FINAL textbook
repeal of an investment tax credit effect
demand of loanable funds decrease less investment and less savings decrease the long run growth rate of a country
investment tax credit effect on market for loanable goods
demand of loanable funds increases more investments and more savings in economy
How big is the multiplier effect?
depends on the marginal propensity to consume
Keynesian economics
description of how economy works in short run short run changes can affect real variables
what are the differences in productivity of works attributable to
determinants of productivyt h k n t
what are the differences in growth rate of countries attributle to
differences in productivity of workers
what does money do
easier trading specialization
Other things the same, if workers and firms expected prices to rise by 2 percent but instead they rise by 3 percent, the
employment and production rise.
main trade off people face
equity vs efficency
increase of money supply causes
excess supply of money people get rid of their excess money by spending it on goods or by loaning it increased demand for goods but supply of goods does not increase so prices must rise
lower RRR
expansionary monetary policy lower RRR allows banks to loan out more money
open market purchase
expansionary monetary policy federal reserve purchases of treasury bonds
how do you fix demand shock recession supply shock recession
expansionary policy to increase ad (p back to original) expansionary policy to increase AD(p permently higher)
lower discount rates
extansionary monetary policy lower discount rates make it cheaper for banks to borrow so banks have more money to loan out
Stagflation
falling output and rising prices
Recessions (contractions)
falling real incomes for two or more quaters of RGDP contraction
Adam Smith
father of economics
who sets the RRR
federal reserve bank
open market sales
federal reserve sales of treasury bonds
mutual funds
financial intermediaries institutions that sell shares to the public and use the proceeds to purchase a portfolio of stocks and bonds
stocks and bonds are in what financial institution
financial markets
what do financial institutions consist of 2
financial markets financial intermediaries
sticky wage theory
firms and workers set teh nominal wage in advance based on expected price of the product they sell wages are slow to adjust so firms incrase production bc they are more profitiable
Misallocation of resources from relative-price variability
firms dont all rais prices at the same time so relative prices can vary distors the allocation of resoruces and consumer demand
neo classical misperception theory
firms may confuse changes in price level with changes in relative price of the products they sell is price is above expected price firms may believe its relative price is rising and may increase output and employment
debt financing in the bond market refers to what
firms take money for investment
which is more responsible for lag fiscal or monetary policy
fiscal
an open market sale causes money to
flow out of the economy
are bitcoins money1111111111111111111111111111111111
for now they are not considered money
when there a trade deficit and I>S where does the nation barrow the differnce
foriegners
how to you fix a liquidy trap
forward guidance: raise inflation expectations by commiting to keep interest rates low so ppl spend now quanitative easing: buy larger variaty of financial instruments
mutual fund
fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets financial intermediary
debt financing
funds raised through various forms of borrowing that must be repaid
should we focus on government debt or budget deficits
goverments debt
crowding out
government crowds out firms from being able to get loads due to government deficit
government runs a budget surplus or increases its budged surplus
government savings increase more total savings in the economy supply of loanable funds increase more total savings and more investments in the economy increases the long run growth rate of a country
financial system/institutions
group of institutions in the economy that help match one persons savings with another persons investment moves the economyes scare resources from savers (lenders) to borrowers (firms )
crowding out effect of fiscal poliyc
happens when the interest rate in higher increases in G increase Y which increases money demand this reduced interest rate and therefore investment
Harry buys a bond issued by Dell, Inc., which uses the funds to buy new machinery for one of its factories. In the language of macroeconomics
harry is saving dell is investing
commodity money111111111111
has a value independent of its use as money money with intrinsic value (alternative uses)
when ms is high price level is
high
what are the two reasons NCO could be negative which is the good reason
high investment and low savings high investment
longer term bonds have higher or lower interest rates
higher bc its more risky
longer term to maturity bonds have ___ interest rates
higher interest rates bc they are more risky
when the infaltion rate is higher than expected the real value of the loan is____ than expected which benefits ______
higher than lenders
market for goodsand services sells
house hold buy firms sell
savings by households 2
households deposit money in a bank or mutual fund households buy bonds or stocks
market for factors of production
households sell, firms buy
what was the cause of the great recession
housing market low interest rates and bubble mortgages
Money Demand111111111111111111
how much wealth want to hold in liquid form dependent of P an increase in P reduces the value of money so more money is required
liquidity trap
if interest rates have already fallen to zero monetary policy could no longe rbe effective
gdp what is not included
illegal goods second hand goods intermediate goods good that do not enter a market
If the economy is at point b, a policy to restore full employment would be a. an increase in the money supply. b. a decrease in government purchases. c. an increase in taxes. d. All of the above are correct.
