econ

S =

(Y + TR - T - C) + (T - G - R) Y - C - G (C + I + G + NX) - C - G I + NX

current account =

- financial account NX

potential money multiplier =

1 / required reserve ratio

current account + financial account

= 0

expansionary policy impact

AD, real GDP, price level, and employment increase

equation of exhange

M * V = P * Y (M = actual money held by public, V = income velocity of money, P = price level, Y = real national output (real GDP))

M2 =

M1 + savings deposit + money market deposit accounts + small denomination time deposits + retail money market mutual funds

MRP(L) =

MP(L) * P

profit is maximized when

MRP(L) = W

S + I =

NFI

if domestic saving is less than investment

NFI is negative

most important tool of fed reserve

OMO, largest daily means to control money supply

S (national saving) =

S private + S public

functions of federal reserve

Supplies the economy with fiduciary currency Provides a clearing mechanism for checks Holds depository institution reserves Acts as the government's fiscal agent Supervises member banks Acts as the "lender of last resort" Regulates the money supply Intervenes in foreign currency markets

unit of accounting

a measure by which prices are expressed; common denominator of the price system (central property of money)

what backs money?

acceptability, predictability of value and confidence, durability, divisibility

what a bank does

accepts deposits, grant loans

bank deposit effect: actual change in money supply =

actual money multiplier * change in excess reserves

OMO effect: actual change in the money supply =

actual money multiplier x change in open market operations

firm's demand for labor depends on

additional output produced by one more worker (marginal product of labor) the additional revenue received from selling the additional output (marginal revenue)

demand for money

amount of money people wish to hold (transactions demand, precautionary demand, asset demand)

determines lending potential of banks

amount of reserves in banking system

medium of exchange

any asset that sellers will accept as payment

checkable deposits

any deposits in a thrift institution or a commercial bank on which a check may be written

money

any medium that people generally accept in exchange for goods and services

legal total reserves

anything that the law permits banks to claims as reserves

board of governors

appointed by the president with senate confirmation 14 yr staggered permanent terms chair chosen by the Pres to a four-year permanent term

net worth =

assets - liabilities

near moneys

assets that are almost money

at high levels, individual labor supply curve may be

backward bending

opportunity cost of holding on to money

benefit of liquidity

labor productivity

better machinery & equipment, increases in human capital, better management & organization

organization of the fed

board of governors, 12 fed reserve district banks, federal open market committee, depository institutions

tools used by fed to increase money supply

buy securities, lower reserve ratio, lower discount rate

open market operations

buying and selling government bonds to the fed

OMO buying/selling securities

buying increases bank reserves and increases money supply selling decreases bank reserves and decreases money supply

federal reserve system

central bank of US

market determinants of exchange rates

changes in real interest rates, perceptions of economic stability, changes in productivity, changes in product and asset preferences, relative price levels, currency expectations

M1 transaction approach

currency, checkable deposits, traveler's checks not issued by banks

categories of balance of payments transactions

current account transactions, financial account transactions, capital account transactions

financial account

deals with buying and selling of real and financial assets (FDI, financial investments), other investment assets, reserve assets)

_______ in interest rate stimulates investment

decrease

increases in labor supply

decrease equilibrium wage and increase equilibrium labor quantity

decreases in labor demand

decrease equilibrium wage and labor quantity

increase in amount of labor ______ amount of work

decreases

increase in wage ____ leisure

decreases

increasing/ decreasing discount rate

decreasing encourages borrowing, increasing required & excess reserves and the money supply increasing discourages borrowing, decreasing required & excess reserves & the money supply

marginal product is ______ due to ____________

decreasing; the law of diminishing marginal product (returns)

liquidity

degree to which an asset can be acquired or disposed without much danger of any intervening loss in nominal value and with small transaction costs

