M4 MT

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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


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