incrase money supply
how does the goverment do expansionary fiscal policy
increase in goverment spending or decrease in taxes
ppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate-demand curve right.
quantity theory of money
increases in money supply cause inflation increase the price level decrease the value of money
open market purchase______ the reserve int the banking system while ____ the money supply
increases reserves in banking system increaes the money suppky
increase in taxes does what to intersest rates repeal an investment tax credit
increases them decreases
how does monetary policy stimulate aggregate demand
increasing interest rate
discouraged workers11111111111111
individuals who would like to work but have given up looking for a job
Hyperinflation what causes it1111111111111111111
inflation exceeding 50% per month excessive growth in money supply
Tax distortions (a cost of inflation)
inflation makes nominal income grow faster than real income so inflation causes people to pay more taxes even when their real incomes dont increase
tax treatment
interest on most bonds is considered taxable income interest on municipal bonds (gov bonds) are tax free
opportunity cost in MD and MS
interest rate
what is the most important reason the AD slopes downward
interest rate effect
According to liquidity preference theory, the opportunity cost of holding money is the inflation rate. t or f
interest rate!
the relationship between the value of money and price level is
inverse
relationship between AD and Price level
inverse realtionship
law of demand11111111111111111111
inverse relationship between price and quantity demanded
why has the US been saving less than invesntmetns
investment in the 1990s increased faster than people were saving due to the information tech boom
relative price
is the price of one good relative to (divided by) another
what does increased goverment spending do to interest rates? how do they fix this?
it increases it using the loanable funds graph they can fix it by increasing money supply by buying bonds which decrease interest rates
The General Theory of Employment, Interest, and Money
keynes 1936
what is the most imporant reason the AD curve is downward
keynes interest rate effect
what are the four payments for the four factors of production
labor-wages entrepreneurs-payments land-rent physical capital-interest
factors of production
land labor physical capital entrepreneurs
who uses stocks11111111111111111111
large corporations to borrow money
how does a permanent tax cut effect AD
large impact bc houses knew they had a lot to spend
The tax cut will have a larger impact on aggregate demand in the economy with larger or smaller marginal propensity to consume
larger
in a demand shock recession ad shifts
left
a tax hike shifts ad to the
left bc ppl dont have as much to spend
increase in taxes shifts ad to the decreas?