FOMC

determines monetary policy composed of the board of governors, president of NY fed reserve bank, president of 4 remaining district banks

net exports

difference between exports and imports of goods and services (balance of trade + balance of services)

excess reserves

difference between legal reserves and required reserves

discretionary monetary policy

discretionary changes in open market operations, the reserve ratio, and/or the discount rate in order to achieve certain national economic goals

decreases in technology shift the production function

downward

purchasing power parity

equilibrium value of an exchange rare is at the level that allows a given amount of money to buy the same quantity of goods abroad as it will back home

policy used to increase AD

expansionary

production function

explains the relationship between the production of goods and services based on the factors of production

current account surplus

exports exceed imports

possible monetary policy options to solve gaps

federal reserve buys or sells bonds buy itself, raises or lowers reserve ratio by itself, raises or lowers discount ratio by itself, combination

thrift institution

financial institutions that receive most of their funds from the savings of the public

traveler's checks

financial instruments purchased from a bank or a nonbanking organization and signed during purchase that can be used as cash upon a second signature from the purchaser

when MRP(L) < W

firms should hire less labor

when MRP(L) > W

firms should hire more labor

leakages

forces that reduce the money multiplier (currency drains, excess reserves)

determines purchasing power of domestic currency

foreign prices

money multiplier

gives maximum potential change in the money supply due to a change in excess reserves

at lower wages the substitution effect is _____ than the income effect, resulting in _____ ____ labor supply curve

greater; upward sloping

equation of exchange in terms of growth rate

growth rate of money supply + growth rate of velocity = growth rate of the price level (inflation rate) + growth rate of real GDP

near moneys characteristics

highly liquid, easily converted to cash

transactions demand

holding money as a medium of exchange to make payments (varies directly with nominal national income)

asset demand

holding money as a store of value instead of other's assets (level varies with interest rate)

precautionary demand

holding money to meet unplanned expenditures and emergencies (level varies with interest rate)

market labor supply curve

horizontal summation across all individual workers constructs the market quantity of labor supplied at that wage

market demand labor curve

horizontal summation across all perfectly competitive firms constructs the market quantity of labor demanded at that wage

factors affecting the marginal product of labor

human and physical capital, technology progress, output per day (Q)

complement

if capital increases and is a complement for labor, then the marginal revenue product curve shifts right

substitute

if capital increases and is a substitute for labor, then the marginal revenue product curve shifts left

current account deficit

imports exceed exports

decreases in labor supply

increase equilibrium wage and decrease equilibrium labor quantity

increases in labor demand

increase equilibrium wage and quantity

decrease in amount leisure ____ amount of work

increases

decrease in wage ____ leisure

increases

impact of expansionary monetary policy

increases money supply, interest rate decreases, value of dollar decreases (depreciates), net exports increase, net export effect complements effectiveness of monetary policy

when interest rate rises, OC of holding money _______ ad quantity of money demanded ______

increases; falls

balance of trade determinants

inflation among trading partners, political stability, interest rates among trade partners

if growth rate of velocity is constant

inflation rate = growth rate of the money supply - growth rate of real GDP

financial intermediation sources and uses of funds

institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers

cause of recessionary gap

insufficient AD

discount rate

interest the Fed Res charges for its reserves it lends to depository institutions (only small amounts)

determines equilibrium wage and labor

intersection of the labor demand and labor supply curves

at wages above the equilibrium wage,

labor quantity supplied is greater than labor quantity demanded

at lower interest rates,

larger quantity of money will be demand, interest rate falls

decreases in technology or capital shift the marginal product of labor curve

leftward

excess reserves (ER) =

legal reserves - required reserves

as wage decreases, ___ people want to work

less

at higher wages the substitution effect is _____ than the income effect, resulting in _____ ____ labor supply curve

less; backward bending

quantity theory of money

links between changes in money supply and GDP; money supply and inflation

M2

liquidity approach

demand for leisure

marginal benefit derived from not working

real exchange rate

market exchange rate adjusted for price differences between countries (price of domestic goods in terms of foreign goods)

foreign exchange rates

market for buying and selling foreign currencies

financial account transactions

measure of net capital flows (capital inflows - capital outflows), opposite of net foreign investment (outflows - inflows)

functions of money

medium of exchange, unit of accounting, store of value, standard of deferred payment

capital account transactions

migrant transfer of goods and assets, copyrights & trademarks, relatively small

currency

minted coins and paper currency not deposited in financial institutions

when level of income or price level changes,

money demand curve shifts

stable price level if

money supply grows at same rate as real GDP

inflation occurs if

money supply grows faster than real GDP

deflation occurs if

money supply grows slower than real GDP

as wage increases, ___ people want to work

more

increases in labor cause a _______ along the production function

movement along

current account transactions

net exports, net income on investments, net transfers (gifts by and to citizens and governments)

