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27 Cards in this Set
- Front
- Back
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Automatic Stabilizer |
is a feature of the economy that reduces its sensitivity to the shocks, such as sharp increases or decreases in spending. |
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Commodity Money |
is an object in use as a medium of exchange that also has a substantial value in alternative (nonmonetary) uses. Money history has change to create money that is: divisibility, storable, stability, not heavy to carry around. Gold & sliver ---> paper money Fully backed* |
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Fiat Money |
is money that is decreased as such by the government. It is of little value as commodity, but it maintains it value as medium of exchange because people have faith that the issuer will stand behind the pieces printed paper and limit their production. Backed by nothing* |
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M1 |
is the sum of all coins and paper money in circulation, plus certain checking deposit balances at banks and saving institutions. |
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M2 |
is the sum of all coins and paper money in circulation, plus all types of checking account balances, plus most forms of savings account balances, plus shares in money market mutual funds. Money supply held outside of banks by investment houses, credit unions and other financial institutions. |
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Fiscal Policy |
is its plan for spending and taxation. it is designed to steer aggregated demand in some desire direction. |
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MMDA |
Money Market Deposit Account is a non financial account that pays interest based on current interest rates in the money market.
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MMMF |
Money Market Mutual Funds is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. |
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Monetary Policy |
refers to actions that the Federal Reserve System takes to change interest rates and the money supply. It is aimed at affecting the economy. |
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Open-market operations |
refer to the Fed's purchases or sales of government securities, normally Treasury bills, through transactions in the open market. |
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Federal Funds Rate or FFR |
a short term or overnight interest rate bankers charge other banks when they lend or borrow from each other when they are short or over on reserve. |
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Three Influence, Policies or Instruments of Federal Reserve |
1. Changing the RRR- Required Reserve Ratio; Reduce M1- impact on money supply. 2. Change the discount rate or rate they charge Federal Reserves acts as banker to banks. (If they increase banks become discouraged. 3. Open market operation- Federal Reserves decides to buy or sell government securities to or from banks. (government securities are bonds) |
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Two types of operations |
Directive sell or buy government bonds. for every $1 banks are short on reserve they reduce. 1/ RRR |
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Contraction |
GDP decreases Federal reserves sells to bankers. (Negative on either side of balance sheet) Federal balance sheet: - assets of govt security & -liability of reserve account of banks Banks balance sheet: +Assets Govt Security & - Assets on Reserves with Federal. |
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Expansion |
GDP Increases Banks sells to Federal Reserves. (Positive on either sides of balance sheet) Federal balance sheet: + assets of govt security * + liability of reserve accounts of banks, Banks balance sheet: - assets govt security & + assets in reserve. |
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Find the equilibrium level of GDP. C = 120 + 0.80DI I = 320 G = 480 (X - IM) = -80 T= 200 + 0.25Y |
Y = C + I + G + (X - IM) C = 120 + 0.80DI DI = Y - T DI = Y - (200 + 0.25Y) DI = 0.75Y - 200 C = 120 + 0.8(0.75Y - 200) C = 0.6Y - 40 Y = 0.6Y - 40 + 320 + 480 - 80 Y = 0.6Y + 680 0.4Y = 680 Y = (1/0.4) x 680 Y = 2.5 x 680 = 1,700 Equilibrium GDP is 1,700 |
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Multiplier for Expenditures or Government purchases |
M exp = 1 / 1- [b (1 - t)] 1 / 1 - .8 ( 1 - .25 ) .8 x .75 = .6 1 / 1 - .6 1 / .4 = 2.5 The multiplier for G 2.5 is GDP autonomous spending |
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Multiplier for fixed taxes |
M To = -b (MPC) / 1 - b ( 1 - t ) -.8 / .4 = -2 The multiplier for fixed taxes is -2 |
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What happens to money supply if $12 million dollars in buried treasure are discovered and deposited in a bank if the Reserve Requires Ratio is 10 % |
Change in Check-able deposit = Initial Deposit x Md (Deposit Multiplier or Money Multiplier) change in check-able deposit = 12,000,000 x 1 / .10 = 120,000,000 12,000,000 x 10 = 120,000,000 an infusion of $12 million into reserve will support an increase in money of $120,000,000 million. |
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Medium of Exchange |
is the object or objects used to buy or sell other items such as goods and services. Transaction Cost exchange $ for goods & exchange goods for $
C ---> M ---> C |
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Barter |
Direct exchange of one thing for another.
C ---> C <--- |
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Unit of account |
is the standard unit for quoting prices. |
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Store of value |
is an item used to store wealth from one point in time to another. keep a portion of our money in form of money. |
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FDIC |
Federal Deposit Insurance Corp. |
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Federal Open Market Committee |
A market called Federal Fund, where bankers who need money or banks who have extra money can borrow or lend from the federal reserves with an interest rate called federal fund rate. |
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Open market committee |
a 12 individual group, among other representative for district banks. Include: 7 Board of Governors of The Federal Reserve System, appointed for 14 years. 1 President of the Federal District Bank of NY 4 other district presidents The Chairman of the Governors forms a consensus after hearing statements.
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find equilibrium GDP and the budget deficit C = 0.90DI I = 100 G = 540 (X-IM) = -40 T = 1/3 Y |
Y = C + I + G + ( X - IM ) C= 0.9( Y - T ) C= 0.9[Y - (1/3)Y] C= 0.9[(2/3)Y] C= 0.6Y Y= 0.6Y + 100 + 540 - 40 Y= 0.6Y + 600 0.4Y = 600 Y= (1/0.4) x 600 Y= 2.5 x 600 = 1500 Budget deficit = G - T = 540 - [(1/3) x 1,500] =540 - 500 = 40 |