left right
government runs a budget deficit or increases budged deficit
less over all savings supply of savings goes down less total savings and less investments in the economy decreases the long run growth rate of a country
what causes a change in supply curve
level of technology price of input seller expectations number of producers
bonds have term to maturity credit risk tax treatment
life of bond the probability that the borrower will fail to pay some of the interest interest on bonds that is taxed
term to maturity what does short date do long date
life of the bond contract short date means less risky long date means more risky
A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a
liquidity trap
how is there more money in checking accounts than there is actual currency in the economy
loans
classical theory describe the world in the
long run
AS is vertical in the ____________ and upward sloping in the _____
long run short run
in the short run economic activity fluctuates about its111111111111111111111
long run trend
tax free bonds do what to interest rates
lower interest rates
bank activities are designed to allow themselves to11111111111111
make a profit
invisible hand
market guide self interest people to create desirable social outcomes
critics of active policy stabilation believe
may destabiize the economy rather than help it
fuctions of money 3
medium of exchange unit of account store of value
principles of monetary neutrality
monetary policy affect nominal variables but not real variables in the long run
problems with monetary policy
monetary policy occures with a lag fed does not control amount of money that households chose not to put not banks feds cannot control how much exvess reserve banks choose to keep
The immediate effect of a monetary injection increases the economy's ability to supply goods and services. t or f
monetaryt inject does not change ability to supply goods and services
what eliminates the need for a double coincidence of wants
money
unit of account
money allows a way of measuring value in a standard manner each good has aprice in terms of dollar which enable us to compare different value
store of valueNOOOO
money allows people to defer consumption until a later date enables us to transfer our wealth from today to future other assets can do this as welll but money does it the best bc it is liquid
appreciation/depreciation111111111111111111111
money can buy more money can buy less
medium of exchangeNOOO
money is acceptable in a wide variety of places as a form of payment in exchange for goods and services
the great depression
money supply fell and stock prices fell
what caused the great depression
money supply fell and unemployment rose
fiat money111111111111
money that has little or no intrinsic value or alternative use any money that is authorized by a central bank or goverment does not have to be exchanged by the central bank for gold or some other commodity
When the U.S. real interest rate rises, purchasing U.S. assets becomes
more attractive to everyone bc interest rates represent a return on assets
structural unemployment
more people are looking for jobs than jobs are available
what happens to the market for loanable goods when taxes are reduced shelter some interest earned from savings from taxes liek IRA
more private savings more total savings supply of loable funds increases more total savings and investment in economy increases the long run growth rate of a country
what causes a change in quantity demanded
movement along the curve caused by a change in P
M1 money supply
narrowest and most commonly used definition of money supply= currency+ checking account+ travelers checks
in an open econmy where does the supply of loanble funds come from
national savings also investment+NCO
Suppose Jason believes that the government should follow an active stabilization policy when the economy is experiencing severe unemployment. Which of the following policies would he recommend in this case?
needs to shift ad to the right to do this he needs to decrease taxes
the relationship between money demanded and value of money is
negative
If Canadian purchases of foreign assets are less than purchases of Canadian assets by foreigners, then Canada has a___ NCO and a ____ net exports
negative negative
type of relationship between r and QDlf
negative relationship as interest rate goes up QDlf does down as r goes down QDlf goes up
if the money supplu grows at the same rate as real GDP there will be
neither inflation nor delfation
does inflation itself reduce purchasing power
no
does a change in money supply affect Y
no Y is determined by technology and resources
If the real exchange rate between India and Thailand is 1 and purchasing-power parity holds, then 1 Indian rupee buys 1 Thai bhat.
no bc it doesnt mean 1 unit of currency buys another
is total output changed by the money sypply in the long run
no bc they are real variables
are all assets money111111111111111
no bc they arent all medium of exhange
In the definition of the money supply, where do credit cards belong
none bc credit cards are not money they are measure of debt
default in bonds
not paying back the money
spill over effect of unions
one firm gets unionized higher wages means less ppl hired those extra ppl then floods other companies and their wage goes down
what is the most often used fiscal policy
open market operations
3 tools of money policy
open market operations discount rate required reserves ratio
3 ways to increase money supply
open market purchases decreasing the discount rate decreasing the reserve requirements