NX =

net foreign invesment

real exchange rate (XRr) =

nominal exchange rate * (domestic price level / foreign price level)

shadow banking

nonbank financial institutions raise funds from investors and purchase securitized loans from banks less regulated and highly leveraged

3 tools of federal reserve

open market operations, discount rate, reserve requirements

determinants of money supply

open market operations, reserve ratio, discount rate

production function eq

output time / period = some function of labor Q = A*f(L) (Q = a firm's output L = labor; A = available technology, physical and human capital)

discrimination

paying a person a lower wage or limiting job opportunities based on irrelevant characteristics such as race or gender

required reserve ratio

percentage of total deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed

central banks role

perform banking functions for their nations government provide financial services for private banks conduct their nation's monetary policies

change in physical capital

physical capital can be a complement or substitute for labor

determinants of labor demand

physical capital, human capital, price of the product, technology, number of firms

labor supply curve

positive relationship between the wage and hours worked

exchange rates

price of one currency in terms of another

marginal product of labor is determined based on

production function

when wage increases

profit maximizing amount of labor decreases

when wage decreases

profit maximizing amount of labor increases

standard of deferred payment

property of an asset that makes it desirable for use as means of settling debt maturing in the future (essential property of $)

open market operations (OMO)

purchase and sale of existing US government securities in the open private market by the federal reserve system

raising and lowering reserve ratio

raising increases required reserves, decreases excess reserves, thus decreases money supply lowering increases money supply

determinants of money demand

real GDP, price level

current and financial account relation

related in absence of interventions by finance central banks current account + financial account = 0

marginal revenue product of labor

represents a firm's additional revenue from hiring one more worker

reserve ratio

required percentage banks must hold at Fed or in vault

most powerful tool of fed

reserve ratio (not used much)

balance sheet assumptions

reserve ratio is 10% checkable deposits are the bank's only liabilities an individual bank can lend all it wants up to its excess reserve amount loan proceeds are deposited into checkable accounts zero excess reserves banks have zero net worth

required reserves (RR) =

reserved ratio * checkable deposits

increase in capital shifts MRP(L) curve

right

Increases in technology or capital shift the marginal product of labor curve

rightward

balance of payments

summary record of a country's economic transactions with foreign residents and governments over a year

wages differ

superstars are compared to essential workers, diamond-water paradox, increase in relevant incomes of superstars

lending money

supply is affected, loan is approved --> borrower gets $, bank gets IOU, IOU not part of M1

labor quantity supplied exceeds labor quantity demanded

surplus --> equilibrium wage and quantity decrease equilibrium wage decreases and labor quantity increases

balance of trade categories

surplus and deficit items

fractional reserve banking

system in which depository institutions hold reserves that are less than the amount of deposits

arbitrage

taking advantage of a price discrepancy between two markets

store of value

the ability to hold value over time

labor demand is derived from or dependent on

the demand for good or service produced by labor

barter

the direct exchange of goods and services for other goods and services without the use of money

arbitrage could occur until

the exchange rate settles back into "long - run equilibrium" exchange rate or prices will adjust in one or both countries

compensating differentials

undesirable characteristics of some jobs, time preferences, bad working conditions

increases in technology shift the production function

upward

balance of trade

value of goods bought and sold in the world market

required reserves

value of reserves that a depository institution must hold in the form of vault cash or deposits with the Fed

balance of services

value of services bought and sold in the world market

equation of exchange is not an accurate inflation predictor if

velocity of money is not constant

substitution effect

when wage increases, opportunity cost of leisure increases; workers will substitute more work for less leisure, increasing quantity supplied of labor

income effect

when wage increases, people can afford more goods and services, including leisure; workers will substitute more leisure for less work, decreasing quantity supplied of labor

rational amount of leisure

where marginal benefit of leisure interests the wage

types of discrimination

worker, customer, negative feedback loops

US dollar appreciates -->

yen depreciates decrease in supply and/ or increase in demand for USD decrease in demand and/or increase in supply of yen