MACRO FINAL
aggregate demand is downward sloping for 3 reasons
wealth affect interest-rate effect exchange-rate effect
unit of account
the yardstick people use to post prices and record debts
what is associated with monetary and fiscal policies?
Lags because it takes the economy time to adjust
when the interest rate is below equilibrium
this is a shortage that puts upward pressure on interest rate
when the interest rate is above equilibrium
this is a surplus that puts downward pressure on interest rate
quantity of equation
M x V = P x Y
nominal GDP
P x Y
M2 money supply
Everything in M1 plus small time deposits and money market funds (except those held in restricted retirement accounts
The executive branch (president and the congress) control what policy?
Fiscal policy
leverage ratio
the ratio of assets to bank capital
short run economic fluctuations focuses on two behavior variables
- real variable (output of goods and services) - nominal variable (average level of prices)
What shifts aggregate supply?
-shift right: anything that decreases input costs of production (cheap labor/fuel, technology, lower taxes) -shift left: anythign that increases input costs of production (more expensive labor, fuel, interest rates, higher taxes)
money multiplier formula
1/reserve requirement
misperceptions theory
An unexpectedly low price level leads some suppliers to think their relative prices have fallen, which induces a fall in production
M1 money supply
Currency, demand deposits at banks, some other liquid deposits (balances in savings accounts)
theory of liquidity preference
Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance
When the Fed increases the rate of money growth, long-run result is
Higher inflation rate and higher nominal interest rate
What happens to real GDP, investment, and unemployment during recessions?
Real GDP and investment decline while unemployment rises
monetary policy
the setting of the money supply by policymakers in the central bank
Classical dichotomy
Theoretical separation of nominal and real variables
velocity of mony formula
V = (P × Y) / M P: Price level (GDP deflator) Y: Real GDP M: quantity of money
nominal variables
Variables measured in monetary units (dollar prices)• Dollar prices
real variables
Variables measured in physical units (relative prices, real wages, real interest rate)
aggregate supply curve
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
aggregate demand curve
a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
recession
a period of declining real incomes and rising unemployment
The feds can influence reserve ratio by
altering reserve requirements
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
store of value
an item that people can use to transfer purchasing power from the present to the future
sticky price theory
an unexpectedly low price level leaves some firms with higher than desired prices, which depresses their sales and leads them to cut back production
If the Fed wants to increase the money supply, it can
buy bonds in open market operations, decrease reserve requirement
open market operations
buying or selling government bonds
contradictory
decrease aggregate demand so it intersects the short run aggregate supply curve
a decrease in CPI or GDP is a
decrease in price
deflation
decrease in price levels
how can the feds increase money supply?
decrease reserve requirement decrease interest rate buy bonds in an open market decrease discount rate
When Citibank repays a loan it had previously taken from the Fed what happens to money supply?
decreases
When the Fed increases the interest rate it pays on reserves what happens to money supply?
decreases
When the Feds sells bonds in an open-market what happens to money supply?
decreases
When the feds raise reserve requirement what happens to money supply?
decreases
If the Fed raises the interest rate it pays on reserves, it will ________ the money supply by increasing ________.
decreases; excess reserves
When consumption, investment, government, or NX increase, demand increases if any of the factors decrease
demand also decreases
Formula for loans
deposits - reserves
hyperinflation
extraordinarily high rate of inflation
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to _____ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore ______ , and the number of foreign products purchased by domestic consumers and firms (imports) will _____ . Net exports will therefore _______ , causing the quantity of domestic output demanded to ________. This phenomenon is known as the _________ effect
fall, rise, fall, rise, rise, exchange rate
when price level falls the cost of borrowing money ________, causing the quantity of output demanded to _____ . This phenomenon is known as the _______ effect.
falls, rise, interest rate effect
Why is AD sloped downward?
higher prices are associated with lower quantities of output and lower price levels are associated with higher quantities of output
expansionary
increase aggregate demand so it intersects the short run aggregate supply curve
Inflation
increase in price levels
how can feds decrease money supply?
increase reserve requirements increase interest rates sell bonds in an open market increase discount rate
When the FOMC decreases its target for the federal funds rate what happens to money supply?
increases
when government passes a law to increase minimum wage this
increases the natural rate of unemployment shifting LRAS to the left
LRAS depends on
labor, capital, technology and natural resources
cash
liquid but pays no interest
when the Fed increases the money supply
lowers the interest rate and increases the quantity of goods and services demanded for any price level
increase in deposits formula
money multiplier x deposits (money multiplier= 1/reserve ratio)
commodity money
money that takes the form of a commodity with intrinsic value
fiat money
money without intrinsic value that is used as money because of government decree
sticky wage theory
nominal wages are slow to adjust to changing economic conditions (does not respond immediately when price level is different from expected)
depression
occurs when things slow down; GDP drops (severe recession)
bonds
pays interest but not as liquid
impact of expansionary fiscal policy
pushes the economy above the natural level of unemployment
impact of contradictory fiscal policy
pushes the economy below the natural level of unemployment
when the fed decreases the money supply
raises the interest rate and decreases the quantity of goods and services demanded for any price level
as price level falls
real wealth rises, interest rates fall, and the exchange rate depreciates.
changes needed to increase aggregate supply
regulations on firms decrease human capital improves input prices decrease
the money multiplier is reciprocal of
reserve ratio
Formula for reserves
reserve ratio x deposits
multiplier effect
suggests that shift in aggregate demand could be larger
crowing-out effect
suggests that shift in aggregate demand could be smaller
changes needed to decrease aggregate supply
tax rates increase technology declines inflation expectations are higher
money multiplier
the amount of money that results from each dollar of reserves
When the level of output is less than the natural level of output this is?
the economy experiencing a recession
When the level of output is more than the natural level of output this is?
the economy experiencing an expansion
of the reasons which effect is the most important reason for the dowward slope of aggregate demand and least important?
the interest-rate effect is most important and the wealth effect is the least important
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
money supply
the quantity of money available in the economy