what do the 3 SRAS theories have in common
output deviates from its natural rate when the actual price level deviates from the price level people expected
free trade111111111111111
outward polices work beset
what are examples of automatic stabalizers
personal income tax unemployment insurance
the relationship between money and P is
positive
type of relationship between r and QSlf
positive relationship as interest rate goes up quantity of supply of loanable funds goes up ' if it goes down so does QSlf
Suppose that Thailand's saving exceeds its domestic investment. In this case, Thailand has
postitive NCo and postive net exports
draw a graph to show a stock market crash
ppl feel they lost money so they spend less ad shifts left firms respond first to recession by decreasing SRAS in order to get back to equalibrium SRAS must shift right
Normal goods vs inferior goods1111111111111111111
ppl prefer normal goods and will replace inferior goods if they can afford it
money demanded depends on what
price level
Pigou's wealth effect
price level declines consumers feel wealthier so they increase a demand for goods and s
Keynes Interest Rate Effect
price level declines so ppl buy bonds and assets decrease in interest rate increase in investment goods increase in quannity demand of g and s
mundell Fleming exchange rate effect
price level decreases interest rate falls domenstic and investment in foreign contries increase the US dollar depreciates domenstic goods become cheaper net exports increase and demand increases
what happens to prices unempoyment and out put in expansions
price rises unemployment back to orignial y the same
investment
purchase of physical capital by firms
investment by firms1111111111111111111
purchase of physical capital by firms
forward guidance
raise inflation expectations by committing to keep interest rates low used in liquidity trap
real exchange rate
rate at which goods and services of ones country trade for the goods and services of another
nominal exchange rate
rate at which ones countries currenty trades for another
discount rate
rate charged by the red to banks to borrow money
Are relative prices real or nominal variables?11111111111111111111
real
The model of aggregate demand and aggregate supply explains the relationship between
real GDP and price level
real versus normial variables111111111111111
real are adjusted for inflation
theoyr for why PPP does not always hold practice
real exchange rates flucuate
real interest rate
real interest rate = nominal interest rate - inflation rate
variables that infuence nco
real interset rates paid on foriegn assets real interest rates paid on domestic assets percieved risk of holding foriegn assets goverment policies affecting ownership
what did the govermnet do in the great recession
reduce fed funds rate to zero purchased mortgage backed securites injected capital into banking system increased gov spending and reduced taxes
an increase in R ______ the quanity of G and S demanded
reduces
how can the feds raise interst rates
reducing the money supply
what does the fed do
regulate banks acts as lenders of last resort to banks
Shoeleather Cost of Inflation
resources wasted when inflation encourages people to reduce their money holdings
seven board of governors how long do they serve renewable?
responsible for overseeing the FED they are appointed by the president and serve 14 year nonrenewable
If countries that imported goods and services from the United States recovered from recession, we would expect that U.S. net exports would what does it do to ad
rise and ad shift right
If the nominal exchange rate remains at 30 Thai bhat per U.S. dollar while prices in Thailand rise more slowly than in the United States, then the real exchange rate of Thai goods for U.S. goods
rises
advantages of mutual funds 3
risk diversification allows small time savers to have diverse portfolio access to professional money manager skills
risk lover vs risk averse111111111111111111
risk lover would prefer stocks risk averse means wanting to avoid stocks
equity finance
sale of stock by firms to raise money
equity financings
sale of stocks by firms to raise money
a change in money supply causes nominal GDP to change by the
same percentage
increase in interest rate makes ppl want to
save more money and have less money demand
In the language of macroeconomics, a higher interest rate induces people to
save more, so the supply of loanable funds slopes upward.
who are lenders and borrowers in the financial system
savers=lenders borrowers= firms
what government polices can effect the market for loanable funds
saving incentives investment incentives government budget deficits and surpluses
Cutter is spending less than he's earning, and he uses his unspent income to buy some stock from Phi Optics Corporation. A macroeconomist will call Cutter's act:
savings
what happens if ppl adopt a live for today approach
savings go down supply of loanable funds decrease less total savings and less investments in the economy decreases the long run growth rate of a country
what happens to the loanable funds graph when a goverment runs a surplus
savings goes to the right
When the Federal Reserve increases the Federal Funds target rate, it achieves this target by purchasing government bonds. This action will shift aggregate demand to the right. b. purchasing government bonds. This action will shift aggregate demand to the left. c. selling government bonds. This action will shift aggregate demand to the left. d. selling government bonds. This action will shift aggregate demand to the right.
