macro final sg
long run Aggregate Supply curve - vertical potential
Shape of (full-employment)
short run Aggregate Supply curve
Shapes of
fiat
US currency is '_____ money' - not backed by gold or silver, but is valuable because it's accepted as a means of payment, is legal tender, and is relatively scarce
$287 billion
US surplus in services in 2019 -
$345 billion
US trade deficit with China
contractionary fiscal policy
Usually to control inflation or reduce budget deficits
expansionary fiscal policy
Usually to increase GDP and lower unemployment
liquidity
availability of assets for purchasing
administrative lag
arises from the time it takes to enact the needed statutes.
progressive tax system,
based on the taxpayer's ability to pay
proportional tax system
one that imposes the same relative burden on all taxpayers
interest
opportunity cost of holding money
zero interest rate policy (ZIRP)
when a central bank sets its target short-term interest rate at or close to 0%.
open-market operations
• Buying and selling of government securities (or bonds) • Commercial banks and the general public • Used to influence the money supply
sum of all past deficits and surpluses
•public debt - Sum of all outstanding debt =
long-run vertical Phillips Curve
vertical at natural rate of unemployment
Budget surplus:
when Gov spending < Taxes
Budget deficit
when Gov spending > Taxes.
Troubled Asset Relief Program (TARP)
$700 billion bailout to financial institutions
problems w the fiscal policy
*Recognition lag, administrative lag, operational lag
Tax progressively
*progressive tax system, proportional tax system, regressive tax system
North American Free Trade Agreement (NAFTA)
- Agreement between United States, Canada, and Mexico. - Established a free trade zone between the countries. - Trade has increased in all countries. - Enhanced standard of living.
World Trade Organization (WTO)
- Established by Uruguay Round of GATT. - 153 member nations in 2011. - Oversees trade agreements and rules on disputes. - Critics argue that it may allow nations to circumvent environmental and worker-protection laws.
expansionary fiscal policy
- Increase Gov spending or decrease Taxes.
contractionary fiscal policy
- Increase Taxes or decrease Gov spending.
crowding-out effect
- Increased government deficits reduce private investment
European Union (EU)
- Initiated in 1958 as Common Market. - Abolished tariffs and import quotas between member nations. - Established common tariff with nations outside the EU. - Created euro zone with one currency.
discount rate
- Rate that banks borrow from the Fed
external public debt
- about 1/3 rd of federal debt held by foreign citizens and governments
Federal Open Market Committee (FOMC)
- controls supply of money
Political business cycle
- higher Gov spending and lower Taxes during election years
prime interest rate
- interest rate banks offer to their best customers
Indirect effects of trade protection
- possible reduction in efficiency, retaliation, higher costs for downstream consumers
U.S. government securities
- the way that Federal government borrows to pay for its deficits
Functions of the Federal Reserve
1) Issue currency, 2) Set reserve requirements, 3) Lend money to banks, 4) Collect/clear checks, 5) Act as a fiscal agent for U.S. government, 6) Supervise banks, 7) Control the money supply
monetary multiplier (M)
1/R
trade protection
Arguments in favor of ? - Increased domestic employment, reduce unfair advantage of cheap foreign labor in foreign countries, Protection against dumping
balance sheet
Assets = Liabilities + Net Worth
excess reserves
Banks create money through lending ___________ ____________
Federal Reserve System
Board of Governors and 12 Federal Reserve District Banks
expansion
Built-in (automatic) stabilizers - during ________________: transfer payments fall and taxes rise.
recession
Built-in (automatic) stabilizers -During ____________: transfer payments rise and taxes fall.
