Economics final

tight money or restrictive monetary policy

Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation. See also contractionary monetary policy

financial intermediaries

Financial firms (banks, mutual funds, insurance companies, etc.) that acquire funds from savers and then lend these funds to borrowers (consumers, firms, and governments).

What would be the price of a perpetuity bond that has a $100 interest payment and a 10% yield?

$1,000 The price (P) of the bond is $1,000. It is determined by dividing the interest payment by the yield, so the equation: is P = $100 ÷ 0.10, or P = $1,000.

If Amanda has an income of $40,000 and disposable income of $30,000, how much does she pay in taxes?

$10,000 Amanda pays $10,000 in taxes. The amount is determined by subtracting disposable income from total income.

inflation

A general rise in prices throughout the economy. It is a measure of changes in the cost of living

disinflation

A reduction in the rate of inflation. An economy experiencing disinflation still faces inflation, but at a declining rate.

The _____ measures the average prices paid by urban consumers for a typical market basket of consumer goods and services.

CPI This is a measure of the average change in prices paid by urban consumers for a typical market basket.

Suppose the consumer price index in 2010 was 150 and its corresponding basket of goods was $19,000. If the consumer price index was 140 in 2006, what is the cost of that same basket of goods in that year?

$17,733 To find the cost of the basket of goods in 2006, divide the CPI in 2006 by the CPI in 2010 and multiply by the cost of the basket of goods in 2010. The equation is Cost in 2006 = (140/150) × $19,000 = 0.9333 × $19,000 = $17,733.

What is the yield of a perpetuity bond that has an interest payment of $100 and a price of $10,000?

1% The yield (Y) on the bond is 1%. It is determined by dividing the interest payment by the price of the bond, so the equation is: Y = $10,000 ÷ $100, or Y = 1. 1 / 100 = 0.01 or 1%.

Suppose that government spending decreases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will decrease by

1,000 billion

2010 200 2011 230 2012 250 If 2010 is the base year, then the consumer price index for 2012 is:

125

Suppose the consumer price index in 2006 was 120 and its corresponding basket of goods was $19,000. If that same basket of goods was $23,000 in 2010, what was the value of the consumer price index in that year?

145 To find the value of the CPI in 2010, divide the cost of the basket of goods in 2010 by its cost in 2006 and multiply by the value of the CPI in 2006. The equation is CPI = ($23,000/$19,000) × 120 = 1.21 × 120 = 145.2, or 145.

Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is:

3

An investor purchased $1,000 bond that paid $50 in coupon payments over the life of the bond. What is the return on investment?

5% $50 ÷ $1,000 = 5%

The Fed's Board of Governors consists of _____ members who are appointed by the president and confirmed by the Senate.

7

Last year, the consumer price index (CPI) was 115 while the consumer price index for this year is 125. The rate of inflation is:

8.7

M2

A broader definition of money that includes "near monies" that are not as liquid as cash, including deposits in savings accounts, money market accounts, and money market mutual fund accounts.

financial system

A complex set of institutions, including banks, bond markets, and stock markets, that allocate scarce resources (financial capital) from savers to borrowers.

Laffer curve

A curve that shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at a 100% tax rate.

Laffer curve

A curve that shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at a 100% tax rate. maximum is the tip of the curve

money multiplier

A formula that measures the potential or maximum amount the money supply can increase (or decrease) when a dollar of new deposits enters (exits) the system and is defined as 1 divided by the reserve requirement.

medium of exchange

A function of money in which goods and services are sold for money, then the money is used to purchase other goods and services.

fiscal sustainability .

A measure of the present value of all projected future revenues compared to the present value of projected future spending

fiscal sustainability

A measure of the present value of all projected future revenues compared to the present value of projected future spending.

cyclically balanced budget

Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions.

Calculating Inflation Using the CPI

CPI = (Cost in current period) ÷ (Cost in base period) × 100 Example: Suppose a market basket consists of pizza and soda Base year prices: Pizza = $6 and Soda = $2 Current year prices: Pizza = $8 and Soda = $3 CPI = ($8 + $3) ÷ ($6 + $2) × 100 = 137.5 (average prices rose 37.5% since the base year)

Strong consumer demand:

Consumers spend more money, demand increases, and prices rise.

fractional reserve banking system

Describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process.

Medium of exchange:

Eliminates the double coincidence of wants common to barter.

Which region or country holds 28% of U.S. banknotes?

Europe and Russia Europe and Russia hold 28%.

annually balanced budget

Expenditures and taxes would have to be equal each year.

contractionary monetary policy

Fed actions designed to decrease the money supply and raise interest rates to shrink income and employment, usually to fight inflation.

Keynesian Theory short run? long run?

Fiscal policy is effective, while monetary policy is ineffective in times of deep recession. Economy adjusts to long-run equilibrium; increased money supply leads to higher prices.

Which of the following did NOT occur when the housing bubble collapsed?

Housing prices increased dramatically. This did not occur when the housing bubble collapsed.

Increase Infrastructure Spending:

Improving roads and communications networks, stabilizing legal and financial systems, and improving human capital and technologies (R&D).

Decrease Tax Rates:

Increases aggregate supply by providing firms incentives to expand or for individuals to work more.

Monetarist Theory

Increasing the money supply reduces interest rates, which leads to greater consumption and investment. Monetary policy is therefore effective in the short run. Fiscal policy is ineffective as it crowds out consumption and investment.

Why is the consumer price index a conditional cost-of-goods index?

It measures only private goods and services. The CPI is a conditional cost-of-goods index because it measures only private goods and services.

monetary rule

Keeps the growth of money stocks such as M1 or M2 on a steady path, following the equation of exchange (or quantity theory), to set a long-run path for the economy that keeps inflation in check.

Yolanda took $5,000 from her checking account and put the money in her savings account at the same bank. Based on that information, which of these is true?

M1 went down by $5,000, but M2 was unchanged.