selling government bonds which will shift aggregate demand to left bc ppl want to save more bc money supply becomes lower as money goes from bank to gov
restore full employment means
send back the curves to equalibrium
fiscal policy
setting the level of government spending and taxation by government policy makers
aggreate demand and suppyl is used to describe short or long run fluctuations
short run
theory of liquidity preference
short run and supposes that interest rate adjust to bring money supply and money demand into balance interest rate effects how much people want to hold in liquid form
cyclical unemployment
short run fluctuations in unemployment rate deviation from the natural rate
business cycle1111111111111111111
short term fluctuations in economic activity
how does a temorary tax cut effect ad
small impact bc ppl know its only here for a little
deficits
spend more money today than you made today
normative statement
statement which describes how the world should be option
Menu costs help explain
sticky price theory
Why does the SRAS curve slope upward?\ what 3 theories
sticky wage theory, sticky price theory, misperceptions theory
S and P 500111111111111111
stock index 500 large cap us stocks which combine for about 80 percent of all us market Capitalization
down jones111111111111111111
stock index weighted average of stock prices of the 30 biggest US companies
stocks vs bonds which is riskier1111111111111111111111
stock ppl claim ownership to the firm bonds used by large corporation ro gov stocks
Which function of money is illustrated when Mia deposits money in her piggy bank?
store of value
unions cause
structural unemployment
efficiency wages cause
structural unepmployment but can make works work more effiencly
debt
sum of all previously incurred deficits and interest
banks business model
take in deposit from savers pay interest make loan to borrowers charge interest
investment tax credit111111111111111111
tax credit given for purchase of equipment firms wish to invest more
tax free bonds do what to interest rate
tax free bonds cause for lower interest rates they will offer higher rates if you are being taxed
what causes shift of supply curve
technology price of inputs sellers expectations number of producers
what does interest in the bond market depend on
term to maturity credit risk tax treatment
principal in bonds1111111111111111111
the amount borrowed
natural rate of output (potential output or full employment output)
the amount of output the economy produces when unemployment is at its natural rate
velocity of money
the average number of times each dollar in the money supply is used to purchase goods and services the rate at which money changes hands
Why is Ms a vertical line?111111111111111
the central bank sets the money
bank profit is determined through
the difference in interest rates that they pay on deposit and make on loans
LiquidityNOOOO
the ease at which an asset can be exhanged into an economy main medium of exchange
market failure
the economy fails to allocate resources efficiently on its own externalities one firm has too much market power
output gap why does it occure
the gap between real GDP and potential GDP bc ppl arent rational in short run
the inflation fallacy refers to
the incorrect belief that inflation robs people of their purchsing power over the long term workers get payed more and
People choose to hold a larger quantity of money if
the interest rate falls, which causes the opportunity cost of holding money to rise.
required reserve ration RRR
the minimum fraction of deposits that banks are required to keep as reserves
natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates
Fisher effect111111111111111111
the one-for-one adjustment of the nominal interest rate to the inflation rate
Credit Risk111111111111111111111
the probability that the borrower will fail to pay some of the interest or principal
catch-up effect
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
inflation tax
the revenue the government raises by creating money when the gov prints money the price level rises and the dollar are less valurable so you need more
human capital11111111111111
the skills and knowledge gained by a worker through education and experience
what happesn if the goverment does not interfere with recessions
the sras will shift left to met at e but prices are now lower
Federal Open Market Committee (FOMC)
the systems principal monetary policy making body
classical dichotomy
the theoretical separation of nominal and real variables
aggregate supply curve
the total quanity of goods and services firms produce and sell at any given price level
what does a change in money sypply do to price level
there is an equal and porportionate change in price level
how do they compensate for longer date to maturity and higher risk bonds
they provide higher interest rates
how are stock prices determinded
though supply and demand in organized stock exchanges demand is determined by peoples perception of the corporations profitability in the future
how do households fund investments
through financial systems households keep their money there and banks loan it out
a tax credit will shift ad a repeale of tax credit will shift ad
to right left
what is the primary reason people hold money
to use it as medium of exchange
GNP (Gross National Product)
total dollar value of goods & services produced by a nation nationals
are we currently running a trade deficit or surplus
trade deficit
IRA111111111111111
traditional IRA (individual retirement account) allows individuals to direct pretax income toward investments that can grow tax-deferred
An investment tax credit shifts the demand for loanable funds right and raises the interest rate. t or f
true
mo
two traders are willing to exchange their products directly needed for a barter system to work
index funds
type of mutual fund with a portfolio constructed similar to a market index over time they have higher returns than their actively managed
frictional unemployment(job search)
unemployment that occurs when people take time to find a job
a shortage causes a ____ presure on price a surplus causes a ___ pressure on price
upward donwward
financial markets BOND MARKET used by who
used by large corporations federal state or local goverments to barrow money
demand for money is low when
value is high
monetary contraction11111111111111111111
value of money increases the price level decreases
why do we prefer M1
we are mostly interested in moneys role as the medium of exchange
how can the goverment pursue encourage growth in long run how do we increase productivity rates
we need to increase investments we can fund investmetns by encouraging savings
special cost of unexpected inflation
when actual inflation is higher or lower than expected redistributes wealth among debtor sand creditors
when does debt increase1111111111111111
when we increase borrowing to finance deficits
equilibrium value of money1111111111111111
where MS and MD cross
bank run11111111111111111
widespread panic in which great numbers of people try to redeem their paper money
trends of labor force over time women and why
women are participating more in labor force men went down changing political attitudes new technologies improved birth control
a big expansionary ad shift
ww2 boom
are banks a good option for those who are risk averse
yes
are debt cards money11111111111111
yes
are there persistent trade deficits111111111111111111111
yes
are unpaid workers in a family business employed?
