Econ 202 Chapter 13

BAILOUTS AND LOANS WERE PROVIDED IN EXCHANGE FOR?

AUSTERITY MEASURES AND GREATER SCRUTINY IF ECONOMIC POLICIES.

THE EUROZONE

CREATED IN 1992 BY 12 NATIONS THAT ENVISIONED A SINGLE CURRENCY TO FACILITATE TRADE.

EXTRORDINARY ACTIONS BY THE FED AND ECB LED TO SOME?

CRITICISMS AS LONG TERM INFLATION BECAME MORE LIKELY.

THE EFFECT OF MONETARY POLICY

Classical economists believe that expansionary monetary policy only creates inflation Velocity (V) is assumed to be fixed. Output (Q) is fixed at full employment

IRVING FISHER

Developed a theory to measure the utility of commodities. Showed the interest rate as the link between capital and income. Developed key idea: equation of exchange

AS A RESULT OF THE WORLDWIDE FINANCIAL CRISIS?

EUROZONE BEGAN TO HAVE PROBLEMS IN 2008

MILTON FRIEDMAN

Emphasized monetary policy over fiscal policy. Advocated a policy of consistent growth in the money supply.

TIGHT MONEY, RESTRICTIVE MONETARY POLICY

FED ACTS TO DECREASE THE MONEY SUPPLY TO FIGHT INFLATION.

EASY MONEY, ACCOMMODATIVE MONETARY POLICY

FED ACTS TO INCREASE THE MONEY SUPPLY TO STIMULATE THE ECONOMY.

WHAT WAS THE FIRST ERUOZONE MEMEBR TO FACE A FINANCIAL CRISIS IN 2008

IRELAND

MONETARY GROWTH RULE

Increasing the money supply by a set percentage each year at a level consistent with long-term price stability and economic growth. It is slow to correct severe economic shocks.

FED ACTIONS TO STEM THE 2007/2009 FINANCIAL CRISIS

It used normal monetary policy tools and some it hadn't used since the 1930s. By December 2008, the Fed had lowered the federal funds target rate to essentially zero percent. The Fed then turned to extraordinary measures when it began making massive loans to banks and buying large amounts of risky assets.

THE KEYNESIAN MODEL

Keynes argued that economies can get stuck out of equilibrium. Wages and prices are sticky in the short run.

MONETARY POLICY CHALLENGES

LOW INTEREST RATES AND BAD INCENTIVES RESULTED IN A HOUSING BUBBLE THAT COLLAPSED AFTER 2006.

THE EQUATION OF EXCHANGE

M × V = P × Q M is the supply of money. V is velocity of money (average number of times money is spent in a year). P is the price level. Q is the economy's real output level

What happens when a demand shock pushes output below long run equilibrium?

Monetary policy can shift AD back to the right to restore long-run output and prices

MONETARY POLICY

POLICIES AIMED AT CONTROLLING THE MONEY SUPPLY TO TARGET INTEREST RATES IN AN ECONOMY

EACH MEMEBR OF THE EUROZONE MUST?

SATISFY CERTAIN ECONOMIC CRITERIA

INFLATION TARGETING

Setting a target on the inflation rate, usually around 2% per year, and adjusting monetary policy to keep inflation in that range. It is difficult to correct for supply shocks.

TOOK EXTRAORDINARY ACTIONS TO PREVENT THE COLLAPSE OF THE EURO

THE EUROPEAN CENTRAL BANK

IN 2007 THE ERUOZONE EXPANDED BEYOND?

THE ORIGINAL 12 MEMEBR TO INCLUDE SEVERAL EASTRN EUROPEAN NATIONS

THE LONG RUN: CLASSICAL THEORY

They assume that wages, prices, and interest rates are flexible. As a result, labor, product, and capital markets are expected to adjust to keep the economy at full employment.

THE TAYLOR RULE

To address both inflation and output, the Fed can follow the Taylor rule: Fed funds target rate = 2 + current inflation rate + ½(inflation gap) + ½(output gap)

SRAS CURVE

UPWARD SLOPING BECAUSE HIGHER PRICES CAN TEMPORARILY INCREASE OUTPUT

EXPANSIONARY MONETARY POLICY

Used in times of economic downturn to boost aggregate demand. The Fed purchases bonds in open market operations to push the interest rate lower, leading to more spending and investment

CONTRACTIONARY MONETARY POLICY

Used when inflationary pressures build up in the economy. The Fed sells bonds in open market operations to push the interest rate higher, slowing down or reducing aggregate demand

LRAS CURVE

VERTICAL BECAUSE OUTPUT IS FIXED IN THE LONG RUN, WAGES AND PRICES BEING FLEXIBLE

THE EUROPEAN STABILITY MECHANISM

WAS TO SET UP FACILITATE LOANS TO EUROZONE MEMBERS

MONEY ILLUSION IS THE PERCEPTION THAT...

WEALTH RISES WHEN THE MONEY SUPPLY GROWS. THE DELAYED REACTION IN WAGES AND PRICES MAKES THEM STICKY

The twin goals of monetary policy are?

economic growth with low unemployment. stable prices with moderate long-term interest rates.

The quantity theory of money is defined by the

equation of exchange

What do Keynesians believe about fiscal policy?

fiscal policy is effective in the short run

What do monetarists believe about fiscal policy?

in the short run monetary policy is effect

Monetarists believe an increase in money supply will increase spending in the short run but leads only to

inflation in the long run.

According to the Keynesian Model an increase in the money supply would?

lower interest rates, leading to increased investment and aggregate demand

Monetarists believe that the crowding out effect

makes fiscal policy ineffective

What do classical economists believe about fiscal policy?

monetary and fiscal policies are ineffective

Types of monetary rules include:

monetary growth rule. inflation targeting. the Taylor rule.

A product of the classical theory is the?

quantity theory of money