Higher interest rates affect aggregate demand by:

Making borrowing more expensive, forcing consumers and firms to cut spending and investing Giving people more incentive to save than spend Forcing the government to spend more on financing the national debt Increasing the value of the U.S. dollar, making U.S. exports more expensive

unit of account

Money provides a yardstick for measuring and comparing the values of a wide variety of goods and services. It eliminates the problem of double coincidence of wants associated with barter.

expansionary fiscal policy

Policies that increase aggregate demand to expand output in an economy. These include increasing government spending, increasing transfer payments, and/or decreasing taxes.

discretionary fiscal policy

Policies that involve adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation.

teaser rates

Promotional low interest rates offered by lenders for a short period of time to attract new customers and to encourage spending.

In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then:

Q = $10 trillion.

Unit of account:

Reduces the number of prices needed to just one per good.

The Fed uses three major tools to conduct monetary policy:

Reserve requirements: Establishing the minimum level of reserves banks must hold. Discount rate: Setting the interest rate at which banks can borrow from the Fed. Open market operations: Buying and selling government securities to target the federal funds rate.

In 2015, more than 40% of federal government spending was on:

Social Security, Medicare, and Medicaid. Social Security, Medicare, and Medicaid constituted more than 40% of spending in 2015.

automatic stabilizers

Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers.

THE FEDERAL RESERVE AT WORK: TOOLS, TARGETS, AND POLICY LAGS

The Fed's tools include altering reserve requirements, changing the discount rate, and open market operations (the buying and selling of government securities). The Fed uses open market operations to keep the federal funds rate at target levels. The Fed's policies, as with fiscal policy, are subject to information, recognition, decision, and implementation lags. Unlike fiscal policy, the Fed's decision lags tend to be shorter because Fed policies are not subjected to lengthy legislative processes.

How Does the Government Finance Its Deficit (G - T)?

The Federal Reserve prints money to buy bonds: ΔM Treasury bonds held domestically and externally: ΔB Sales of government assets: ΔA

MONETARY THEORIES

The classical equation of exchange is M × V = P × Q. In the long run, velocity (V) and output (Q) are assumed to be fixed. Therefore, changes in the money supply translate directly into changes in the price level: ΔM = ΔP. In the short run, Keynesian monetary analysis suggests that changes in the money supply change interest rates, leading to changes in investment and aggregate demand when the economy is healthy. However, in a deep recession, changes in the money supply have no effect on the real economy. Monetarists suggest that in the long run, the economy functions in the way that classical economists described, but they see monetary policy affecting interest rates in the short run, which in turn affects investment and/or consumption. In the long run, the Fed targets price stability. Low rates of inflation are most conducive to long-run economic health. Monetary policy can offset demand shocks because the objective of full employment is compatible with the objective of stable prices. Supply shocks present a more challenging problem for monetary policy. A negative supply shock reduces output but increases the price level. Expansionary monetary policy to increase output further increases the price level, and contractionary policy to reduce the price level worsens the recession.

barter

The direct exchange of goods and services for other goods and services.

return on investment

The earnings, such as interest or capital gains, that a saver receives for making funds available to others. It is calculated as earnings divided by the amount invested.

public choice theory

The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors.

federal funds rate

The interest rate financial institutions charge each other for overnight loans used as reserves.

discount rate

The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank.

natural rate of unemployment

The level of unemployment at which price and wage decisions are consistent; a level at which the actual inflation rate is equal to people's inflationary expectations and where cyclical unemployment is zero.

vesting period

The minimum number of years a worker must be employed before the company's contribution to a retirement account becomes permanent.

In which of the following scenarios would government action to increase the money supply be MOST effective?

The money multiplier is 2.5.

In which of the following scenarios would government action to increase the money supply be LEAST effective?

The money multiplier is zero.

M1

The narrowest definition of money that measures highly liquid instruments including currency (banknotes and coins), demand deposits (checks), and other accounts that have check-writing or debit capabilities.

tradeoff between risk and return

The pattern of higher risk assets offering higher average annual returns on investment than lower risk assets.

reserve ratio

The percentage of a bank's total deposits that are held in reserves, either as cash in the vault or as deposits at the regional Federal Reserve Bank.

THE MONEY MULTIPLIER AND ITS LEAKAGES

The potential money multiplier is equal to 1 divided by the reserve requirement. This is the maximum value for the multiplier. Money leakages are caused by banks choosing to hold excess reserves and by individuals, businesses, and foreigners holding a portion of their funds in cash rather than depositing it in a bank. Leakages reduce the money multiplier. The leakage-adjusted money multiplier takes leakages into account and provides a more realistic estimate of the money multiplier in the economy.

Who appoints members to sit on the Fed's Board of Governors?

The president of the United States Members are appointed by the president of the United States.

decision lag

The time it takes Congress and the administration to decide on a policy once a problem is recognized.

recognition lag

The time it takes for policymakers to confirm that the economy is in a recession or a recovery. Short-term variations in key economic indicators are typical and sometimes represent nothing more than randomness in the data.

implementation lag

The time required to turn fiscal policy into law and eventually have an impact on the economy.

Suppose Congress enacted investment tax credits to spur more business investment. What impact would this have on the loanable funds market? Please choose the correct answer from the following choices, and then select the submit answer button.

There would be an increase in demand; the entire demand curve shifts right. Investment tax credits effectively reduce tax payments for firms building new factories or buying new equipment. This should increase the demand for loanable funds as firms seek to invest more.

Taylor rule:

Used to approximate the Fed's actions on interest rates based on economic conditions:

crowding-out effect

When deficit spending requires the government to borrow, interest rates are driven up, reducing consumer spending and business investment.

Money is the most liquid asset, because as _______ it requires no conversion. Please choose the correct answer from the following choices, and then select the submit answer button.

a medium of exchange Money is the most liquid asset, because as a medium of exchange it requires no conversion.

Financial intermediaries

accept funds from savers and efficiently channel these to borrowers, reducing transaction and information costs, as well as lowering risk. A bond is a contract between a seller (government or company) and a buyer. As a general rule, as market interest rates rise, the value of bonds (paying fixed dollars of interest) fall, and vice versa.

automatic stabilizers

automatic stabilizers Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers.

