macro final sg

long run Aggregate Supply curve - vertical potential

Shape of (full-employment)

short run Aggregate Supply curve

Shapes of

fiat

US currency is '_____ money' - not backed by gold or silver, but is valuable because it's accepted as a means of payment, is legal tender, and is relatively scarce

$287 billion

US surplus in services in 2019 -

$345 billion

US trade deficit with China

contractionary fiscal policy

Usually to control inflation or reduce budget deficits

expansionary fiscal policy

Usually to increase GDP and lower unemployment

liquidity

availability of assets for purchasing

administrative lag

arises from the time it takes to enact the needed statutes.

progressive tax system,

based on the taxpayer's ability to pay

proportional tax system

one that imposes the same relative burden on all taxpayers

interest

opportunity cost of holding money

zero interest rate policy (ZIRP)

when a central bank sets its target short-term interest rate at or close to 0%.

open-market operations

• Buying and selling of government securities (or bonds) • Commercial banks and the general public • Used to influence the money supply

sum of all past deficits and surpluses

•public debt - Sum of all outstanding debt =

long-run vertical Phillips Curve

vertical at natural rate of unemployment

Budget surplus:

when Gov spending < Taxes

Budget deficit

when Gov spending > Taxes.

Troubled Asset Relief Program (TARP)

$700 billion bailout to financial institutions

problems w the fiscal policy

*Recognition lag, administrative lag, operational lag

Tax progressively

*progressive tax system, proportional tax system, regressive tax system

North American Free Trade Agreement (NAFTA)

- Agreement between United States, Canada, and Mexico. - Established a free trade zone between the countries. - Trade has increased in all countries. - Enhanced standard of living.

World Trade Organization (WTO)

- Established by Uruguay Round of GATT. - 153 member nations in 2011. - Oversees trade agreements and rules on disputes. - Critics argue that it may allow nations to circumvent environmental and worker-protection laws.

expansionary fiscal policy

- Increase Gov spending or decrease Taxes.

contractionary fiscal policy

- Increase Taxes or decrease Gov spending.

crowding-out effect

- Increased government deficits reduce private investment

European Union (EU)

- Initiated in 1958 as Common Market. - Abolished tariffs and import quotas between member nations. - Established common tariff with nations outside the EU. - Created euro zone with one currency.

discount rate

- Rate that banks borrow from the Fed

external public debt

- about 1/3 rd of federal debt held by foreign citizens and governments

Federal Open Market Committee (FOMC)

- controls supply of money

Political business cycle

- higher Gov spending and lower Taxes during election years

prime interest rate

- interest rate banks offer to their best customers

Indirect effects of trade protection

- possible reduction in efficiency, retaliation, higher costs for downstream consumers

U.S. government securities

- the way that Federal government borrows to pay for its deficits

Functions of the Federal Reserve

1) Issue currency, 2) Set reserve requirements, 3) Lend money to banks, 4) Collect/clear checks, 5) Act as a fiscal agent for U.S. government, 6) Supervise banks, 7) Control the money supply

monetary multiplier (M)

1/R

trade protection

Arguments in favor of ? - Increased domestic employment, reduce unfair advantage of cheap foreign labor in foreign countries, Protection against dumping

balance sheet

Assets = Liabilities + Net Worth

excess reserves

Banks create money through lending ___________ ____________

Federal Reserve System

Board of Governors and 12 Federal Reserve District Banks

expansion

Built-in (automatic) stabilizers - during ________________: transfer payments fall and taxes rise.

recession

Built-in (automatic) stabilizers -During ____________: transfer payments rise and taxes fall.

