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88 Cards in this Set
- Front
- Back
Gross Domestic Product
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the total value of all goods and services legally produced within a nation per year
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Gross National Product
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any output made by an American company, even if they are abroad, and excluding foreign companies in the US
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Exclusions to GDP
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1. Intermediate Goods
2. Secondary (used) Goods 3. Payment-in-kind products 4. Things you make/do for yourself 5. Illegal stuff |
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Inclusions/Distortions to GDP
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1. Bads (hurricane cleanup)
2. Leisure is not valued 3. Environmental damage not included 4. Population growth = higher GDP not included (ceteris parabus) |
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Per Capita GDP
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PC GDP = $GDP/population
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Recession
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2+ consecutive quarters of declining GDP
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Keynesian Model
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GDP = C + I + G + (X-M)
output = household consumption + business investment + gvt spending - trade deficit (exports - imports) |
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Household consumption
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C = ~69%
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Business Investments
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I = ~16%
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Government Spending
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G =~18%
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Trade Deficit
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X-M = ~-3.5%
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Good Measures of Well-being
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1. Real Median Household Income
2. Real productivity growth |
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"Ratchet Effect"
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every time there is a crisis, the government increases its presence in the economy. after the crisis, the gvt doesn't return to pre-crisis levels
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Automatic Fiscal Stabler
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if UNE increases, UNE payments increase (sensitivities chart)
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GDP Deflator
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an index calculated for every year which shows how output prices change over time
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GDP Deflator Construction
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1. pick a base year for comparison (2000)
2. Calculate "nominal" GDP ∑ Pt · Qt 3. Calculate "real" GDP ∑ P base year · Qt 4. Calculate Deflator (nominal GDP/real GDP) x 100 |
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Nominal GDP Calculation
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∑ Pt · Qt
Prices times Quantities of all goods produced |
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Real GDP Calculation
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∑ P base year · Qt
use base year prices for current year quantities |
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GDP Deflator Calculation
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(Nominal GDP/Real GDP) x 100
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Uses of the GDP Deflator
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1. To calculate inflation statistics
2. To adjust historical/current data for comparisons across time |
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Historical Recessions
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'82: Reagan
'91: HW Bush '01: W Bush '08-'09: Bush/Obama |
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Inflation π
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a sustained increase in prices
~3% |
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Deflation
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a sustained decrease in prices
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Hyper-Inflation
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a super fast run up in prices
Classic ex: Weimar Republic Worst ex: 1/46-7/46 Hungary Current ex: Zim dollars, Zimbabwe |
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Why do we have inflation?
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1. Psychological benefits
2. Stable, predictable business environment 3. Capitalizes banks |
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Inflation helps ____ and hurts _____
Deflation helps ____ and hurts ____ |
Inflation: debtors, creditors
Deflation: creditors, debtors value of $ is going down |
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Consumer Price Index
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measure estimating the average price of consumer goods and services purchased by a household
(like GDP for expenditures) |
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Consumer Price Index Construction
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1. Fix a quantity of items ("basket")
2. Calculate Expenditures for all years ∑ Pt · Q 3. Calculate base year expenditure ∑ P base year · Qt 4. CPI = (Exp t/Exp by) x100 |
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CPI Uses
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1. Calculate consumer price inflation
2. Adjust historical/current data for comparison across time |
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Inflation Formula
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π = (CPI t - CPI t-1)/CPI t-1 x 100
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Inflation Biases/Problems with CPI
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in general, CPI-based inflation is overstated
1. Substitution Bias 2. Quality Bias 3. Technology Bias 4. Constant Basket Requirement |
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Substitution Bias
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based on the assumption that you'll always buy the same things
ex. if the price of apples go up, you'll buy more bananas |
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Quality Bias
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often times if price goes up its because the quality has gone up
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Technology Bias
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new technology alters our demand for consumption choices
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Constant Basket Requirement (problem with CPI)
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it's unrealistic, we change our consumption choices all the time
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Unemployment Rate
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UNE = # jobless jobseekers/total labor force
currently 10.2% |
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Full/Natural Unemployment Rate
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5%
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Exclusions from the "Labor Force"
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1. Discouraged workers
2. Institutionalized people 3. Real retirees 4. Home-stayers 5. Military 6. Children 7. Students that aren't working |
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Types of Unemployment
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1. Frictional
2. Structural 3. Cyclical (1 and 2 part of natural) |
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Frictional Unemployment
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"job search"; at any moment, some % of workers quit their jobs to seek new ones--labor is optimizing its situation
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Structural Unemployment
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"firm search"/ "job mismatch"; firm is searching for new employees
--at any time, some % of firms may leave a location and seek another one Structural UNE #2: technological progress creates a skill mismatch |
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Cyclical Unemployment
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according to the business cycle
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Why does Aggregate Demand slope down?