yes
is the velocity of money stable in the long run
yes
In 2016, the economy produced Y = 300 cars; the money supply is $600,000, and each car sells for $10,000. The nominal GDP is:1111111111111111111111111111111111111111111
$3,000,000 and V = 5
variables that influence net exports
-Consumers' preferences -Prices of goods at home/abroad -Incomes of consumers at home/abroad -The exchange rates at which foreign currency trades for domestic currency -Transportation costs -Gov. policies
the money supply demand diagram
-as the value of money rises, the price level falls -the Fed sets MS at some fixed value, regardless of P -a fall in value of money (or increase in P) increases the quantity of money demanded -P adjusts to equate quantity of money demanded with money supply
two markets in the circular flow diagram
-the market for goods and services -the market for "factors of production"
3 facts about economic fluctuations
1. Economic fluctuations are irregular and unpredictable 2. Most macroeconomic quantities fluctuate together 3. As output falls, unemployment rises
Why the AD Curve Slopes Downward1111111111111111111111
1. wealth effect 2. interest rate effect 3. exchange rate effect
Assume that the nominal exchange rate (e) = 10 pesos per $. The price of a tall Starbucks Latte: P = $3 in U.S., P* = 24 pesos in Mexico Calculate the real exchange rate, measured as Mexican lattes per U.S. latte
1.25
Suppose that in a closed economy GDP is equal to 15,000, taxes are equal to 4,000, consumption equals 10,000, and government expenditures equal 3,000. What are private saving and public saving?
1000 and 1000
If the reserve requirement is 10%, how much is the total increase in checking account deposits caused by an initial deposit of $1,000
10k
central bank of united states how many district/reginal banks
12
The manager of the bank where you work tells you that the bank has $500 million in deposits and $350 million dollars in loans. If the reserve requirement is 5 percent, how much is the bank holding in excess reserves?
125
The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves?
19.5
how much does real GDP grow on average1111111111111111111111111
3 percent
Assume that the nominal exchange rate (e) = 10 pesos per $. The price of a tall Starbucks Latte: P = $3 in U.S., P* = 24 pesos in Mexico What is the price of a U.S. latte measured in pesos
30 nominal exchange rate* domestics price
If U.S. residents purchase $600 billion worth of foreign assets and foreigners purchase $300 billion worth of U.S. assets us net captial outflow is
300 billion capital is flowing out of us
how long does the chair serve renewable?
4 years yes
how often does the FOMC meet
6 weeks in DC
the federal open market commitee is made up of
7 board of gov menmbers president of NY federal reserve bank 4 of the other regional bank presidents
Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits?
950 95=required to reserve 1/.1 * 95
Compared to bondholders, stockholders A. face higher risk and have the potential for higher returns. B. face higher risk but receive a fixed payment. C. face lower risk and have the potential for higher returns. D. face lower risk but receive a fixed payment.
