Macroeconomic Concepts Overview

why do recessions happen?

-demand for labor falls -downward wage rigidity causes employment and output to fall

What was the economic cause of the Great Depression

-economists do not have a definite reason why the "short-run" fluctuation lasted so long -reason we have macroeconomics

what are the three schools of thought as to why recessions happen?

1. real business cycles 2. Keynesian theory 3. financial and monetary theory

what is the average time between recessions in the US?

5.5 years

involving fiscal policy:

A tax cut is proposed in Congress. The tax cut is passed by Congress and signed by the president.

Asset Liquidity

Ability of an asset to be used as payment.

Cyclically Adjusted Deficit

Adjusted deficit reached -7.5% of GDP in 2009.

Neutral Monetary Policy

Adopted at 2% inflation and 3.4% unemployment.

Money Market Changes Impact

Balances shift without affecting M1 and M2 supplies.

Independent Agency

Basic nature of the Federal Reserve System.

Federal Reserve Governors

Board has 7 members overseeing monetary policy.

Federal Reserve Board Members

Board has 7 members with 14-year terms.

Central Banking Authority

Board of Governors oversees U.S. banking system.

Purchasing Power

Decreases with an excessive money supply increase.

Which of the following statements is correct? Other things equal:

Deflation will shift both the transactions demand curve for money and the total money demand curve to the left.

Public Debt Contributors

Demand-pull inflation historically not significant.

Budget Deficit Definition

Excess of government spending over revenues.

Exclusion of Time Deposits

Excluded from M1 due to non-immediate exchange use.

Consumer Expectations

Expectation of higher future income leads to current spending.

Bond Prices

Fall when money supply is reduced.

Quantitative Tightening

Fed's plan to end monetary stimulus and raise interest rates.

QE Restart

Fed's response to COVID recession, buying $3 trillion in bonds.

2009 Recovery Act

Implemented $787 billion tax cuts and expenditure increases.

Money Supply (M1)

Includes coins, paper money, checkable, and savings deposits.

Cost of Holding Money

Includes sacrificing interest income.

M2 Money Supply Inclusion

Includes shares in money market mutual funds.

Net Exports Shift

Increase shifts AD curve right by multiple of change.

Interest Rate Decrease Impact

Increases Ig values and aggregate demand.

Government Securities Purchase

Increases money supply, paid with newly created money.

Inflation Impact on Money

Inflation hinders money's exchange acceptance.

Money Power and Price Level

Inversely related: money power vs. price level.

Discretionary Fiscal Policy

Involves specific changes in taxes and government spending for stabilization.

Which of the following best describes the effect of the zero-interest rate policy implemented in December 2008?

Its effectiveness was limited by the zero lower bound problem. increase the interest rate, reduce investment, and reduce aggregate demand

Money as Store of Value

Keeps wealth spendable for future use.

Concern of Large Public Debt

Legitimate concern: crowding out private investment.

Zero-Interest Rate Policy

Limited by the zero lower bound problem.

Money Supply Components

M1 includes coins, currency, and checkable deposits.

Public Debt Increase

May have minimal impact during severe depression.

Federal Reserve Board Appointment

Members appointed by president with Senate confirmation.

Real Burden of Public Debt

Minimal burden in severe economic depression.

Equilibrium Price Level

Occurs where aggregate demand and supply curves intersect.

Independence of Federal Reserve

Operates as an independent agency.

Currency in Circulation

Part of both M1 and M2 money supplies.

Aggregate Supply Shift

Price level increase does not shift the curve.

Unit of Account

Primary use of money when estimating expenses.

Aggregate Demand Decrease

Results in output decline with unchanged price level.

Interest Rate

Rises if money demand exceeds supply, leading to reduced money holdings.

Fiscal Policy Sequence

Rising consumption leads to economic recovery.

Mortgage-backed Securities

Securities backed by mortgage payments.

Board of Governors

Seven members appointed by the president, confirmed by the Senate.