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1. Consumer Wealth Effect
2. Investor Interest Rate Effect |
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Consumer Wealth Effect
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If prices fall, we feel wealthier and buy more stuff
-Marginal Propensity to Consume ex. movie tix p falls, buy food |
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Investor Interest Rate Effect
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as prices fall, many save the difference
ex movie tix p falls, pocket the difference |
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Marginal Propensity to Consume
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amount that consumption changes in response to an incremental change in disposable income
~94% in America; with a dollar of disposable income, you will spend 0.94 |
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Things that Shift Aggregate Demand
(∆Q at any given P) |
Fiscal Policy:
1. ∆s to gvt spending→ a direct ↑ in AD 2. ∆s to tax rate→ indirect ↑ in AD Monetary Policy 3. ∆s to interest rates (r); r ↓ leads to ↑ borrowing and ↑ AD Consumer Responses 4. Wealth Effect: as wealth is high, AD is high 5.Consumer Confidence: consumers are flaky |
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Producer Price Index
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a measure of the cost of a basket of goods and services bought by firms
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Wealth Effect
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as wealth (stock portfolios, housing values, etc) are high, AD is high
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Aggregate Demand
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expenditures: C + I + G + (X-M)
total stuff demanded at any P level |
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Aggregate Supply
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amount supplied by sellers at any given price level
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Long Run Aggregate Supply
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"potential Q"- the maximum amount of GDP we can produce with full employment
-vertical |
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Short Run Aggregate Supply
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amount of GDP we can produce in the short run (at least one input is fixed)
-upward sloping |
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Why is SRAS upward sloping?
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1. Sticky Wages: as Ps ↑, wages are stuck and producers ↑q while they can
-contracts, annual salaries, etc. 2. (Sticky Prices) 3. (Misperceptions) |
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Things that Shift Aggregate Supply
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1. ∆s to Labor Supply
ex. immigration 2. ∆s to Technology: positive, rightward shift 3. ∆s to Raw Material Availability ex. oil shocks '70's |
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Possible Aggregate Market Shifts
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1. ↓ AD: remedy = ↓r,↓taxes,↑G
2. ↑ AS: remedy = let it go, keep monetary supply flexible 3. ↑AD: "inflationary gap" 4. ↓AS: "recessionary gap"/"stagflation" |
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Inflationary Gap
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when AD↑; real GDP surpasses potential GDP, causing inflation
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Inflationary Gap Government Options
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want to lower AD:
1. leave it alone and it will produce more π ↑AD →↑P, ↑G, ↓UNE→pressure on wages→ ↓SRAS→ ↓Q, ↑UNE, ↑π 2. Fiscal Policy: ↓G, ↑taxes to ↓AD 3. Monetary Policy: ↑r to ↓borrowing |
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Recessionary Gap / Stagflation
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when AS↓, real output is lower than potential output
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Recessionary Gap Government Options
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1. Leave it alone, eventually something will adjust to ↑SRAS
2. Fiscal Policy: ↓taxes, ↑G 3. Monetary Policy: ↓r (2 and 3 boost inflation to correct UNE) |
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Financial Markets
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bond market + stock market
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Financial Intermediaries
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Banks
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Bond
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a certificate of indebtedness; a contract with specific payment terms (time of payback, interest rate)
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Bond Characteristics
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1. Term-Length of time until maturity; r depends on term
2. Credit-Risk: the probability that the borrower will fail to repay some interest or principal 3.Tax-Treatment: they way the failure to pay/default tax laws treat the interest earned on the bond |
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Types of Bonds
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1. Corporate
2. US Treasury Bonds 3. State/Local Municipal Bonds |
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Stocks
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"equity financing"
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Key Numbers for Stock Holders
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1. Price
2. Dividend: corporations pay out some of profits to stock holders 3. Price:Earnings ratio P stock/Earnings per share over the last year |
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What happens to savings as tax rates increase?
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SR: private savings will fall, public savings is flat, government spending will increase
LR: private savings fall as GDP falls, public savings falls as tax revenue falls as GDP falls |
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What happens to savings as tax rates fall?
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SR: private savings is flat if C↑ with tax decreases, public savings will fall if G stays the same
LR: private savings increase as GDP increases, public savings may increase as GDP increases |
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Crowding Out
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with government deficits, G enters LF mkt on Demand side → ↑r →↓ private I
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Crowding In
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if (X-M) < 0, this means foreign sellers don't want our stuff
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Budget Deficit
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annual difference between government spending and taxes
~$400 bill annually $1.8 trillion in '09 |
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Trade Deficit
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annual difference between exports and imports
(X-M) |
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Government Debt
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Cumulative deficits over time
~$11 trill ~$2.7 to foreigners |
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Future Value
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Principle x (1+r) ^t
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Present Value
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FV/(1+r)^t
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Role of the Federal Reserve
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1. Regulate the banking system
2. Lend money to banks 3. Controls money supply a. can buy or sell bonds b. can change borrowing rate |
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Money has to be...
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1. Accepted as a medium of exchange
-counterfeit resistance -divisible for small transactions 2. Unit of Account- relative value 3.Store of Value: converts perishable assets into storable wealth (no protection for inflation) |
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Types of Money
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1. Commodity Money
2. Full Bodied/Commodity Backed Money 3. Fiat Money |
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Commodity Money
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money that has intrinsic value
ex. gold, silver, cigarettes in prison |
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Full Bodied/Commodity Backed Money
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paper money backed by some commodity
ex. silver certificates in the US before '71 |
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Fiat Money
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no intrinsic value, only backed by trust in the governments ability to regulate printing
ex. dollar money today |
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High Powered Money
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cash + coins
~$1.5 trillion |
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M1/Liquid Money
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cash + coins + checks + travelers checks
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M2
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M1 + savings, money mkt accts, etc
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Fractional Reserve Banking
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keep a fraction of deposits in reserve, lend out the rest for some r price
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Reserve Rate
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how much reserve banks must keep in the vaults
reserves held/deposits US: ~10% |
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Money Multiplier
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1/reserve ratio
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