Which one of the following will cause the demand of loanable funds curve to shift rightward?

businesses are more confident in the future of the economy

In the short run, changes in the money supply will NOT change output according to:

classical economists

In the United States, fiscal policy is enacted by:

congress

After the elections of 2010, the U.S. Senate remained controlled by the Democrats, but the majority of the House of Representatives became Republican. You might expect that this would increase the _____ lag associated with fiscal policy.

decision Decision lag is the time required for both houses of Congress and the administration to decide on a policy. Having different parts of the Congress controlled by different political parties (or having Congress controlled by one party while the president is of another party) usually results in decisions taking more time.

Which of the following is one of the three primary tools for conducting monetary policy? infrastructure spending individual income tax rate corporate income tax rate Correct: discount rate discount rate

discount rate

In which of the following is a risk-averse investor LEAST likely to invest?

growth stocks A more risky portfolio would contain a greater portion of savings in growth stocks and high-return bonds.

According to monetarists, when will the economy move back to the natural rate of unemployment after a change in output?

in the long run According to monetarists, in the long run the economy will move back to the natural rate of unemployment after a change in output.

natural rate of unemployment or nonaccelerating inflation rate of unemployment (NAIRU)

is the rate of unemployment that exists when prices and wages are equal to people's expectations. At the natural rate of unemployment, the economy is at "full employment."

supply-side fiscal policy

is to shift the LRAS curve to the right. Such policies do not require a tradeoff between output and prices; however, these policies require more time to work.

Generally, economists believe that monetary policy should focus on price stability in the _____ run and output or income in the _____ run.

long; short

Which function of money provides the solution to the problem of needing a double coincidence of wants for trade to occur?

medium of exchange Money is a medium of exchange because goods and services are sold for money, then the money is used to purchase other goods and services. This solves the problem of needing a double coincidence of wants.

teaser rates

promotional low interest rates offered by lenders for a short period of time to attract new customers and to encourage spending.

During the Great Depression, some people would withdraw all of their cash from the bank and hide it under their mattress rather than risk losing it. This is an example of which function of money?

store of value A store of value is the function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow.

Rules: Money grows by a fixed amount each year, preventing monetary policy from causing too drastic an effect because the economy is inherently stable in the long run. versus Discretion: A flexible money approach based on current economic conditions. It is useful in severe recessions when constant money growth might not be enough.

t

The compounding effect is powerful because it causes debt (if no payments are made) and savings to increase dramatically over time.

t

Which of the following will NOT cause the supply of loanable funds to shift?

technological advancements Technological advancements cause the demand for loanable funds to shift

open market operations

the buying and selling of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system.

Which one of the following will cause the supply of loanable funds curve to shift rightward?

workers fear that unemployment will increase

After the housing bubble collapsed, the federal funds target rate was changed to essentially:

zero. The Fed lowered the target to zero.

Eliminate Burdensome Regulations:

Leads to greater efficiency if the costs of regulation outweigh the benefits.

externally held debt

Public debt held by foreigners, including foreign industries, banks, and governments

internally held debt

Public debt owned by domestic banks, corporations, mutual funds, pension plans, and individuals.

underemployed workers

Workers who are forced to take jobs that do not fully utilize their education, background, or skills. Underemployed workers often hold part-time jobs.

Financial intermediaries

accept funds from savers and efficiently channel these to borrowers, reducing transaction and information costs, as well as lowering risk. A bond is a contract between a seller (government or company) and a buyer. As a general rule, as market interest rates rise, the value of bonds (paying fixed dollars of interest) fall, and vice versa

Financial institutions:

reduce information costs, reduce transaction costs, and diversify assets.

The loanable funds market model describes the financial market for:

saving and investment. The market for loanable funds is a simple model that describes the financial market for saving and investment.

Alternative to money targeting is inflation targeting: implementing policy to keep inflation at about 2% to faciliate long-term economic growth

t

If the reserve requirement is 25%, the money multiplier = 1/0.25 = 4. If the reserve requirement is 15%, the money multiplier = 1/0.15 = 6.67.

t

The market for loanable funds describes the financial market for saving and investment. Savers provide more funds to the loanable funds market as interest rates increase. Firms demand more funds for investment opportunities as interest rates fall.

t

The natural rate of unemployment is very stable in the United States, at around 5% to 6%.

t

mandatory spending

Spending authorized by permanent laws that does not go through the same appropriations process as discretionary spending. Mandatory spending includes Social Security, Medicare, and interest on the national debt.

public choice theory

The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors

reserve requirement

The required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits.

information lag

The time policymakers must wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter (three months) after the fact.

How much interest will be earned on $1,000 at 10% interest over 28 years? Assume compounding interest.

$14,420.99 The interest earned is $14,420.99.

The money multiplier is equal to:

1/reserve requirement.

According to the table, the number of people in the labor force is: Employed 85 Unemployed seeking work 25 Discourage workers 15 Retired 10

110

population 500 number employed 300 number unemployed 50 what is the employment rate of this economy?

14.3%

money

Anything that is accepted in exchange for goods and services or for the payment of debt.

Decision lag:

Legislative process to enact policies

Contractionary Monetary Policy:

Less money → higher interest rates → lower C, I, G, and (X − M) = decrease in aggregate demand and output

multiplier effect

allows each dollar of government spending to expand aggregate output by a multiple of the amount spent. Changes in government spending have a larger multiplier than changes in taxes.

When the economy is operating at the natural rate of unemployment:

cyclical unemplyment

In 2009, the average inflation rate was negative. This is an example of:

deflation

Which of the following is a role of financial institutions?

diversifying assets to reduce risk Diversifying assets to reduce risk is a role of financial institutions.

Compared with demand-side fiscal policy, supply-side fiscal policy:

does not require a trade-off between higher prices and lower unemployment.

The graph shows the supply and demand for loanable funds. If the market interest rate is (meet in middle)

there will be an excess supply of funds.

The Federal Reserve Act of 1913 tasked the central bank with all of the following purposes EXCEPT:

to provide employment in the federal government. This was not one of the purposes of the Federal Reserve Act of 1913.

