Week 8 - Macro policy issues - Part 1

Question 1

what is monetary policy?

Answer 1

the process by which the monetary authority of a country controls the supply of money

Question 2

what is fiscal policy?

Answer 2

the use of government expenditure and revenue collection to influence the economy

Question 3

what is the quantity equation?

Answer 3

MV = PY

nominal money supply)(velocity) = (Price level)(Real GDP

Question 4

how does the quantity equation relate to the neutrality of money?

Answer 4

• Links growth rate of money supply to Inflation rate + Economic growth rate
• Predicts what will happen to the economy when the Fed pursues a monetary policy action

Question 5

what is money neutrality?

Answer 5

the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption - Long-Term Impact

Question 6

what is the gold standard?

Answer 6

•Pegs money supply in an economy to fixed quantity of gold. It was created to help keep the money supply fixed. * see homework 8 for details.

Question 7

what is the Brenton woods agreements?

Answer 7

• Outlined Western financial arrangements from mid-1940s to 1960s
• Created International Monetary Fund (IMF) and World Bank
• Established fixed exchange-rate system