A
fractional reserve banking system
A banking system in which banks keep less than 100 percent of deposits as reserves
which factor can the goverment only effect
AD
consumer firm optimism increase draw graph
AD shift right bc they feel more confident in buying then sras follows
expansionary fiscal policy shifts
AD to the right
Wealth of Nations
Adam Smith
command economy111111111111111111
An economic system in which the government controls a country's economy.
mixed economy111111111111111111
An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.
CPI versus GDP deflator
CPI uses a fixed basket only includes consumption goods bought by households includes the price of imports
market economy
Economic decisions are made by individuals or the open market.
open market operations
FOMC buys and sells government bonds
FDIC Insurance11111111111111
Federal Deposit Insurance Corporation that protects the money in a bank account backed by US goverment covers the depositors of failed depository institution dollar for dollar up to 250000 per deposit
complementary goods1111111111111111
Goods that are commonly used with other goods if you buy one you want to buy the other
junk bonds
High-risk, high-interest bonds
Why is the financial system important?
Important for economic growth as it provides funds to firms for capital investment, training workers, and new technologies
disposable income
Income remaining for a person to spend or save after all taxes have been paid
confusion and inconvenience (cost of inflation)
Inflation changes the yardstick we use to measure transactions. Complicates long-range planning and the comparison of dollar amounts over time
Current chairman of the Fed previous chair?
Jerome Powell yanet yellen
sticky price theory
Many prices are sticky in the short run due to menu costs
natural resources11111111111111
Materials or substances such as minerals, forests, water, and fertile land that occur in nature and can be used for economic gain
capital outflow is when
NCO is greater than 0
capital inflow
NCO<0
net foreign investment means
Net capital outflow
lender of last resort
One of the functions of the Fed: It provides funds to troubled banks that cannot find any other sources of funds.
in the long run what does Pe and Yn equal111111111111111111111111
P N
positive statement
Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence.
substitute goods1111111111111111
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
rise of oil prices draw graph
SRAS shift left bc decrease in output
supply shock recession11111111111111111111111
SRAS shifts left
Jerry has the choice of two bonds, one that pays 5 percent interest and one that pays 2 percent interest. Which of the following is most a municiple bond and corporate bond
The 2 percent bond is a municipal bond, and the 5 percent bond is a corporate bond.
Marginal Propensity to Consume (MPC)
The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income
Law of Supply11111111111111111111
The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.
expenditure method of calculating gdp
Y=C+I+G+NX
Foreign Direct Investment1111111111111111
a capital investment that is owned and operated by foreign entity
bonds111111111111111111
a certificate of indebtedness
risk averse risk lover1111111111111111
a dislike of uncertainty like want lower interst rates they prefer higher interset ratesand stocks
The Money Supply-Demand Diagram
a fall in the value or increase in p increases the quanity of money demanded curved line down
Purchasing Power Parity law of one price why does this not happen?arbitrage
a good should sell for the same price in all markets arbitrage by selling a good in another market you have to pay for transportation costs
financial markets
a place where savers(households) directly provide funds to borrowers(firms) bond or stock market households are lending money directly to firms when they buy bonds and stocks firms are borrowing money directly from households in order to invest in physical capital
bank panic1111111111111111
a situation in which many banks experience runs at the same time
what will cause for a rise in the real interest rate in the market for loanable funds
a storage of loans
national income accounting
a system that collects macroeconomic statistics on production, income, investment, and savings
how does a price level decrease effect AD? MD? people will try to ___their money holdings the interest rate will____ this makes residential and buisness investmetn to _____
ad shift left md shift left lower lower investment and demand for g and s goes up
contractionary fiscal policy shifts
ad to left
the multiplier effect of ad shifts
additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending
Reserves111111111111111
amount of deposits that banks keep in their vault or with the federal reserve bank
foreign portfolio investment1111111111111111
an investment that is financed with foreign money but operated by domestic residents
how does keynes explain shifts in AD and output
animal spirits cause waves of pessimism and optimism
money
any asset that people are willing to accept in exhange for goods and services and payment of debt