Providing standardized products is a way financial institutions reduce:

transactions costs. This is a way financial institutions reduce information transaction costs.

How much interest will be earned on $1,000 at 10% interest over 30 years? Assume compounding interest.

$17,449.40 The interest earned is $17,449.40.

When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by

$300 billion

. (Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate demand from _____ to _____, aggregate output will increase from _____ to _____. ( diagonally)

AD0; AD1; Q0; Qf

functional finance

An approach that focuses on fostering economic growth and stable prices, while keeping the economy as close as possible to full employment.

hyperinflation

An extremely high rate of inflation; above 100% per year.

GDP deflator

An index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA).

The consumer price index (CPI)

An index of the average prices paid by urban consumers for a typical market basket of consumer goods and services.

The actual money multiplier found in the economy is often lower than the potential money multiplier due to leakages caused by:

Banks choosing to hold excess reserves by not lending out the maximum amount allowed. Individuals and businesses holding money in cash rather than in a bank. Foreign consumers, businesses, and governments holding cash in reserves or as a medium of exchange.

easy money, quantitative easing, or accommodative monetary policy

Fed actions designed to increase excess reserves and the money supply to stimulate the economy (increase income and employment). See also expansionary monetary policy.

Employer-sponsored programs

Fixed contribution plans, such as 401(k), 403(b), and TIAA-CREF, allow workers to contribute pretax dollars and employers to partially match contributions.

The use of money as a medium of exchange helps reduce the inefficiencies inherent in:

a barter economy.

Which of the following instruments has the highest expected return?

a high-return bond A high-return bond has higher risk and should have a higher expected return.

Which region or country holds 13% of U.S. banknotes?

asia

If a customer deposits $500 cash in a checking account, the bank's:

assets increase. Assets increase when money is deposited.

The amount of reserves held by banks above the legally required amount is:

excess reserves. Excess reserves are reserves held by banks above the legally required amount.

All of the following are tools of fiscal policy except one. Which is the exception? Transfer payments Interest rates Government spending Taxes

intrest rates

money multiplier

is the maximum amount the money supply can increase (or decrease) when a dollar of new deposits enters (or exits) the system. Money Multiplier = 1/Reserve Requirement

The Federal Reserve Act mandates monetary policies that will:

maintain high employment. The Federal Reserve Act mandates monetary policies that will promote economic growth accompanied by high employment, stable prices, and moderate long-term interest rates.

All else remaining equal, if the amount of money market deposit accounts increases, this will increase the size of:

only M2. All else remaining equal, if the amount of money market deposit accounts increases, this will increase the size of M2. However, money market deposit accounts are not included in M1.

How does expansionary fiscal policy affect real GDP in the long run when the economy is already at full employment?

real gdp will stay the same Expansionary fiscal policy will have no effect on long-run real GDP when the economy is at full employment

Leakages are:

reductions in the amount of money used for lending that reduce the money multiplier. Leakages are reductions in the amount of money used for lending that reduce the money multiplier.

According to classical economists, if there is a 10% increase in the money supply:

the price level will increase by 10%. The price level will increase by 10% because a change in the money supply translates into the same change in the price level, since velocity and real output are assumed to be fixed.

In 2011, the Chairman of the Federal Reserve, Ben Bernanke, began to have press conferences after the Federal Open Market Committee reports were released. This is an indication of the Fed's commitment to:

transparency. The press conferences are part of the Fed's commitment to transparency. This new openness has come about because the Fed recognized that monetary policy is hampered when financial actors take counterproductive actions when they are not certain what the Fed will do.

liquidity trap

When interest rates are so low, people hold on to money rather than invest in bonds due to their expectations of a declining economy or an unforeseen event such as war.

During the 1970s, when handheld calculators became popular and replaced slide rules in performing computations, workers in the slide rule industry lost their jobs. These workers' unemployment status is:

Structural

equation of exchange

The heart of classical monetary theory uses the equation M × V = P × Q, where M is the supply of money, V is the velocity of money (the average number of times per year a dollar is spent on goods and services, or the number of times it turns over in a year), P is the price level, and Q is the economy's real output level.

discouraged workers

are the portion of marginally attached workers who have given up actively looking for work and, as a result, are not counted as unemployed.

Kayla is a computer engineer who has been laid off as a result of the most recent downturn in the economy. What type of unemployment is Kayla experiencing?

cyclical unemployment Cyclical unemployment results from changes in the business cycle.

supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point _____ in the graph.

d (top)

The _____ measures the average changes in the prices received by domestic producers for their output.

ppi

Which of the following is a financial intermediary in the loanable funds market model?

mutual funds

The _____ rate of unemployment is the level also known as the nonaccelerating inflation rate of unemployment.

natural

An asset's liquidity is determined by how fast, easily, and reliably it can be converted into cash

t

Federal Reserve System is the central bank of the United States. It was established by the Federal Reserve Act of 1913 and is required by law to promote economic growth accompanied by full employment, stable prices, and moderate long-term interest rates.

t

Price of Bond = Annual Interest Payment ÷ Yield (%) Example: If a bond pays $100 per year, and the yield is 6%, the price of the bond is $100 ÷ 0.06 = $1,667.

t

Social Security and Medicare liabilities rise each year as Americans live longer and health care costs rise. These two components pose a big concern for future debt.

t

the Fed targets the federal funds rate, an interest rate that influences nearly all other interest rates. The federal funds rate was near 0% from 2008 to 2015.

t

During the period before 1776, tobacco was used in the Chesapeake colonies (in what is now the United States) to make payments, even to pay fines and taxes. Consider tobacco leaves as an example of commodity money: Which of the following problems would it be most likely to have?

Exactly! The correct answer is: It was not durable. For a commodity to be used as money, its value must be easy to determine, it must be divisible, and it must be durable. A commodity must be accepted by many people as money if it is to act as money. Clearly, tobacco was accepted and its value could be determined. But leaves are not durable for very lon

Monetary policy is subject to lags:

Information lag: The time it takes for economic data to become available. Recognition lag: The time before a trend in the data is certain enough to warrant a change in policy. Decision lag: The time it takes for the Federal Reserve Board to meet and make policy decisions. Implementation lag: The time it takes for banks and financial markets to react to the policy change.

