ECON 2020

medium of exchange, unit of account, store of value, standard of deferred payment

Core functions of money in the economy

slef-funding, quasi-governmental, and non-democratic

FED

expansionary monetary policy

FED actions to counter-act recession?

rate at which commercial banks borrow and lend their excess reserves to each other overnight, FED upper and lower target

FFR

monetary system backed by "full faith and credit" of the issuing government (monopoly money)

Fiat Monetary System

self report data over reflects expensive goods when sales data shows more inexpensive goods

Formula/Outlet bias

expansionary fiscal policy

Government actions to counter-act recession?

if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation (bad money drives out good)

Gresham's law

with rising unemployment and inflation, stabilization policy can only address one while worsening the other (gov't leans to fix inflation)

How does stagflation pose a problem for governmental stabilization policy?

interest rate for reserves manipulates banks lending choices

IOR

tax rate that maximizes government revenue (55-85%)

Laffer curve

lack of portability, grasham's law, supply limits, resource loss

Negatives of commodity money

fully trust based and no supply limit

Negatives to FIAT money

new products are incorporated into calculation after availability increases and price drops

New Product Bias

IOR & TOMO

New tools

RRR, PCR, FFR, POMO

Old tools

interest rate FED charges banks on overnight loans

PCR

buying and selling of primarily government bonds to impact money supply

POMO

SRAS

Philips curve breaks down when the _______ curve shifts in AD/AS

fixes all four commodity money negatives

Positives of FIAT money

cannot determine if price increased are from increased quality or inflation

Quality bias

FED set ratio for required bank reserves

RRR

payment at a future date is made possible because of the general acceptability of money (loan contracts)

Standard of deferred payment

market basket quantities do not fluctuate with inflation, overestimates inflation that consumer faces

Substitution bias

short term REPO or reverse REPO's with terms and set date

TOMO

data collection, data analysis, policy formulation, policy implementation, impact

What are 5 lags for stabilization policy?

physical capital goods, natural resources, labor, productive know-how

What are factors of production?

consumption, gross investment, government spending, net exports

What does GDP consist of?

production capabilities at a certain time

What does aggregate supply mean?

healthcare, education, environment (quality of life

What does gdp fail to measure?

period where prices are irrelavent

What does long run mean?

inverse of unemployment rate and wage inflation

What is Philips curve relationship?

risk that pumping money into the economy won't have any effect

What is a liquidity trap?

purchasing government bonds or other financial assets in order to stimulate economic activity

What is quantitative easing?

when an economy is experiencing inflation and stagnant/declining growth

What is stagflation?

consumption, interest rates, NX, government spending

What shifts AD?

factors of production and institutional factors

What shifts LRAS?

factors of production and input costs (labor, energy $, etc)

What shifts SRAS?

unemployment that rises during economic downturns and falls when the economy improves

cyclical unemployment

liquidity trap and zero bound principle

flaw of interest rate mechanism

unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs

frictional unemployment

FED control over interest rates as an economic whole

interest rate mechanism

allows for buying and selling of goods instead of barter system

medium of exchange

to flatten out the business cycle in order to lower overall volatility

purpose of stabilization policy?

provides an easy way to accumulate wealth

store of value

mismatch between workers and employers, workers skills are not applicable in modern labor market

structural unemployment

provides stability by putting a price value to an good

unit of account

LRAS

what curve represents the economy at potential/full employment (max efficiency)

helps determine what monetary/fiscal policy needs to be used, fix unemployment or inflation

what guidance does philiaps curve provide for policy makers?

some frictional and structural, but not cyclical unemployment

what is full employment rate of unemployment