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