How does the fractional reserve banking system help to prevent bank runs?

It requires that banks keep a portion of their deposits as reserves. Fractional reserve banking requires that banks keep a portion of their deposits as reserves.

When the housing bubble collapsed in 2007, _____ rose significantly, and the Fed lowered interest rates.

unemployment

Classical Theory short run? Long run?

Monetary policy is ineffective. The economy always self-adjusts. Economy self-adjusts due to flexible prices. Changes in the money supply lead only to price changes.

fiat money

Money without intrinsic value but nonetheless accepted as money because the government has decreed it to be money.

Expansionary Monetary Policy:

More money → lower interest rates → higher C, I, G, and (X − M) = increase in aggregate demand and output

The Fed is composed of a seven-member Board of Governors and twelve regional Federal Reserve Banks. The regional banks and their branches conduct the following services:

Provide a nationwide payments system. Distribute coins and currency. Regulate and supervise member banks. Serve as the banker for the U.S. Treasury

Government-sponsored programs

Social Security: Current workers pay benefits of retirees through the payroll tax on wages.

When the economy is weak:

Tax receipts fall Transfer payments rise (both have expansionary effects to offset the recession)

When the economy is strong:

Tax receipts rise Transfer payments fall (both have contractionary effects to fight inflation)

public debt

The portion of the national debt that is held by the public, including individuals, companies, pension funds, along with foreign entities and foreign governments. This debt is also referred to as net debt or federal debt held by the public.

national debt

The total debt issued by the U.S. Treasury, which represents the total accumulation of past deficits less surpluses. A portion of this debt is held by other government agencies, and the rest is held by the public. It is also referred to as the gross federal debt.

labor force

The total number of those employed and unemployed. The unemployment rate is the number of unemployed divided by the labor force, expressed as a percent.

All else remaining equal, if the amount of savings deposits increases, this will increase the size of:

only M2. All else remaining equal, if the amount of savings deposits increases, this will increase the size of M2. However, savings deposits are not included in M1.

John has an escalator clause in his labor contract by which his salary automatically increases according to the previous year's inflation rate. If John's salary is $50,000, this year's consumer price index is 120, and the previous year's CPI was 115, what will John's new salary be?

$52,000 John's new salary will be $52,000. To determine the new salary, the old salary must be multiplied by the current year's index divided by the previous year's index. The equation is New Salary = $50,000 × (120/115) = $50,000 × 1.04 = $52,000.

What is the name of the index of the average prices for all goods and services in the economy?

GDP deflator This is an index of the average prices for all goods and services in the economy, including all the components of GDP.

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's required reserves?

375

If the marginal propensity to consume is 3/4, the simple multiplier is

4

People are counted as unemployed if they do not have a job but are available for work and have been actively seeking work for the previous _____ weeks.

4

If the reserve requirement is 20%, the money multiplier is:

5

Which of the following scenarios would be most likely to cause the shift in the supply for loanable funds from S0 to S1, shown in the following diagram? (going down)

Households decide to save more. If households decide to save more, this will increase the supply of loanable funds. This will cause a decrease in interest rates and an increase in the amount of funds traded.

liquidity

How quickly, easily, and reliably an asset can be converted into cash.

price level

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).

In the short run, what happens to the aggregate price level when the Fed decreases reserve requirements?

The aggregate price level rises. An increase in the money supply shifts the aggregate demand curve to the right, which increases the aggregate price level.

discretionary spending

The part of the budget that works its way through the appropriations process of Congress each year and includes national defense, transportation, science, environment, and income security.

structural unemployment

Unemployment caused by changes in the structure of consumer demands or technology. It means that demand for some products declines and the skills of this industry's workers often become obsolete as well. This results in an extended bout of unemployment while new skills are developed.

cyclical unemployment

Unemployment that results from changes in the business cycle, and where public policymakers can have their greatest impact by keeping the economy on a steady, low-inflationary, solid growth path

Supply shocks on key inputs:

When prices for goods with inelastic demand (such as food or oil) rise, the higher prices are passed on to other industries and to consumers.

marginally attached workers

Workers who were available for work and actively looked for it during the last 12 months, but not in the last 4 weeks.

David works as a software developer, but he recently took paternity leave after he and his wife had a child. David is considered to be:

employed

contractionary monetary policy

fed actions designed to decrease the money supply and raise interest rates to shrink income and employment, usually to fight inflation.

. Which is NOT one of the three basic functions of money?

means to collect taxes

Steve worked in a North Carolina furniture factory until it went out of business because foreign competition had cheaper labor costs. Now he is unable to find a new job because he is not qualified for any available jobs. This is an example of:

structural unemployment. Structural unemployment occurs when there is a change in consumer demand or technology requiring that unemployed people retrain for new jobs.

A bank can continue to make loans as long as its reserve ratio, calculated as its reserves as a percentage of its total customer deposits, is greater than the reserve requirement. Reserve Ratio = Reserves/Customer Deposits

t

Pensions

are monthly payments made by employers to their retired employees based on length of employment with the company.

n a fractional reserve banking system,

banks accept deposits and hold only a certain portion in reserves, loaning out the rest

In February, the Federal Reserve determined that the data showed the economy was heading toward a recession. At the March and April meetings, it debated what should be done, and at the May meeting it finally agreed on what to do. This is an example of:

decision lag. Decision lag occurs between the time that the Fed recognizes a problem and the time that it figures out what should be done about the problem.

How many regional districts are there in the Federal Reserve System?

12

deficit

The amount by which annual government expenditures exceed tax revenues.

Which or who of the following would hold external debt?

a Japanese citizen Externally held debt is debt that is held by foreigners.

externally held debt

Public debt held by foreigners, including foreign industries, banks, and governments.

surplus

The amount by which annual tax revenues exceed government expenditures.

money illusion

A misperception of wealth caused by a focus on increases in nominal income but not increases in prices.

