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econ 202 > Quiz 4 > Flashcards

Quiz 4 Flashcards

1
Q

recessionary gap

A
  • actual RGDP < potential RGDP
  • actual to the left of LRAS
  • U > 5
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2
Q

inflationary gap

A
  • actual RGDP > potential RGDP
  • actual to the right of LRAS
  • U < 5
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3
Q

Fix recessionary gap with FP

A

↑ gov spending
↓ tax
↑ transfer

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4
Q

Fix recessionary gap with MP

A

↓ RRR / discount rate / interest rate
buy US security

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5
Q

3 timing of FP n MP

A
  1. decision
  2. implementation
  3. effects
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6
Q

1st timing

A

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

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7
Q

2nd timing

A

implementation - how long it takes to put a decision into action

FP - slow

MP - almost instantaneous implementation

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8
Q

3rd timing

A

effect - how long it takes to see measurable change in eco

FP - relatively fast

MP - very slow ( any MP actions impact interest rates)

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9
Q

deposit creation multiplier equation

A

total deposit = initial deposit x (1/RRR)

  • RRR in decimals
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10
Q

M1

A

liquid money that is easily spent / converted

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11
Q

what does M1 consist of

A

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

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12
Q

M1 Size

A

19 trillions

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13
Q

M2

A

broader measure of money that consist of M1 + some less liquid asset

21 trillion

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14
Q

what does M2 consist of

A
  1. all of M1
  2. amount in saving account
  3. amounts in money market mutual funds (MMMP)
  4. amounts in money market deposit accounts (MMDA)
  5. amount in certificates of deposit (CDS)
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15
Q

indexing

A

method to cope w inflation
- periodic adjustment to wages/benefits base on measuring change in PL

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16
Q

1st problems with indexing

A

lag between occurrence of inflations + when wages/benefits are adjusted

  • indexing happen once per yr
  • ex: inflation in 2022 but benefits comes after
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17
Q

2nd problems with indexing

A

inflation may not be measured accurately
- BLS can make mistakes

18
Q

3rd problems with indexing

A

may reduce incentives to control inflations
- since you’re getting “benefits” they might not want to resolve it

19
Q

4th problems with indexing

A

disruptive to international trades

20
Q

M1 vs M2 liquidity

A
  • M1 is more liquid such as cash, checks, so on
21
Q

problem with deposit creation multiplier

A
  • 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
22
Q

FP vs MP international trades

A

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 →
23
Q

quantity theory of money

A

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

24
Q

influence on velocity of money

A

-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

25
Q

crowding out

A

gov borrow excessive amounts of money
where ↑ gov spending/borrowing lead to ↑ IR which
C ↓ I ↓ (x-m) ↓
chain reaction

26
Q

1st influence on supply (loanable funds)

A
  • supply are savers
    △ in wealth/income
  • ↑ wealth/income ↑ supply = supply →
27
Q

2nd influence on supply (loanable funds)

A

△ in time preferences
- ↓ time pref ↑ supply
(this is because ↑ time perf means they want to spend more NOW = less saving = less supply)

28
Q

time preferences

A

ppl tends to prefer to spend more money sooner rather than later

29
Q

3rd influence on supply (loanable funds)

A

demographic △
(more specifically age)
- if there are more ppl in prime earning yrs, ↑ supply

30
Q

demographic graph

A

↑ 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

31
Q

1st influences on demand
- loanable funds

A

investor conflict
- if business management feel more confidence about the future ↑ D

32
Q

2nd influences on demand
- loanable funds

A

productivity of capital
- ↑ capital productivity ↑ D

33
Q

3rd influences on demand
- loanable funds

A

gov borrowing (all level) ↑ D ↑

34
Q

Short run phillip’s curve

A

inverse relationship between inflation and unemployment, where they move opposite directions in SR

35
Q

AS/AD + Phillips

A

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

36
Q

FED + Target

A
  • must choose either target money or interest rates
  • forfeit one when choosing the other
37
Q

When does FED target money

A
  • target money if concerned w inflation
  • change M1/M2
38
Q

When does FED target interest rates

A
  • 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

39
Q

Conservative vs liberal

A

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

40
Q

monetizing

A

central bank buys debt of its own government

41
Q

problem w monetizing

A
  1. cause central bank to respond bc they have target on IR w excessive borrowing
  2. cause separation between FP and MP to disappear
  3. since FP+MP are expansionary, this add inflationary pressure
  4. gov adding to debt by ↑ borrowing

econ 202 (5 decks)

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