Fiscal policy

Changing government spending or taxes

c

Considering the impact of policy on the credit market (market for loanable funds), which of the following will tend to increase spending (aggregate demand) in the economy? (I) Expansionary fiscal policy; (II) Expansionary monetary policy. a. I but not II b. II not I c. both I and II d. neither I nor II

b

Considering the impact of policy on the credit market (market for loanable funds), which of the following will tend to reduce the interest rates? (I) Expansionary fiscal policy; (II) Expansionary monetary policy. a. I but not II b. II not I c. both I and II d. neither I nor II

b

Countries that use more of their resources to produce capital goods rather than consumption goods A) Will have slower economic growth in the future B) Will push their production possibility curve out further in the future C) Will have a lower standard of living in the future

supply-side

Critics of ? economics argue that the relationship between tax rates and economic incentives is small and of uncertain direction

Direct effects of protection

Decline in consumption, Increase in domestic production, Decline in imports, Tariff revenue

downward sloping curve

Demand for money - curve

Phillips Curve

Demonstrates short-run tradeoff between inflation and unemployment

Trade Adjustment Assistance Act

Designed to help individuals hurt by international trade

Fed Funds rate

Fed targets the ?, but does not directly set this rate. Only indirectly influences rate through changing money supply

b

In laissez-faire economies A) Decisions on what to produce, how to produce, and who receives the production are made by the government B) Decisions on what to produce, how to produce, and who receives the production are made primarily by firms and households C) Fail to generate any incentives for entrepreneurship compared to command economies

equilibrium interest rate

Intersection of money demand and money supply produces ?

expansionary monetary policy:

Open market purchases, decrease R, decrease discount rate,

contractionary (restrictive) monetary policy

Open market sales, increase R, increase discount rate,

Federal funds rate

Overnight borrowing rate between banks.

Reagan

President ? championed supply-side economics

Offshoring of jobs

Shifting of work previously done by American workers to workers abroad

vertical line

Supply of money set by the Fed - line

General Agreement on Tariffs and Trade (GATT)

Three principles: • Equal, nondiscriminatory trade between member nations • Reduction in tariffs • Elimination of import quotas

$2.5 Trillion

US Exports in 2019 -

$3.1 Trillion

US Imports in 2019 -

8.5%

US Share of world merchandise exports in 2019

13%

US Share of world merchandise imports in 2019 -

$577 Billion

US Trade Deficit in 2019 -

liquidity trap

a contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective.

quantitative easing (QE)

a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.

regressive tax system

a type of tax that is assessed regardless of income

functions of money

a) medium of exchange, b) unit of account, c) store of value are all:

Council of Economic Advisers (CEA)

advises President on fiscal policy

aggregate supply shocks

cause both inflation and unemployment to rise

interest on excess reserves

contractionary (restrictive) monetary policy increasing ? → intended to control inflation usually by slowing down GDP growth

interest on excess reserves

expansionary monetary policy: decreasing ? → intended to increase aggregate demand and GDP and lower unemployment

Moral hazard

financial bailouts may lead to more risky behavior in the future

Contributors to financial crisis of 2007-2008

government policies encouraging home-ownership, lax lending practices by banks, subprime mortgage loans to non-credit worthy borrowers which had initially low and then high interest rates, mortgage-backed securities, rapidly declining home-prices

public investments

government spending on public infrastructure (roads, bridges, electric grid, public buildings, etc.) reduces crowding out since it increases value of private investment

Financial Services Industry

includes Commercial banks, thrifts, mutual fund companies, investment banks, insurance companies.

M2

includes M1 plus savings account, money market deposit account (MMDA), time deposits, and money market mutual fund (MMMF)

Leverage

using borrowed money to invest magnifies profits and losses

Total increase in money supply if all excess reserves are loaned out

initial increase in reserves x M=

M1

most liquid. Includes Federal Reserve Notes (cash), checkable deposits

stagflation

usually caused by negative supply shock

Money market model

quantity of money demanded/supplied on horizontal axis and interest rate on vertical axis.

Zero Lower Bound

refers to the belief that interest rates cannot be lowered beyond zero.

Reserves

required reserves + excess reserves =

actual reserves

required reserves + excess reserves =

reserve ratio (R)

required reserves/Checkable deposits =

operational lag

results from how much time it takes for the effect of tax changes to be realized and be felt.

Bank reserves

vault cash + deposits and Fed =

Trade protection policies

tariffs, quotas, antidumping duties

Recognition lag

the amount of time it takes for fiscal or monetary authorities to recognize a problem in the economy.

total demand for money

transactions demand for money + asset demand for money=

Misery index

unemployment rate + inflation rate