As baby boomers keep retiring in coming years, it is likely that fiscal imbalance wil

worsen. The increasing liabilities of the U.S. federal government means that fiscal imbalance will worsen.

Suppose that a bond's total interest payments are $400 and its yield is 5%. How much is this bond's price?

$8000

What is the yield of a perpetuity bond that has an interest payment of $500 and a price of $10,000?

5% The yield (Y) on the bond is 5%. It is determined by dividing the interest payment by the price of the bond, so the equation is: Y = $500 ÷ $10,000, or Y = 5% (remember to multiply the decimal by 100 to convert it to a %).

If there are 1,500 in the population, 900 are employed, and 100 are unemployed, what is the unemployment rate?

10% The unemployment rate is defined as the number of unemployed divided by the total labor force. The total labor force is equal to the number of unemployed plus the number of employed, thus the equation is: Unemployment Rate = 100/1,000, or Unemployment Rate = 10%.

in which year was the public debt held by the public the highest percentage of GDP?

1945 In 1945 the public debt held by the public as a percentage of GDP was more than 100%. Ch

During which period did the Fed respond to the dot.com boom and act to raise interest rates?

1998-1999 The peak of the Internet growth, when new dot.com companies sprouted up daily, led to tremendous economic growth. But along with growth came inflationary pressures, and the Fed responded by raising interest rates.

During which period did the Fed respond to the collapse of technology stock prices and act to reduce interest rates?

2001-2003 With the dramatic collapse in the price of technology stocks along with the short recession in 2001, the Fed lowered interest rates to stimulate employment.

What is real GDP in 2014 dollars using 2013 prices? Apples Price Pears Price Apples Quantity Pears Quantity 2013 $1.00 $1.00 100 120 2014 $0.80 $2.00 150 100

250

If there are 3,000 in the population, 1,000 in the labor force, and 930 classified as being employed, what is the unemployment rate?

7% The unemployment rate is defined as the number of unemployed divided by the total labor force. The total labor force is equal to the number of unemployed plus the number of employed. Thus the equation is Unemployment Rate = 70/1,000 = 7%.

If there are 3,000 in the population, 930 are employed, and 70 are unemployed, what is the unemployment rate?

7% The unemployment rate is defined as the number of unemployed divided by the total labor force. The total labor force is equal to the number of unemployed plus the number of employed. Thus the equation is Unemployment Rate = 70/1,000 = 7%.

Suppose there is a sudden increase in demand for a country's exports. Which of the following short-run monetary policy scenarios makes the MOST sense?

A contractionary monetary policy brings the economy back to the same preshock price level and full employment equilibrium. This positive demand shock will push aggregate demand to the right, increasing the price level, pushing the economy above full employment, and increasing the dangers of an inflationary spiral. A contractionary monetary policy that brings the economy back to the same preshock price level and full employment equilibrium makes the most sense.

deflation

A decline in overall prices throughout the economy. This is the opposite of inflation

leakages

A reduction in the amount of money that is used for lending that reduces the money multiplier. It is caused by banks choosing to hold excess reserves and from individuals, businesses, and foreigners choosing to hold more cash.

pensions

A retirement program into which an employer pays a monthly amount to retired employees until they die.

Taylor rule

A rule for the federal funds target that suggests the target is equal to 2% + Current Inflation Rate + 1/2(Inflation Gap) + 1/2(Output Gap).

solvency crisis

A situation when a bank's liabilities exceed its assets.

Federal Open Market Committee (FOMC)

A twelve-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks. It oversees open market operations (the buying and selling of government securities), the main tool of monetary policy.

Which region or country holds 11% of U.S. banknotes?

Africa and the Middle East Africa and the Middle East hold 11%.

Store of value:

Allows people to save now and spend later.

Consumer price index (CPI):.

An index of the average change in prices of a market basket of consumer goods and services

Gdp deflator

An index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA)

producer price index (PPI)

An index of the average prices received by domestic producers for their output.

____ workers are not considered part of the labor force because they have given up looking for work because they think there aren't any good jobs available.

DISCOURAGED

Demand Shocks Versus Supply Shocks

Demand shocks affect the AD curve. Caused by factors such as consumer confidence, business sentiment, or export demand. Monetary policy is more effective because targeting one goal automatically targets the other. Supply shocks affect the SRAS curve. Caused by factors such as changing input prices or technological innovation. Monetary policy is less effective because targeting one goal makes the other target worse. Rising food prices cause a negative supply shock that is difficult to counteract with monetary policy.

Which of the following acts did NOT further clarify, supplement, and expand the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?

Fair Housing Act of 1968

tight money or restrictive monetary policy

Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation. See also contractionary monetary policy.

Which of the following is advisable with respect to holding credit card debt?

Find lower-cost borrowing opportunities. This is advisable.

Monetarist Theory short run? long run?

Fiscal policy is ineffective because government spending crowds out consumption and investment, while monetary policy is effective. Economy adjusts to long-run equilibrium; increased money supply leads to higher prices.

MODERN MONETARY POLICY

In the past, monetary targeting was used to control the rate of growth of the money supply. Later, an alternative approach of inflation targeting, targeting the inflation rate to around 2%, became more prevalent. The Fed sets a target federal funds rate and then uses open market operations to adjust reserves and keep the federal funds rate near this level. The Taylor rule is a general rule that ties the federal funds rate target to the inflation gap and the output gap for the economy, and has done a good job in estimating the actual federal funds rate target set by the Fed. When inflation rises, the Fed uses contractionary monetary policy to increase the federal funds rate to slow the economy. When the economy drifts into a recession and inflationary pressures fall, the Fed does the opposite and reduces the federal funds rate, giving the economy a boost. Fed transparency helps us to understand why the Fed makes particular decisions and also what the Fed will probably do in similar circumstances in the future.

Keynesian Money Theory

Increasing the money supply leads to greater investment when the economy is healthy. In times of severe recession, however, monetary policy is ineffective. Fiscal policy is the preferred approach to restore the economy

Which of the following must be true of a commodity for it to be used as money?

