Econ Test 4
Taylor's rule
4% federal funds rate, 2% inflation rate is tolerable. For every 1% above that, the real federal funds rate goes up by .5% and the nominal federal funds rate goes up by 1.5%
Calculate increase or decrease in taxes
= (MPC)M x change in taxes
calculate multiplier
= 1/MPS or 1/1-MPC
Calculate the value of the dollar
= 1/price level When the price of goods goes up, the value of the dollar goes down
Calculate change in real GDP
= M x change in initial spending
Reserve ratio equasion
= commercial bank's required reserves / commercial bank's checkable-deposit liabilities
What are fractional reserves
The bank will have to pay only a fraction back to the Fed
Money functions as
a store value, a unit of account, and a medium of exchange
Progressive tax system
a tax who's average tax rate increases as the taxpayer's income increases. A tax for which the average tax rate rises with GDP
Proportional tax
a tax whose average tax rate remains constant as the taxpayer's income increases or decreases. a tax for which the average tax rate remains constant as GDP rises or falls
If you are estimating your total expenses for school next semester, you are using money primarily as
a unit of value
On a diagram where the interest rate and the quantity demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by
a vertical line
Excess reserve
actual reserve - required reserve
The total demand for money curve will shift to the right as a result of
an increase in nominal GDP
Built- in stabilizer
anything that increases the government's budget deficit during a recession and increases its budget surplus during an expansion without requiring explicit action by policy makers. Advantage is that it doesn't require action by congress, but could take a lot of time
The difference between a budget deficit and the public debt
budget deficit is the government spending greater than tax revenue for one year public debt is the accumulation over time of budget deficits that are offset by any budget surpluss
If the MPS in an economy is 0.1 government could shift the aggregate demand curve righward by 40 billion by
increasing government spending by 4 billion: Multiplier = 1/1-MPC or 1/MPS = 1/0.1 = 10 > 40bil/10 = 4 billion
Discretionary fiscal policy refers to
intentional changes in taxes and government expenditures made by Congress to stabilize the economy
Assets demand depends on what
interest rates
When money supply increases
interest rates go down
Contractionary fiscal policy is so named because it
is aimed at reducing aggregate demand and thus achieving price stability
Expansionary fiscal policy is so named because it
is designed to expand real GDP
Assets =
liabilities + net worth
Deflation is characterized by what
low output
purchasing groceries using a debit card best exemplifies money serving as a
medium of exchange
Transactions demand depends on what
nominal GDP and income
During a recession, households often experience a decrease in income, moving them into a lower tax bracket
non discretionary
Spending on unemployment benefits increase when more people become employed during a recession
non discretionary
The goldsmith's ability to create money was based on the fact that
paper money in the form of gold receipts was rarely redeemed for gold
The asset demand for money is most closely related to money functioning as a
store of value
What corrects inflation?
Contractionary fiscal policy
Which of the following statements is correct? • The actual reserves of a commercial bank equal its excess reserves minus its required reserves • a bank's liabilities plus its net worth equal its assets • When borrowers repay bank loans, the supply of money increases • A single commercial bank can safely lend a multiple amount of its excess reserves
A bank's liabilities plus it's net worth equal its assets
M1
Currency + Checkable deposits
Crowding-out effect
An expansionary fiscal policy may increase the interest rate and reduce investment spending, thereby weakening or cancelling the stimulus of the expansionary policy. When the government increases spending, spending in the private sector may decrease
bog controls BSUS
Board of Governors controls
Discretionary fiscal policy
Changes in government spending and tax collections designed to achieve a full employment and non inflationary domestic output. Used to control or regulate the business cycle
Differentiate between discretionary fiscal policy and non discretionary or built - stabilization policy
Discretionary fiscal policy is a policy action aimed at stabilizing the business cycle. Examples include changes in government spending and changes in taxes levied. Non discretionary fiscal policy is automatic which include the automatic stabilizers of increasing net taxes in an expansion and decreasing net taxes during a recession.
What corrects for a recession?
Expansionary fiscal policy
FOMC
Federal open market committee, in charge of selling securities in the open market
Why can't be used in the form of money?
Food is parishable
Most modern bank systems are based on
Fractional reserves
Calculate the change in government spending need to close the GDP gap
GDP gap / M
Budget deficit
Government spending in excess of tax revenues
Which thing does not cause any curves to shift
Interest rates
Brief description of fiscal policy and what are it's goals
It is a deliberate attempt by the government to either increase or decrease government spending or taxes in order to correct for recession and inflation. Its goals are full employment, to stabilize prices, and achieve economic growth
Money multiplier equation
It magnifies excess reserves into a larger creation of checkable-deposit money
Which is not a part of the M2 money supply?
Large denominated time deposits
A bank that has assets of $85 billion and a net worth of $10 billion must have
Liabilities of $75 billion
M2
M1 + small time deposits
Explain the effect of a discretionary increase in government spending of $50 billion on the economy when the economy's marginal propensity to consume is .75
MPC= .75 Multiplier = 1/ 1-. 075 = 4 4 x 50 billion = 200 billion
The transactions demand for money is most closely related to money functioning as a
Medium of exchange
Calculate the increases or decreases in taxes
Real GDP = (MPC)M x T
lag problems
Recognition- beginning of recession/awareness Wait and see: continued recession/inflation Legislation: between need identified & solution transmission: between action taken and effect Effectiveness: if action had effect
Arrange the following in a commercial bank's balance sheet Stock shares 300,000 Reserves 60,000 Property 290,000 Checkable deposits 150,000 Securities 40,000 Loans 60,000
Reserves 60,000 - Assets Property 290,000 - Assets Securities 40,000 - Assets Loans 60,000 - Assets Stock Shares 300,000 - Liabilities and net worth Checkable Deposits 150,000 - Liabilities and net worth Assets = liabilities and net worth
Why are financial institutions required to keep reserves?
To control the supply of money
Countercyclical discretionary fiscal policy calls for
deficits during recessions and surpluses during periods of demand-pull inflation
Which of the following is correct? • a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right • a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged • Deflation will shift both the transactions demand curve for money and the total money demand curve to the left • inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged
deflation will shift both the transactions demand curve for money and the total money demand curve to the left
The reserves of a commercial bank consist of
deposits at the federal reserve bank and vault cash
Congress decides to increase taxes during a period of expansion
discretionary
Congress votes to expand spending on infrastructure
discretionary
Discretionary vs non discretionary
discretionary allows a broker to buy and sell securities without the client's consent. A non-discretionary the client makes all the trading decisions.
Define asset liquidity
easily accessible cash vs house
Actual reserve
excess reserve + required reserve
Contractionary fiscal policy
helps control demand-pull inflation 1) Decrease government spending 2) increase taxes 3) combination of the two
Expansionary fiscal policy
increase government spending, reduce taxes, combination of the two Pursue expansionary fiscal policy in a recession
In defining money as M1, economists exclude time deposits because
they are not directly or immediately a medium of exchange