M4 MT
taylor rule
A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables
discount rate
The interest rate on the loans that the Fed makes to banks
interest on reserves
The payment by a central bank of interest on the deposits (required reserves plus excess reserves, if any) held by commercial banks at the central bank.
to avoid accelerating inflation over time
The unemployment rate must be high enough that the actual rate of inflation matches the expected rate of inflation
velocity of money equation
V = (P x Y) / M or (Nominal GDP)/M
phillips curve
a curve that shows the short-run trade-off between inflation and unemployment
means of payment
a method of settling a debt
quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
In a closed economy with no government, aggregate expenditure is
consumption plus investment
M1 is composed of
currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses
taylor rule formula
current inflation rate + equilibrium real federal funds rate + (1/2*inflation gap) +(1/2*output gap)
what happens if the Fed sells government securities
decreases money supply, decreases output, decreases aggregate demand, decreases inflation
Tools Fed uses
discount rate, reserve requirements, open market operations, interest on reserves
When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 ________ because ________
does not change; both currency and checkable deposits are included in M1
If the AD curve shifts from year to year and the AS curve does not, then the short run Phillips curve would be
downward sloping
As firms search for the best employee to fill an opening and the unemployed search for the job that best fits their skills, the economy experiences
frictional unemployment
what two variables does the phillips curve look at?
inflation and unemployment
The Federal Reserve monetary policy goals of maximum employment means
keeping the unemployment rate close to the natural unemployment rate.
an increase in aggregate demand
leads to both inflation and a fall in the unemployment rate
are deposits assets or liabilities
liabilities, since the bank owes the saver their deposits
During the financial crisis of 2008-2009, the Fed's actions to supply reserves to the banking system was an attempt to
make certain the banks had enough liquidity to not collapse
banks earn a profit by
making loans at a higher interest rate than the rates that they offer on their deposits.
functions of money
medium of exchange, store of value, unit of account
NAIRU
non-accelerating inflation rate of unemployment
Discouraged workers are classified by the BLS as
not in the labor force
what happens if the fed increases reserve requirements?
reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit
the FOMC consists of
seven members of the Board of Governors, the president of the New York bank, and four presidents from the other 11 reserve banks
positive shock
shifts SRPC down
negative supply shock
shifts SRPC up
store of value
something that keeps its value if it is stored rather than used
When we keep part of our wealth in a bank checking account, we are using money as a
store of value
open market operations
the buying and selling of government securities to alter the supply of money
if the Fed had not bailed out the larger financial institutions during the Great Recession,
the fall in overall stock prices would likely have been larger
reserve requirement
the percentage of deposits that banking institutions must hold in reserve
asset bubble
the price of an asset is pushed to an unreasonably high level due to expectations of further price gains
quantitative easing
the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand
velocity of money
the rate at which money changes hands
Long-Run Phillips Curve (LRPC)
the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience
unit of account
the yardstick people use to post prices and record debts
what happens if the Fed lowers the discount rate?
this increases excess reserves in commercial banks throughout the economy and expands the money supply.
what happens if the Fed increases the discount rate?
this lowers excess reserves in commercial banks throughout the economy and contracts the money supply
horizontal axis of phillips curve
unemployment rate
how do unemployment and inflation relate in the long run?
unemployment stays constant
The function of money that helps assess the opportunity cost of an activity is money's use as a
unit of account
the word "fiat" is
used to describe today's money because it is money set by law.
medium of exchange
anything that is used to determine value during the exchange of goods and services
how was banking "invented"?
Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand.
quantity theory of money equation
M x V = P x Y
for an asset to be a "means of payment" the asset
can be used to settle a debt.
If government expenditures on goods and services increases by $20 billion, then aggregate demand
increases by more than $20 billion
what happens if the Fed buys government securities
increases money supply, increases output, increases aggregate demand, accelerates inflation
what happens if the fed decreases reserve requirements
increases the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, increases the money stock, and lowers the cost of credit
Are unemployment and inflation in a negative or positive relationship?
negative