Macroeconomics final
FOMC works to help the economy function at its most efficient its goals is maintaining financial stability at maintaining maximum employment levels at curtailing inflation. Federal funds rate is an appropriate level the Fed and please open market operations which involve purchase or sale of government securities in the open market
Federal reserve system was founded in Congress in 1913 and serves as central bank for the United States this mandate requires the Fed to pursue these sometimes conflicting goals simultaneously in the Fed must keep a inflation rate low in the economy growing so that people can find work
keynsians believe employment will increase when higher gov. spending, tax cuts, or higher transfer payments
1970 federal budget has been deficit except 1998-2001, 2012 is deficit of 1.1 trill.
Fiat currency is anything declared to be legal tender without backing of some physical reserve asset like gold or silver. It refers to objects that are money because the law decrees or orders them to be money
Commodity money is based on physical reserve assets like gold or silver or other commodities that are stored somewhere else
Credit cards are not money because they result in a loan you receive an instant loan from the bank once you have used a credit card.
Debit cards are also not money it authorizes the merchant to transfer money that you do have on a deposit on the bank.
The fed can also increase the reserve ratio. It increases what banks hold back in reserves which is a part of the monetary base. Increase in money being used by individuals and businesses is decreasing the quantity of money
Fed also decreases the quantity of money through an open market operation by selling securities in the open market the Fed decreases the monetary base.
When potential GDP increases aggregate supply also increases in the short run which means it shifts to the right. The AS curve shifts when there is a change in the money wage rate or other resources rise in resource prices.
In 1970 US experience traumatic resource shock which will hire prices and a sharp drop in aggregate supply.
Increase in quantity of money results in lower nominal interest rate. Nominal interest rates will normally return to its original value because the value of money is falling. The value of money decreasing means the price level is rising, which also causes inflation.
Inflation is a monetary phenomenon because the percentage increase in quantity of money bring some equal percentage increase in price level
Tax policy in particular influences the behavior of investors in the financial markets when tax policy reduces the level of saving investment piece of the capital accumulation is slowed in the growth rate of the economy to declines
Inflation rises to 2% and the real interest stays the same at 2% and no nominal interest rates is 4%
Loanable funds are used for three purposes business investment government budget deficit international investment or lending
Loanable funds come from three sources private savings government budget surplus international borrowing
Saving = income - tax - consumption
Net investment = gross investment - depreciation
Supply side economics has received much publicity both with positive and negative over the past few decades economist argued that supplies side effects take no longer show results in demand side effects this is why proponents of supply side claim that even though tax cuts me cut into federal coffers over a short term cuts will also stimulate the creation of new jobs new investments in additional consumer spending. Opponents argue that benefits will be much less pronounced than supporters want to believe
Opponents of supply side economics suggest that tax cuts me cause a loss in revenue for governments in the short term but the last tax revenue is made up overtime as incentives for work investment in conception increases along with economic growth
To alternative strategies for central bank or instrument rule and targeting rule
Rules to beat discretion an inflation targeting rule a money targeting rule a nominal GDP targeting rule
The short run Phillips curve SRPC is used to show the relationship between inflation and unemployment both are constant. Unemployment on a graph is on the horizontal axis and the inflation rate is on the vertical it is a downward sloping curve. Higher inflation leads to lower unemployment
The long run Phillips curve LRPC shows the relationship between inflation and unemployment when economy is at full employment. The long run Phillips curve is vertical. Higher or lower inflation has no effect on unemployment rate
Wealth is the value of all things a person owns. Savings is the amount of income that is not paid in taxes or spent on consumption of goods and services
When we save more our wealth grows but wealth may also increase when market value assets rise. Wealth : savings = capital : investment
tax multiplies is the effect of a change in taxes in aggregated demand
a decrease in taxes increases disposable income and hence consumption expenditure which may have a multiplier effect on other spending
the government can generate demand with an increase in ant expenditure through transfer payments like unemployment insurance or a decrease in taxes
combination of all three is a american recovery and reinvestment act 2009
transfer payments multipler occurs when an increase in transfer payments increases aggregated demand,
higher transfer payments increase disposable income and hence consumption expenditure a key component of aggregated demand
fiscal policy is fed. gov. use of budget in order to achieve the macro objectives of high and sustained economic growth and full employment
how gov. chooses to spend its revenue impacts economy through effects that taxes or expenditures have on consumer and business behavior
Medium of exchange is any object that is generally excepted in exchange for goods and services like a token. Medium exchange acts as a money illuminator need for barter.
