ECON 2020
medium of exchange, unit of account, store of value, standard of deferred payment
Core functions of money in the economy
slef-funding, quasi-governmental, and non-democratic
FED
expansionary monetary policy
FED actions to counter-act recession?
rate at which commercial banks borrow and lend their excess reserves to each other overnight, FED upper and lower target
FFR
monetary system backed by "full faith and credit" of the issuing government (monopoly money)
Fiat Monetary System
self report data over reflects expensive goods when sales data shows more inexpensive goods
Formula/Outlet bias
expansionary fiscal policy
Government actions to counter-act recession?
if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation (bad money drives out good)
Gresham's law
with rising unemployment and inflation, stabilization policy can only address one while worsening the other (gov't leans to fix inflation)
How does stagflation pose a problem for governmental stabilization policy?
interest rate for reserves manipulates banks lending choices
IOR
tax rate that maximizes government revenue (55-85%)
Laffer curve
lack of portability, grasham's law, supply limits, resource loss
Negatives of commodity money
fully trust based and no supply limit
Negatives to FIAT money
new products are incorporated into calculation after availability increases and price drops
New Product Bias
IOR & TOMO
New tools
RRR, PCR, FFR, POMO
Old tools
interest rate FED charges banks on overnight loans
PCR
buying and selling of primarily government bonds to impact money supply
POMO
SRAS
Philips curve breaks down when the _______ curve shifts in AD/AS
fixes all four commodity money negatives
Positives of FIAT money
cannot determine if price increased are from increased quality or inflation
Quality bias
FED set ratio for required bank reserves
RRR
payment at a future date is made possible because of the general acceptability of money (loan contracts)
Standard of deferred payment
market basket quantities do not fluctuate with inflation, overestimates inflation that consumer faces
Substitution bias
short term REPO or reverse REPO's with terms and set date
TOMO
data collection, data analysis, policy formulation, policy implementation, impact
What are 5 lags for stabilization policy?
physical capital goods, natural resources, labor, productive know-how
What are factors of production?
consumption, gross investment, government spending, net exports
What does GDP consist of?
production capabilities at a certain time
What does aggregate supply mean?
healthcare, education, environment (quality of life
What does gdp fail to measure?
period where prices are irrelavent
What does long run mean?
inverse of unemployment rate and wage inflation
What is Philips curve relationship?
risk that pumping money into the economy won't have any effect
What is a liquidity trap?
purchasing government bonds or other financial assets in order to stimulate economic activity
What is quantitative easing?
when an economy is experiencing inflation and stagnant/declining growth
What is stagflation?
consumption, interest rates, NX, government spending
What shifts AD?
factors of production and institutional factors
What shifts LRAS?
factors of production and input costs (labor, energy $, etc)
What shifts SRAS?
unemployment that rises during economic downturns and falls when the economy improves
cyclical unemployment
liquidity trap and zero bound principle
flaw of interest rate mechanism
unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs
frictional unemployment
FED control over interest rates as an economic whole
interest rate mechanism
allows for buying and selling of goods instead of barter system
medium of exchange
to flatten out the business cycle in order to lower overall volatility
purpose of stabilization policy?
provides an easy way to accumulate wealth
store of value
mismatch between workers and employers, workers skills are not applicable in modern labor market
structural unemployment
provides stability by putting a price value to an good
unit of account
LRAS
what curve represents the economy at potential/full employment (max efficiency)
helps determine what monetary/fiscal policy needs to be used, fix unemployment or inflation
what guidance does philiaps curve provide for policy makers?
some frictional and structural, but not cyclical unemployment
what is full employment rate of unemployment