Ec302 Exam 2

Front 1

Business Cycle - Long Run: Price, Y and Employment

Back 1

LR: Price is flexible; Y & employment are at "natural" levels

Front 2

Business Cycle - Short Run: Price, Y, and Employment

Back 2

P is "sticky"
shocks and shifts push Y & employment away from natural levels

Front 3

Business Cycle: Shape of AD, LRAS and SRAS curves

Back 3

AD slopes down
LRAS is Vertical
SRAS is Horizontal

Front 4

Shocks to AD or AS cause---

Back 4

fluctuations in GDP and employment

Front 5

How are fiscal and monetary policy used?

Back 5

to stimulate or stablize the economy

Front 6

The Goods market -->

Back 6

IS (investment-saving) curve
Y=C+G+I (Closed Economy -- NX = 0)

Front 7

The money market -->

Back 7

LM (liquidity-money) curve

Front 8

Definition of IS curve

Back 8

Y-r combinations where Goods Market is in equilibrium

Front 9

Define Keynesian Cross

Back 9

the equilibrium where output = expenditure (Y=E)

Front 10

planned expenditure

Back 10

income, how much money able to spend

Front 11

Draw the basic graph for the Keynesian Cross

Back 11

2 equations:
1.) E = Co - mpcT + G+ I + mpcY
slope = mpc
2.) E=Y (m=1)

Front 12

Using the Keynesian Cross; how can we rewrite the equation to solve for Y in terms of Eo?

Back 12

derived from original equation E=Y=C+G+I

Front 13

How does output change from a change in Eo?

Back 13

(1/1-mpc) = Eo multiplier

Front 14

How does a change in Co, G, or I affect Eo?

Back 14

Any change in Co, G, or I changes Eo by the same amount

Front 15

Causes of increase in G, Co, I (real life)

Back 15

increase in G --> Govt spending
increase in Co--> consumer confidence
increase in I --> interest rate

Front 16

Effects of change in T(taxes) on Eo?

Back 16

Any change in T changes Eo by negative marginal propensity to consume X change in T
(taxes cause consumers to spend less but not dollar for dollar)

Front 17

What is the relationship of I and I(r)?

Back 17

Negative relationship between I and I(r)
(Change in I shifts E curve up if positive, down if negative)

Front 18

Graph I as a function of r

Back 18

Given an equation:
Example: I(r) = 1000 - 100r

Front 19

Graph changes in Y, E, and I when r (interest) goes up
KEYNESIAN CROSS

Back 19

if interest goes up then Y decreases, E decreases, I decreases

Front 20

Graph a basic IS curve

Back 20

downwards sloping, relates Y to r

Front 21

Graph change in IS when G increases

Back 21

Shifts to the right

Front 22

Graph changes in IS when T increases

Back 22

shifts to the left

Front 23

Graph changes in IS curve when r increases

Back 23

move along curve up and left (NO SHIFT)

Front 24

What is the equation for IS curve

Back 24

Y as a function of r

Front 25

Equations for LM curve

Back 25

LM Curve is a function of Y, r

Front 26

IS curve: when Y increases, what happens to S? (if mpc<1)

Back 26

As long as mpc<1 then as Y increases, S increases
Derive the IS curve from the market for loanable funds (Saving = Investment)

Front 27

What is the LM curve?

Back 27

The Money Market
Y-r combinations where real money market is in equilibrium (P fixed)

Front 28

Real money supply with LM curve

Back 28

Vertical line; P is fixed and M is fixed

Front 29

Real Money Demand

Back 29

Money Demand = L(r) for a given Y

Front 30

Properties of Real Money Supply Curve = M/P (M, P fixed)

Back 30

1. P is fixed ("sticky")
2. M is fixed at M, money supply exogenous
3. At any interest rate, the real money supply is the same -->
4. (M/P)s is a vertical line

Front 31

Properties of (M/P)d = L(r)

Back 31

r is the cost of holding money, so as r increases money demanded decreases (for a given Y); downwards sloping

Front 32

Properties of the LM curve

Back 32

Relationship between r and Y where Real Money supply = Real Money Demand
Set of Y-r pairs where money market is in equilibrium
Upward sloping

Front 33

Show effects of increase of money demand on LM curve

Back 33

increase in real money demand forces the interest rate up, increase in Y

Front 34

Equations for both the IS and LM curve

Back 34

IS curve: Goods Market Equilibrium
LM curve: Money Market Equilibrium

Front 35

Effect of increase in capital for individual?