Aggregate Supply Curve

Shifts left if the U.S. dollar depreciates.

Crowding-out Effect

Strongest at full employment, affecting private investment.

Crowding-Out Effect

Strongest at full employment, reduces private investment.

Public Debt Reduction Scenario

Surplus with higher tax revenues reduces debt.

Fractional Reserve Banking

System allows banks to create money through lending.

Financial Rescue Moral Hazard

TARP rescue may encourage future risk-taking.

When the Fed buys government securities:

They know that the increase in demand generated by the purchases will raise the equilibrium price of those bonds and therefore decrease their equilibrium interest rate.

Price Stability Measures

To maintain stability, increase taxes or reduce government spending.

Federal Funds Target Range

Typically a quarter-of-a-percent wide.

If you are estimating your total expenses for school next semester, you are using money primarily as:

a unit of account.

The seven members of the Board of Governors of the Federal Reserve System are:

appointed by the president with the confirmation of the Senate.

When does expansions happen?

between recessions when GDP is growing

Other things equal, if the supply of money is reduced:

bond prices will fall.

In the United States, the money supply (M1) includes:

coins, paper money, checkable deposits, and savings deposits

The U.S. public debt:

consists of the historical accumulation of all past federal deficits and surpluses.

Other things equal, an excessive increase in the money supply will:

decrease the purchasing power of each dollar.

co-movement of economic patterns

different economic aggregates tend to move together

The crowding-out effect of expansionary fiscal policy suggests that:

government spending increases at the expense of private investment

It is costly to hold money because:

in doing so, one sacrifices interest income.

The Federal Reserve System:

is basically an independent agency

The largest component of the money supply (M1) is:

liquid deposits other than checkable deposits at commercial banks.

The real burden of an increase in the public debt:

may be very small or conceivably zero when the economy is in a severe depression.

If the inflation rate was on target at 2 percent and the unemployment rate was 3.4 percent, the Fed would likely adopt a(n):

neutral monetary policy

downward wage rigidity applies to:

nominal wages

Suppose the demand for money and the supply of money increase simultaneously. We can:

not accurately predict what will happen to interest rates or bond prices.

Which of the following is not a main weakness of monetary policy?

the administrative lag.

What is meant by "peak to trough"?

the high point on a graph just before a recession

If the Federal Reserve System buys government securities:

the money supply will increase

Quantitative Easing

Fed's response to the zero lower bound problem.

Vault Currency Exclusion

First National Bank vault currency not in money supply.

Price and Wage Flexibility

Flexible upward but inflexible downward.

Crowding-out Effect of Fiscal Policy

Government spending rise reduces private investment.

Money Supply Backing

Government's control maintains money value stability.

American Recovery and Reinvestment Act

Implemented a $787 billion stimulus package in 2009.

The Fed's response to the zero lower bound problem was:

quantitative easing.

securities purchase:

will automatically increase the money supply because the Fed will pay for those them with newly created money.

Checkable Deposits Importance

Checkable deposits are a significant part of M1.

Checkable Deposits Classification

Classified as money due to ease of use in transactions.

Coins in Circulation

Coins contribute to both M1 and M2 supplies.

Political Business Cycle

Economic manipulation for political gain.

Deflation

Shifts money demand curves left due to decreased transactions.

Cyclical Asymmetry

Main weakness of monetary policy.

Investment Demand Curve

Can frustrate expansionary monetary policy if it shifts left.

Money Market Deposit Accounts

Part of M2 money supply only.

Built-in Stability Enhancement

Tax system change for increased economic stability.

Money as Unit of Account

Used to estimate expenses, a financial measure.

Long-run Aggregate Supply

Vertical due to flexible input/output prices for full-employment.

In a fractional reserve banking system:

banks can create money through the lending process.

are real consumption growth and real investment growth directly related or inversely related?

directly, when consumption increases, investment increases (most common situation)

The Fed's monetary policy response at the onset of the COVID recession included:

reinitiating QE by buying $3 trillion in longer-term bonds.