Fiscal policy
Changing government spending or taxes
c
Considering the impact of policy on the credit market (market for loanable funds), which of the following will tend to increase spending (aggregate demand) in the economy? (I) Expansionary fiscal policy; (II) Expansionary monetary policy. a. I but not II b. II not I c. both I and II d. neither I nor II
b
Considering the impact of policy on the credit market (market for loanable funds), which of the following will tend to reduce the interest rates? (I) Expansionary fiscal policy; (II) Expansionary monetary policy. a. I but not II b. II not I c. both I and II d. neither I nor II
b
Countries that use more of their resources to produce capital goods rather than consumption goods A) Will have slower economic growth in the future B) Will push their production possibility curve out further in the future C) Will have a lower standard of living in the future
supply-side
Critics of ? economics argue that the relationship between tax rates and economic incentives is small and of uncertain direction
Direct effects of protection
Decline in consumption, Increase in domestic production, Decline in imports, Tariff revenue
downward sloping curve
Demand for money - curve
Phillips Curve
Demonstrates short-run tradeoff between inflation and unemployment
Trade Adjustment Assistance Act
Designed to help individuals hurt by international trade
Fed Funds rate
Fed targets the ?, but does not directly set this rate. Only indirectly influences rate through changing money supply
b
In laissez-faire economies A) Decisions on what to produce, how to produce, and who receives the production are made by the government B) Decisions on what to produce, how to produce, and who receives the production are made primarily by firms and households C) Fail to generate any incentives for entrepreneurship compared to command economies
equilibrium interest rate
Intersection of money demand and money supply produces ?
expansionary monetary policy:
Open market purchases, decrease R, decrease discount rate,
contractionary (restrictive) monetary policy
Open market sales, increase R, increase discount rate,
Federal funds rate
Overnight borrowing rate between banks.
Reagan
President ? championed supply-side economics
Offshoring of jobs
Shifting of work previously done by American workers to workers abroad
vertical line
Supply of money set by the Fed - line
General Agreement on Tariffs and Trade (GATT)
Three principles: • Equal, nondiscriminatory trade between member nations • Reduction in tariffs • Elimination of import quotas
$2.5 Trillion
US Exports in 2019 -
$3.1 Trillion
US Imports in 2019 -
8.5%
US Share of world merchandise exports in 2019
13%
US Share of world merchandise imports in 2019 -
$577 Billion
US Trade Deficit in 2019 -
liquidity trap
a contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective.
quantitative easing (QE)
a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.
regressive tax system
a type of tax that is assessed regardless of income
functions of money
a) medium of exchange, b) unit of account, c) store of value are all:
Council of Economic Advisers (CEA)
advises President on fiscal policy
aggregate supply shocks
cause both inflation and unemployment to rise
interest on excess reserves
contractionary (restrictive) monetary policy increasing ? → intended to control inflation usually by slowing down GDP growth
interest on excess reserves
expansionary monetary policy: decreasing ? → intended to increase aggregate demand and GDP and lower unemployment
Moral hazard
financial bailouts may lead to more risky behavior in the future
Contributors to financial crisis of 2007-2008
government policies encouraging home-ownership, lax lending practices by banks, subprime mortgage loans to non-credit worthy borrowers which had initially low and then high interest rates, mortgage-backed securities, rapidly declining home-prices
public investments
government spending on public infrastructure (roads, bridges, electric grid, public buildings, etc.) reduces crowding out since it increases value of private investment
Financial Services Industry
includes Commercial banks, thrifts, mutual fund companies, investment banks, insurance companies.
M2
includes M1 plus savings account, money market deposit account (MMDA), time deposits, and money market mutual fund (MMMF)
Leverage
using borrowed money to invest magnifies profits and losses
Total increase in money supply if all excess reserves are loaned out
initial increase in reserves x M=
M1
most liquid. Includes Federal Reserve Notes (cash), checkable deposits
stagflation
usually caused by negative supply shock
Money market model
quantity of money demanded/supplied on horizontal axis and interest rate on vertical axis.
Zero Lower Bound
refers to the belief that interest rates cannot be lowered beyond zero.
Reserves
required reserves + excess reserves =
actual reserves
required reserves + excess reserves =
reserve ratio (R)
required reserves/Checkable deposits =
operational lag
results from how much time it takes for the effect of tax changes to be realized and be felt.
Bank reserves
vault cash + deposits and Fed =
Trade protection policies
tariffs, quotas, antidumping duties
Recognition lag
the amount of time it takes for fiscal or monetary authorities to recognize a problem in the economy.
total demand for money
transactions demand for money + asset demand for money=
Misery index
unemployment rate + inflation rate
