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71 Cards in this Set
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Business Cycle  Long Run: Price, Y and Employment

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


Business Cycle  Short Run: Price, Y, and Employment

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

Business Cycle: Shape of AD, LRAS and SRAS curves

AD slopes down
LRAS is Vertical SRAS is Horizontal 

Shocks to AD or AS cause

fluctuations in GDP and employment


How are fiscal and monetary policy used?

to stimulate or stablize the economy


The Goods market >

IS (investmentsaving) curve
Y=C+G+I (Closed Economy  NX = 0) 

The money market >

LM (liquiditymoney) curve


Definition of IS curve

Yr combinations where Goods Market is in equilibrium


Define Keynesian Cross

the equilibrium where output = expenditure (Y=E)


planned expenditure

income, how much money able to spend


Draw the basic graph for the Keynesian Cross

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

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

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


How does output change from a change in Eo?

(1/1mpc) = Eo multiplier


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

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


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

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

Effects of change in T(taxes) on Eo?

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) 

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

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

Graph I as a function of r

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

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


Graph a basic IS curve

downwards sloping, relates Y to r


Graph change in IS when G increases

Shifts to the right


Graph changes in IS when T increases

shifts to the left


Graph changes in IS curve when r increases

move along curve up and left (NO SHIFT)


What is the equation for IS curve

Y as a function of r


Equations for LM curve

LM Curve is a function of Y, r


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

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

What is the LM curve?

The Money Market
Yr combinations where real money market is in equilibrium (P fixed) 

Real money supply with LM curve

Vertical line; P is fixed and M is fixed


Real Money Demand

Money Demand = L(r) for a given Y


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

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 

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

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


Properties of the LM curve

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

Show effects of increase of money demand on LM curve

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


Equations for both the IS and LM curve

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

Effect of increase in capital for individual?

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


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

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


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

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


what is the total GDP growth rate equal to?

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

how do you find the steady state?

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

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

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


Golden Rule (equations)

golden rule: optimize over the steady state consumption


What is the growth rate and technological progress rate at the steadystate?

At the steadystate, 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) 

What is money?

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


Function of Money (3)

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

2 types of money

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

C =
(Money) 
Currency


M1 =

Currency, Demand Deposits, Travelers Checks, Other Checkable Deposits


M2 =

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


M3=

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


What is V?
(Money) 
Velocity: Number of times the Average dollar changes hands in a given period


Quantity Theory of Money/Quantity Equation

M x V = P x Y


Money Supply (equation)

M = C + D
Money = currency + deposits 

Monetary Base = ?
(formula) 
B = C + R
Monetary Base = Currency + reserves 

100 Percent Reserve Banking

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


Fractional Reserve Banking

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


T = ?

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

m = ?

monetary base


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

decrease in reserve ratio is an incrase in money supply


What is the effect on MS when you buy bonds?

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


What is the effect on MS when sell bonds?

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


3 types of monetary policy

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

Open Market Operations (OMO)

buy and sell govt bonds (type of monetary policy)


Discount rate

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

Does Money Supply depend on the interest rate?

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


INflation rate =?

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


Fisher equation for nominal interest rate and real interest rate

nominal = real + inflation


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

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

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

Money Demand depends on interest rate and Y


What is the Money Supply and Money Demand Equilibrium?

.


Summary of LR Business Cycle Theory

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


Summary of SR Business Cycle Theory

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