Econ Exam 2

Stagflation

higher unemployment and higher inflation together

Monetary Policy

to help the economy achieve price stability, full employment, and economic growth. Four main instruments- open-market operations, the reserve ratio, the discount rate, interest on excess reserves

What "backs" the money supply?

The money supply is backed by the government's ability to keep the value of money relatively stable.

Inflation

A persistent rise in the general level of prices

M2

consists of M1 plus savings deposits, including money market deposit accounts, small denominated time deposits, and money market mutual fund balances held by individuals.

Cost-Push Inflation

Inflation resulting from increases in resource costs which reduces aggregate supply (costs pushing up prices from below)

Main Factors of the Crisis of 07-08

unprecedented rise in mortgage loan defaults, the collapse or near-collapse of several major financial institutions, and the generalized freezing of credit availability.

Shrinkflation

Same price but less in the "package"

Disinflation

a decrease (slowdown) in the rate of inflation

Monetary Policy affects GDP

affects the economy through a complex cause-effect chain. Policy decisions affect commercial bank reserves, changes in reserves affect the money supply, changes in the money supply alter the interest rate, changes in the interest rate affect investment, changes in investment affect aggregate demand, and changes in aggregate demand affect real GDP and price level.

Explain the Functions of money

anything that is accepted as a medium of exchange, a unit of monetary account, and a store of value can be used as money.

Describe the components of the U.S money supply

Two major definitions of the money supply. M1 & M2.

Hyperinflation

Extraordinarily rapid inflation having a devastating impact on output and employment

Demand- Pull Inflation

Inflation resulting from an excess of total spending (demand) over supply (demand pulling up pulling)

Deflation

a persistent fall in the general level of prices

M1

consists of currency and traveler's checks and checking deposits owned by individuals and businesses