gap with FP
↑ gov spending
↓ tax
↑ transfer
Fix recessionary gap with MP
↓ RRR / discount rate / interest rate
buy US security
3 timing of FP n MP
- decision
- implementation
- effects
1st timing
decision - how long it takes to make a decisions
FP - only 1 budget per yr so their process to make a decision is SLOW
MP - FOMC meets 6 times per yrs or more if needed
- 2 days meeting and decisions are made on the 2nd day
2nd timing
implementation - how long it takes to put a decision into action
FP - slow
MP - almost instantaneous implementation
3rd timing
effect - how long it takes to see measurable change in eco
FP - relatively fast
MP - very slow ( any MP actions impact interest rates)
deposit creation multiplier equation
total deposit = initial deposit x (1/RRR)
- RRR in decimals
M1
liquid money that is easily spent / converted
what does M1 consist of
cash/coin from:
1. outside of banks
2. amount in bank’s checking account
3. amount in non-bank checking account
- statefarm
4. amount in travelers check
M1 Size
19 trillions
M2
broader measure of money that consist of M1 + some less liquid asset
21 trillion
what does M2 consist of
- all of M1
- amount in saving account
- amounts in money market mutual funds (MMMP)
- amounts in money market deposit accounts (MMDA)
- amount in certificates of deposit (CDS)
indexing
method to cope w inflation
- periodic adjustment to wages/benefits base on measuring change in PL
1st problems with indexing
lag between occurrence of inflations + when wages/benefits are adjusted
- indexing happen once per yr
- ex: inflation in 2022 but benefits comes after
2nd problems with indexing
inflation may not be measured accurately
- BLS can make mistakes
3rd problems with indexing
may reduce incentives to control inflations
- since you’re getting “benefits” they might not want to resolve it
4th problems with indexing
disruptive to international trades
M1 vs M2 liquidity
- M1 is more liquid such as cash, checks, so on
problem with deposit creation multiplier
- assumes bank hold only RRR, and all excess reserves are loaned out, and any loaned amount is subsequently redeposited into the banking system
- problem cuz actual multiplier is smaller than indicated
FP vs MP international trades
international trade changes impact the position of AD curve
- expand + FP = AD →
but it tends to ↑ IR and appreciate $ = AD ← - expand + MP
↓ lower IR & depreciate $ = AD →
quantity theory of money
works w equation of exchange and develop assumption:
if v is constant then ↑ M can ↑ py (nominal GDP)
- its actually P that ↑ not py
- change in m will change p
v = velocity
m = money
p = price
y = real gdp
influence on velocity of money
-affect by
1. how frequently ppl are paid
- more payment = ↑ V
2. efficiency of banking system
- more efficient = ↑ V
3. change in interest rate
- ↑ interest = ↑ V
4. change in PL
- ↑ (or positive) change = ↑ V
crowding out
gov borrow excessive amounts of money
where ↑ gov spending/borrowing lead to ↑ IR which
C ↓ I ↓ (x-m) ↓
chain reaction
1st influence on supply (loanable funds)
- supply are savers
△ in wealth/income - ↑ wealth/income ↑ supply = supply →
2nd influence on supply (loanable funds)
△ in time preferences
- ↓ time pref ↑ supply
(this is because ↑ time perf means they want to spend more NOW = less saving = less supply)
time preferences
ppl tends to prefer to spend more money sooner rather than later
3rd influence on supply (loanable funds)
demographic △
(more specifically age)
- if there are more ppl in prime earning yrs, ↑ supply
demographic graph
↑ money → stages of life
- 3 stages
1. borrowing (early stage) - spend more than income
2. saving (prime/mid stage) - save more than spend
3. dis-saving (late) - spend less
1st influences on demand
- loanable funds
investor conflict
- if business management feel more confidence about the future ↑ D
2nd influences on demand
- loanable funds
productivity of capital
- ↑ capital productivity ↑ D
3rd influences on demand
- loanable funds
gov borrowing (all level) ↑ D ↑
Short run phillip’s curve
inverse relationship between inflation and unemployment, where they move opposite directions in SR
AS/AD + Phillips
AS = left + right
AD = up + down
if AS move left or right, Phillip’s point will move the opposite
- left = right
if AD move up or down, Phillip’s will move the same direction
FED + Target
- must choose either target money or interest rates
- forfeit one when choosing the other
When does FED target money
- target money if concerned w inflation
- change M1/M2
When does FED target interest rates
- when it’s concerned with unemployment or RGDP
- change federal fund rates
if interest rate is not at target, FED either contract or expand market
- move AD for expand
- move AS for contract
Conservative vs liberal
conservative want smaller role for gov
- rec gap = ↓ tax rate
- in gap = ↓ gov spending
liberal want bigger role for gov
- rec gap = ↑ gov spending
- in gap = ↑ tax
monetizing
central bank buys debt of its own government
problem w monetizing
- cause central bank to respond bc they have target on IR w excessive borrowing
- cause separation between FP and MP to disappear
- since FP+MP are expansionary, this add inflationary pressure
- gov adding to debt by ↑ borrowing