Barter is the exchange of goods and services directly for other goods and services like fish and tobacco.. Barter economy is inefficient because it requires a double coincidence of wants. In order to buy or sell something you have to match your wants with someone else.
MPC is equal to change in consumption expenditure divided by the change in disposable income.
Between 2000 and 2010 disposable income in the US Rose about 52% in consumption Rose only 49%
Loan market is where two parties agree to exchange funds for repayment in the future
Bond market or where loans are traded amongst different lenders. A bond is a promise to pay a specified amount of money on specific dates in the future
Currency depreciation refers to the fall in the value of one currency in terms of another.
Currency appreciation is the rise in the value of one currency in terms of another Currency.
These open market impact the real economy by influencing the exchanging money between banks if the Fed wants to lend more in spur the economic activity it will lower the federal funds rate through an open market purchase this lowers the opportunity cost of holding reserves and encourages bank to land if the Fed thinks there is too much money in in the economy it will raise the federal funds rate through an open market sale and raise the opportunity cost of holding reserves in which turn encourages banks to reduce their outstanding loans
First an open market purchases causes the federal funds rate and other short term interest rate to fall the long-term bond interest rate may also fall but less. The decline and interest rates decrease the demand for US dollars and investors can find better rates elsewhere. the exchange rate falls.
M1 consists of Curren$y held by individuals businesses in travelers checks plus checkable deposits owned by an individual and businesses.
M2 is a broader measure of money, it adds M1 to other deposits that individuals and businesses can access quickly in order to pay their obligations. M2 equals M1 plus savings deposit's, small time deposits, money market mutual funds and other deposits.
Gross investment is the total amount spent on new capital goods
Net investment equals gross investment minus depreciation
Interest rate received is must compensate the investor for not only being without their cash for some period of time but also losing some purchasing power because of inflation
Nominal interest rate equals the equilibrium real interest rate plus inflation rate. Real interest rate earned from investment is nominal interest rate paid minus inflation rate for that time period. Real interest rate is independent of the price level.
Largest bond markets in the world is that for debt obligations of the US federal government. Treasure bills are short term debt obligations.
Stock market is perhaps the most widely known and discussed financial market a stock is a certificate of ownership in claim to the profits of a firm
Benefits of global trade government often tries to protect domestic companies from too much competition overseas in the form of tariffs import quotas various regulations.
Taxes fees and restrictions keep oversee products from getting too strong of a foothold in domestic market foreign countries can enact restriction and fees of their own.
Quantity of money is supplied is fixed unless the Fed decides to change its policies.
The Fed does not have to change policies in response to a change in nominal interest rates in the supply of money curve is perfectly vertical.
new Commonly made arguments for restricting international trade that protection saves jobs allows us to compete with cheap foreign labor brings diversity instability and penalizes lacks environmental standards
Three traditional arguments for protection and restricting international trade our national security argument infant industry argument and dumping argument
United States have it treated extensively with other countries import are the goods and services that we buy from other countries exports of the goods and services we sell to people in other countries that exports of goods and services are components of gross domestic product are equal to the value of exports minus the value of imports.
Trade between all nations have grown rapidly through the past few decades United States is one still one of the largest international traders in the world exports are about 13.3% and imports are about 16.5% this compares to the 5.6% in the 4.2% in 1970
Targeting rule is decision rule for monetary policy that sets up the policy instrument at a level that makes the forecast of ultimate policy goal equate to its original target
in recent years the FOMC followed targeting rule August 2011 committee released a statement that federal funds rate is between 0% - 0.25%