It must be readily accepted by many people. A commodity must be accepted by many people as money if it is to act as money.

Which of the following is true of the Eurozone?

It was established by 12 European nations. This is true of the Eurozone.

Why is expansionary fiscal policy ineffective at increasing long-run aggregate output when the economy is already at full employment?

Inflationary expectations rise. When the economy is already at full employment, expansionary fiscal policy will increase inflationary expectations, pushing short-run aggregate supply to the left. The economy ends up back on the long-run aggregate supply curve, but at a higher price level

Which of the following must be true of fiat money?

Its value must be easy to determine. Money must have a value that is easy to determine in order for it to be used as money; therefore, it must be easily standardized.

Which of the following is the correct expression for the equation of exchange in the classical quantity theory of money? (M is the supply of money, V is the velocity of money, P is the price level, and Q is the economy's real output level.)

M × V = P × Q

M2 =

M1 + "near monies" (savings accounts, money market deposit accounts, small-denomination time deposits, and money market mutual fund accounts).

A Wall Street Journal story in October of 2008 reported that inmates in federal prisons could use packaged mackerel fillets (called "macks") to obtain goods and services, such as haircuts (the barber charges two macks). Some prisons provide lockers in which inmates can store their macks. Macks could be considered a form of money in prison because macks serve as a:

Macks serve all the functions listed. Macks are a medium of exchange because goods and services are sold for them. One mack is a unit of account since other items are priced in terms of macks. Macks are also a store of value because they can be used to buy the goods and services the holder wants tomorrow.

WHAT IS MONETARY POLICY?

Monetary policy involves the control of the money supply to target interest rates in order to stabilize fluctuations in the business cycle. The Federal Reserve implements monetary policy. Its goals are to promote economic growth by maintaining full employment, stable prices, and moderate long-term interest rates. Interest rates are crucial because they directly influence the components of aggregate demand, including consumption and investment. Expansionary monetary policy is used during times of recession, and involves expanding the money supply to reduce interest rates. Contractionary monetary policy is used during times of rising inflation, and involves reducing the money supply to raise interest rates.

Jordan Meadows lost his job as an airline pilot and has not been able to find another job as a pilot. Since he is old enough to be eligible for his pension, he decides to retire and devote himself to caring for his elderly parents. According to the Bureau of Labor Statistics, Jordan is:

not in the labor force

HOW BANKS CREATE MONEY

Money is created when banks make loans to customers, because these funds are eventually deposited into other banks as checkable deposits. The fractional reserve system permits banks to create money through their ability to accept deposits and make loans. The reserve ratio is the fraction of total customer deposits held in reserves. The reserve requirement is the minimum reserve ratio banks must follow. A T-account is a simplified bank balance sheet showing assets (money banks lay claim to) and liabilities (money banks owe).

Tight monetary policy is:

contractionary. Tight monetary policy is intended to contract the economy.

Which of the following countries had the HIGHEST average annual inflation between 1970 and 2010?

Peru Peru had the highest average annual inflation between 1970 and 2010.

contractionary fiscal policy

Policies that decrease aggregate demand to contract output in an economy. These include reducing government spending, reducing transfer payments, and/or raising taxes.

supply-side fiscal policies

Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, supply-side policies take longer to impact the economy.

Quite remarkably, the Federal Reserve uses just three primary tools for conducting monetary policy:

Reserve requirements—The required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits. The discount rate—The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank. Open market operations—The buying and selling on the open market of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system.

excess reserves

Reserves held by banks above the legally required amount

What happens to the amount of funds supplied to the loanable funds market when the interest rate decreases?

The amount of loanable funds supplied decreases. The amount of loanable funds supplied decreases when the interest rate decreases and vice versa.

M1 =

currency (banknotes and coins) and demand deposits (checking accounts).

inflation targeting

The central bank sets a target on the inflation rate (usually around 2% per year) and adjusts monetary policy to keep inflation near that target.

THE FEDERAL RESERVE SYSTEM

The Federal Reserve System is the central bank of the United States. The Federal Reserve is structured around twelve regional banks and a central governing agency, the Board of Governors. The Federal Open Market Committee (FOMC) oversees open market operations (the buying and selling of government securities) for the Federal Reserve. The Federal Reserve serves as the lender of last resort, stepping in to loan money to banks that are facing cash emergency shortages or other financial difficulties.

GDP deflator:

The broadest index used to measure inflation; it includes the prices of all goods and services in the economy.

open market operations .

The buying and selling of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system

Federal Reserve System

The central bank of the United States

compounding effect

The effect of interest added to existing debt or savings leading to substantial growth in debt or savings over the long run.

store of value

The function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow.

Government printing money:

The government prints money to finance its borrowing, more money is chasing a relatively fixed amount of goods and services, and therefore prices rise.

Which of the following is true of the Federal Reserve's Board of Governors?

The governors serve 14-year terms.

Tradeoff Between Risk and Return:

The greater the risk involved, the higher the average annual return on investment.

What is the potential money multiplier if the reserve requirement is 4%?

The money multiplier (M) is 25. The money multiplier is determined by dividing 1 by the reserve requirement. The equation is M = 1 ÷ 0.04 = 25.

Implementation lag:

Time required after laws are passed to set up programs

Information lag:

Time required to acquire macroeconomic data

NEW MONETARY POLICY CHALLENGES

To control the financial panic of 2008, the Fed used its normal monetary policy tools and some that it hadn't used in many decades. The European Central Bank is the Fed's counterpart in Europe, setting the monetary policy for the nineteen-member Eurozone. A long and severe debt crisis occurred when several European nations neared default on their loans, requiring extraordinary actions, including bailout loans, by the ECB to keep the effects of the crisis from spreading to the entire Eurozone.