why would the AD curve shift
any changes in C I G or NX will shift a change in P will NOT
Why the Long-Run Aggregate-Supply Curve Might Shift
any event that changes the determinats of Y physical captital human captital labor force natural resources technology
Why does the short-run aggregate supply curve shift
any that shifts the LRAS
no
anything of value owned by a person or firm reflection of ones wealth
physcial capital1111111111
anything that helps produce the product
how does someone join the board of governors
appointed by the president and approved by the senante
nominal vairables
are measured in monetary units $ 100$ worth of milk
real variables
are measured in physical units adjusted for inflation 10 gallons of milk
diminish returns to capital
as capital rises the extra output from each additional unit of capital falls
stock index
average of a group of stock prices
NASDAQ111111111111
average of more than 3000 stock prices international companies
financial intermediaries
banks and mutual funds
fractional reserve system
banks are required to keep a fraction of their deposits as reserves
why does the us barrow so much abroad
bc we recieve lower interest rates
John Maynard Keynes
believed in keynias theory short run econ
municipal bonds
bonds from goverment
if inflation is higher than expected who benefits loaners or borrowers
borrowers bc fisher rate equations loaners are earning less real interst rate than they thougt
business cycle vs trend growth
business cycles are peaks and troughs in teh economy trend growth is the over all growth of economy
what explains the tendency for actual GDP to deviate from potential GDP
business cylce
quantitative easing
buy a larger variety of financial instrumetnts
how can the goverment effect ad 5 ways
by chaning money supply increase money supply change RRR decrease discount rate ncrease goverment spending decrease taxes
Which of the following shifts the short-run aggregate supply curve to the right? a. a decrease in the actual price level b. an increase in the actual price level c. a decrease in the expected price level d. an increase in the expected price leve
c
minimum wage
causes structural unemployment
automatic stabilizers
changes in fiscal policy that automaticlly go into effect during a recession taxes automatically drop
sectoral shifts
changes in the composition of demand across industries or regions of the country can cause frictional unemployment
demand deposit
checking account deposits in banks
stock111111111111111111
claim to partial ownership in a firm
adam smith was a ____ economis
classical
what type of theory is quanity of money theory is it long run or short run theory
classical theory that explains long run behavior
If prisoners of war use cigarettes as money, then cigarettes are
commodity money
types of money11111111111
commodity money fiat money
how would the fed change the AD how do you decrease Federal funds rate increase? what is the federal funds rate
conductt open market purchases in a way so that the new equalibrim federal funds rate would decrease open market sales the interest rate banks charge each oteh on short term loans
higher RRR
contractionary monetary policy higher RRR results in less money loaned out by banks to the general public
higher discount rates do what to the money supply
contractionary monetary policy higher discount rates make it more expensive for banks to borrow so banks have less money to loan out
do corporate or municipal bonds pay higher intererst
corporate bc interest made is being taxed
menu cost
cost of changing price listings printing new menus
opportunity cost
cost of something is what you give up to get it
Monetary policy affects the economy with a long lag, in part because a. proposals to change monetary policy must go through both the House and Senate before being sent to the president. b. monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly. c. changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance. d. changes in interest rates primarily influence investment spending, and firms make investment plans far in advance
d
The value of the goods and services Australia purchases from the U.S. are less than the value of goods and services the U.S. purchases from Australia. The U.S. has A. positive net exports with Australia and a trade surplus with Australia. B. positive net exports with Australia and a trade deficit with Australia. C. negative net exports with Australia and a trade surplus with Australia. D. negative net exports with Australia and a trade deficit with Australia
d
what 3 things do all bonds have
date to maturity (when the bond will be repaid rate of interest (price of borrowing) principal (amount borrowed)
When the Fed sells government bonds, the reserves of the banking system a. increase, so the money supply increases. b. increase, so the money supply decreases. c. decrease, so the money supply increases. d. decrease, so the money supply decreases.
decrease and so the money suppyl decreases as well
Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier
decrease from 20 to 10
how does gov do contractionary fiscal policy
decrease goverment spending or increase taxes