Back 35

Population increase causes loss of capital/investment for individual person since the wealth has to be shared amongst other workers

Front 36

Graph the changes to consumption and steady state capital due to an increase in population

Back 36

increase in population leads to a decrease in both capital and consumption and output

Front 37

what is the equation for change in k (solow growth)

Back 37

output - decrease in capital (depreciation, pop growth, growth rate)

Front 38

what is the total GDP growth rate equal to?

Back 38

g + n
(each worker is getting more effective, there are more of each of these workers)

Front 39

how do you find the steady state?

Back 39

i = outflow
sf(k) = (&+n+g)k

Front 40

Equation for steady state using production function and how changes in variables effect k*

Back 40

Note that per worker production function y = f(k) = Ak^(alpha)

Front 41

Golden Rule (equations)

Back 41

golden rule: optimize over the steady state consumption

Front 42

What is the growth rate and technological progress rate at the steady-state?

Back 42

At the steady-state, the per “effective worker” growth rate is zero. Technological progress rate is positive (g)
GDP per worker growth rate is technological progress rate, g>0, population growth rate is positive (n)

Front 43

What is money?

Back 43

Stock of assets that can be readily used to make transactions.

Front 44

Function of Money (3)

Back 44

1. Medium of exchange (transactions--replaces barter)
2. Unit of account (measures value; goods and services measured in $)
3. Store of value

Front 45

2 types of money

Back 45

1. Fiat money "paper money"
2. Commodity Money; money that has value itself (gold, cigarettes)

Front 46

C =
(Money)

Back 46

Currency

Front 47

M1 =

Back 47

Currency, Demand Deposits, Travelers Checks, Other Checkable Deposits

Front 48

M2 =

Back 48

M1, Savings Deposits (inc. MMDA), Small Time Deposits, MM Mutual Funds (retail)

Front 49

M3=

Back 49

M2, Large Time Deposits, Repurchase Agreements, Eurodollars, MM Mutual Funds (institutional)

Front 50

What is V?
(Money)

Back 50

Velocity: Number of times the Average dollar changes hands in a given period

Front 51

Quantity Theory of Money/Quantity Equation

Back 51

M x V = P x Y

Front 52

Money Supply (equation)

Back 52

M = C + D
Money = currency + deposits

Front 53

Monetary Base = ?
(formula)

Back 53

B = C + R
Monetary Base = Currency + reserves

Front 54

100 Percent Reserve Banking

Back 54

All deposits held in a bank must be kept in the bank (reserves) available for withdrawal; no loans

Front 55

Fractional Reserve Banking

Back 55

Some fraction of deposits is kept in the bank (reserves) available for withdrawal; balance is loaned out. Consider this repeated in multiple banks

Front 56

T = ?

Back 56

Transactions: Total value of transactions
M x V = T
(Note: Transactions is "similar" to nominal GDP)

Front 57

m = ?

Back 57

monetary base

Front 58

What is the effect of a decrease in the reserve ratio on the monetary base and money supply?

Back 58

decrease in reserve ratio is an incrase in money supply

Front 59

What is the effect on MS when you buy bonds?

Back 59

increases the quantity of money (--> Drives down the interest rate)

Front 60

What is the effect on MS when sell bonds?

Back 60

decreases the quantity of money (M/P)s curve shifts to the left)

Front 61

3 types of monetary policy

Back 61

1. reserve requirements
2. Open Market Operations
3. Discount Rate

Front 62

Open Market Operations (OMO)

Back 62

buy and sell govt bonds (type of monetary policy)

Front 63

Discount rate

Back 63

Interest rate charged by fed. reserve for loans to banks
(type of monetary policy)

Front 64

Does Money Supply depend on the interest rate?

Back 64

No, that's why the MS curve is vertical because it is independent of the interest rate

Front 65

INflation rate =?

Back 65

Inflation rate measures the % increase in the price index per period

Front 66

Fisher equation for nominal interest rate and real interest rate

Back 66

nominal = real + inflation

Front 67

What is the rltnsp between real money demanded and the interest rate?

Back 67

Negative relationship between real money demanded and interest rate
positive relationship to Y

Front 68

Money Demand = ? (In terms of nominal interest rate)

Back 68

Money Demand depends on interest rate and Y

Front 69

What is the Money Supply and Money Demand Equilibrium?

Back 69

.

Front 70

Summary of LR Business Cycle Theory

Back 70

Prices Adjust, changes in Demand cause immediate changes in prices, leaving output and income unchanged at F(K, L)

Front 71

Summary of SR Business Cycle Theory

Back 71

Prices are "Sticky", changes in Demand do not move prices so inventories fluctuate causing production changes