Other retirement programs

Traditional IRAs use pretax dollars to fund investments; taxes are paid upon withdrawal after age 59.5. Roth IRAs use after-tax dollars to fund investments. Contributed funds (but not earnings on those contributions) can be withdrawn anytime without penalty, and no taxes are paid on withdrawals (including earnings on investment) after one reaches the age of 59.5.

liquidity trap

When interest rates are so low, people hold on to money rather than invest in bonds due to their expectations of a declining economy or an unforeseen event such as wa

Lauren has a savings account into which she puts money every month so she will eventually have enough money for a down payment on a house. This is an example of which function of money? Please choose the correct answer from the following choices, and then select the submit answer button.

_store of valuestore of value

When the interest rate increases, the amount of loanable funds demanded in the market:

decreases; this is a movement up and to the left along the demand curve. The amount of loanable funds demanded decreases when the interest rate increases and vice versa. These are movements along the demand curve, not shifts.

a reduction in overall prices

deflation

expansionary monetary policy Fed actions

designed to increase the money supply and lower interest rates to stimulate the economy (expand income and employment).

Most of the debt of many developing countries is:

externally held. Most of the debt of many developing countries is externally held.

One strength of the use of discretionary fiscal policy is the timing lags. t or f

f

Contractionary

fiscal policy includes reducing government spending or transfer payments, or raising taxes. The effect is a shift of the AD curve to the left, decreasing prices and aggregate output.

Jennifer did not work during college. She just obtained a bachelor's degree in marketing, and she is now looking for a marketing job in the retail industry. Jennifer is considered:

frictionally unemployed

Which of the following will cause the supply of loanable funds to shift?

incentives to save Incentives to save will cause the curve to shift.

Expansionary fiscal policy

includes increases in government spending or transfer payments, or reducing taxes. The effect is a shift of the AD curve to the right, increasing prices and aggregate output.

Loose monetary policy _____ consumption and _____ investment spending

increases; increases Loose monetary policy stimulates consumption and investment spending.

A cost-of-living index requires:

information on how consumers will respond to changes in product prices and income. A cost-of-living index requires information on how consumers will respond to changes in product prices and income.

quantity theory of money

is a product of the classical school of thought, which concludes that the economy will tend toward equilibrium at full employment in the long run. Classical theorists do not believe that monetary policies are effective at all. Keynesians and monetarists believe that monetary policy can be effective in the short run, but not in the long run.

federal deficit

is the annual amount by which government spending exceeds tax revenues

Jessie has been out of work for more than a year. A few months ago she gave up trying to get a new job until the economy gets better. Jessie is considered to be:

marginally attached. Marginally attached workers are available for work and have actively looked for work in the past year, but not in the past four weeks. Jessie isn't looking.

In a liquidity trap:

monetary policy is ineffective in changing income and output.

Savings deposits are included as part of:

only M1 and M2. Savings deposits are included in not only M1.

expansionary fiscal policy

policies that increase aggregate demand to expand output in an economy. These include increasing government spending, increasing transfer payments, and/or decreasing taxes.

The Federal Reserve Act mandates monetary policies to:

promote economic growth. The Federal Reserve Act mandates monetary policies to promote economic growth accompanied by high employment, stable prices, and moderate long-term interest rates.

It can often take more than a year for researchers and policymakers to determine that an economy is moving out of a recession. That year is known as _____ lag.

recognition Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession.

Which of the following is an example of contractionary fiscal policy?

reducing military spending

Which of the following functions do the Federal Reserve regional banks NOT perform? regulate consumer credit regulate and supervise member banks distribute coins and currency provide a nationwide payments system

regulate consumer credit

The Fed decides to decrease the proportion of deposits that banks must hold from 3% to 1%. Which monetary policy tool is it using?

reserve requirements

Tight money is also called:

restrictive monetary policy. Tight money is also called restrictive monetary policy. It involves decreasing excess reserves and the money supply to shrink income and employment, usually to fight inflation.

frictional unemployment Unemployment

resulting from workers who voluntarily quit their jobs to search for better positions, or are moving to new jobs but may still take several days or weeks before they can report to their new employers.

For more than 10 years Kenneth has worked at a job fixing machinery used to produce textiles. As more and more clothing manufacturers moved overseas to lower labor costs, his services have been less and less in demand until ultimately he found himself out of a job. What type of unemployment is Kenneth experiencing?

structural unemployment Structural unemployment occurs when there is a change in consumer demand or technology requiring that unemployed people retrain for new jobs.

A surplus occurs when tax revenues exceed government spending. The national debt is the accumulation of all past deficits less surpluses. The public debt is the portion of the national debt that is held by the public.

t

About half of U.S. public debt is held externally, by foreign governments and investors. Of this amount, about 40%, or about $2.4 trillion, is held by China and Japan.

t

Banks, savings and loans associations, credit unions, insurance companies, securities firms (brokerages), and pension funds are all types of financial intermediaries that take savings from savers and loan the funds to borrowers

t

Bills, bills, bills. Higher interest rates cause debt payments to take a bigger portion of each paycheck, leaving less to spend on other goods.

t

Borrowing money to finance the debt raises interest rates, making it more expensive for individuals and businesses to borrow money. This is the crowding-out effect.

t

Factors affecting the willingness to save or borrow lead to a change in the market for loanable funds. For example, growing business confidence increases firms' willingness to invest, thus shifting the demand for loanable funds to the right, causing interest rates to rise.

t

Money is created when banks make loans that eventually get deposited back into the system, generating checkable deposits. Part of these deposits are held as new reserves while the rest is again loaned out, creating even more money as it gets deposited back into the system

t

Natural rate of unemployment = Frictional + Structural Unemployment

t

The labor force is the total number of people employed or unemployed. Employed persons are individuals age 16 and over who work for pay, whether full-time, part-time, or even temporary. Unemployed persons are those without jobs but actively seeking work.

t

Unemployment benefits generally produce a high multiplier effect because recipients are likely to spend all of the money quickly. Using expansionary fiscal policy to shift AD during a recession can reduce the time required to achieve full employment. The tradeoff of such policies is potential inflation, although the effect is small when used in a deep recession.

t

leakage-adjusted money multiplier

takes into account the excess reserves and cash holdings that reduce the loans made and therefore reduces the actual money multiplier.