Econ Test 4

Taylor's rule

4% federal funds rate, 2% inflation rate is tolerable. For every 1% above that, the real federal funds rate goes up by .5% and the nominal federal funds rate goes up by 1.5%

Calculate increase or decrease in taxes

= (MPC)M x change in taxes

calculate multiplier

= 1/MPS or 1/1-MPC

Calculate the value of the dollar

= 1/price level When the price of goods goes up, the value of the dollar goes down

Calculate change in real GDP

= M x change in initial spending

Reserve ratio equasion

= commercial bank's required reserves / commercial bank's checkable-deposit liabilities

What are fractional reserves

The bank will have to pay only a fraction back to the Fed

Money functions as

a store value, a unit of account, and a medium of exchange

Progressive tax system

a tax who's average tax rate increases as the taxpayer's income increases. A tax for which the average tax rate rises with GDP

Proportional tax

a tax whose average tax rate remains constant as the taxpayer's income increases or decreases. a tax for which the average tax rate remains constant as GDP rises or falls

If you are estimating your total expenses for school next semester, you are using money primarily as

a unit of value

On a diagram where the interest rate and the quantity demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by

a vertical line

Excess reserve

actual reserve - required reserve

The total demand for money curve will shift to the right as a result of

an increase in nominal GDP

Built- in stabilizer

anything that increases the government's budget deficit during a recession and increases its budget surplus during an expansion without requiring explicit action by policy makers. Advantage is that it doesn't require action by congress, but could take a lot of time

The difference between a budget deficit and the public debt

budget deficit is the government spending greater than tax revenue for one year public debt is the accumulation over time of budget deficits that are offset by any budget surpluss

If the MPS in an economy is 0.1 government could shift the aggregate demand curve righward by 40 billion by

increasing government spending by 4 billion: Multiplier = 1/1-MPC or 1/MPS = 1/0.1 = 10 > 40bil/10 = 4 billion

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy

Assets demand depends on what

interest rates

When money supply increases

interest rates go down

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability

Expansionary fiscal policy is so named because it

is designed to expand real GDP

Assets =

liabilities + net worth

Deflation is characterized by what

low output

purchasing groceries using a debit card best exemplifies money serving as a

medium of exchange

Transactions demand depends on what

nominal GDP and income

During a recession, households often experience a decrease in income, moving them into a lower tax bracket

non discretionary

Spending on unemployment benefits increase when more people become employed during a recession

non discretionary

The goldsmith's ability to create money was based on the fact that

paper money in the form of gold receipts was rarely redeemed for gold

The asset demand for money is most closely related to money functioning as a

store of value

What corrects inflation?

Contractionary fiscal policy

Which of the following statements is correct? • The actual reserves of a commercial bank equal its excess reserves minus its required reserves • a bank's liabilities plus its net worth equal its assets • When borrowers repay bank loans, the supply of money increases • A single commercial bank can safely lend a multiple amount of its excess reserves

A bank's liabilities plus it's net worth equal its assets

M1

Currency + Checkable deposits

Crowding-out effect

An expansionary fiscal policy may increase the interest rate and reduce investment spending, thereby weakening or cancelling the stimulus of the expansionary policy. When the government increases spending, spending in the private sector may decrease

bog controls BSUS

Board of Governors controls

Discretionary fiscal policy

Changes in government spending and tax collections designed to achieve a full employment and non inflationary domestic output. Used to control or regulate the business cycle

Differentiate between discretionary fiscal policy and non discretionary or built - stabilization policy

Discretionary fiscal policy is a policy action aimed at stabilizing the business cycle. Examples include changes in government spending and changes in taxes levied. Non discretionary fiscal policy is automatic which include the automatic stabilizers of increasing net taxes in an expansion and decreasing net taxes during a recession.

What corrects for a recession?

Expansionary fiscal policy

FOMC

Federal open market committee, in charge of selling securities in the open market

Why can't be used in the form of money?

Food is parishable

Most modern bank systems are based on

Fractional reserves

Calculate the change in government spending need to close the GDP gap

GDP gap / M

Budget deficit

Government spending in excess of tax revenues

Which thing does not cause any curves to shift

Interest rates

Brief description of fiscal policy and what are it's goals

It is a deliberate attempt by the government to either increase or decrease government spending or taxes in order to correct for recession and inflation. Its goals are full employment, to stabilize prices, and achieve economic growth

Money multiplier equation

It magnifies excess reserves into a larger creation of checkable-deposit money

Which is not a part of the M2 money supply?

Large denominated time deposits

A bank that has assets of $85 billion and a net worth of $10 billion must have

Liabilities of $75 billion

M2

M1 + small time deposits

Explain the effect of a discretionary increase in government spending of $50 billion on the economy when the economy's marginal propensity to consume is .75

MPC= .75 Multiplier = 1/ 1-. 075 = 4 4 x 50 billion = 200 billion

The transactions demand for money is most closely related to money functioning as a

Medium of exchange

Calculate the increases or decreases in taxes

Real GDP = (MPC)M x T

lag problems

Recognition- beginning of recession/awareness Wait and see: continued recession/inflation Legislation: between need identified & solution transmission: between action taken and effect Effectiveness: if action had effect

Arrange the following in a commercial bank's balance sheet Stock shares 300,000 Reserves 60,000 Property 290,000 Checkable deposits 150,000 Securities 40,000 Loans 60,000

Reserves 60,000 - Assets Property 290,000 - Assets Securities 40,000 - Assets Loans 60,000 - Assets Stock Shares 300,000 - Liabilities and net worth Checkable Deposits 150,000 - Liabilities and net worth Assets = liabilities and net worth

Why are financial institutions required to keep reserves?

To control the supply of money

Countercyclical discretionary fiscal policy calls for

deficits during recessions and surpluses during periods of demand-pull inflation

Which of the following is correct? • a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right • a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged • Deflation will shift both the transactions demand curve for money and the total money demand curve to the left • inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged

deflation will shift both the transactions demand curve for money and the total money demand curve to the left

The reserves of a commercial bank consist of

deposits at the federal reserve bank and vault cash

Congress decides to increase taxes during a period of expansion

discretionary

Congress votes to expand spending on infrastructure

discretionary

Discretionary vs non discretionary

discretionary allows a broker to buy and sell securities without the client's consent. A non-discretionary the client makes all the trading decisions.

Define asset liquidity

easily accessible cash vs house

Actual reserve

excess reserve + required reserve

Contractionary fiscal policy

helps control demand-pull inflation 1) Decrease government spending 2) increase taxes 3) combination of the two

Expansionary fiscal policy

increase government spending, reduce taxes, combination of the two Pursue expansionary fiscal policy in a recession

In defining money as M1, economists exclude time deposits because

they are not directly or immediately a medium of exchange