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30 Cards in this Set

  • Front
  • Back
AD/AS graph
- AD and AS are stock variables and show was households and firms are desired to do at different levels of the price index
- Ad is downward sloping because of the real balance effect
- The AD curve does hold expectations constant
- the AS curve does does hold expectations constant
Pure Gold Standard
- private citizens can own gold and they can melt own gold coins if they wish
- there are fixed exchange rates
- all paper money has some gold backing
- citizens have the right to go to the mint/treasury and have their gold and paper money traded at a fixed price
- foreigners can redeem paper money for gold
Milton Friedman and his monetarist beliefs if false
- one of the tools of the Fed is to set reserve requirements, and the Fed seldom changes reserve requirements
- another tool of the Fed is to engage in open market operations, and if the Fed is pursuing a tight monetary policy it sell government securities
- The Fed manages the federal funds rate, and it has raised this rate at each FOMC meeting since June, 2004
- the Fed sets the discount rate above the intended federal funds rate
Monetary Aggregate
- M1 consists of coins and currency in circulation, demand deposits, and traveler's checks
- M2 consists of M1 plus savings accounts plus small CDs under $100,000 plus shares in retail money market mutual funds; net of retirement accounts
- MZM is defined as "money zero maturity"
- the monetary base consists of all coins and currency plus deposits at the Fed
- M3 contains more components than M1 of M2
GDP accounts
- GDP is a flow variable
- GDP is a measure of final production
- GDP is based on the principle of consumer sovereignty
- GDP includes does not include most illegal activities
- GDP is measure in monetary terms with individual prices used as weights to indicate how much society values particular goods
Suppose nominal GDP increases from $3 trillion in 2004 to $6 trillion in 2005 and suppose the GDP deflator changes from 100% in 2004 to 200% in 2005.. then:
There has been inflation and real GDP is the same in both years
The Period 1933 - 1973
- The Glass-Steagall Act of 19933 set up "firewalls" between commercial banks, savings, and loans, and investment banks
- The Bretton Woods meetings in 1944 put the allies on a full gold bullion standard
- The Fed and the U.S. Treasury reached the famous "accord" in 1951 that removed the Fed from under the control of the Treasury and gave the Fed far greater independence
- The Vietnam War was like other U.S. ars - the Fed increased the money supply sharply
- In 1968, the U.S. government removed the gold backing for Federal Reserve notes and by 1973 the U.S. was completely off any gold standard and had floating exchange rates
U.S. banking from 1975 - 1994
- US citizens were once again allowed to own gold starting in 1975
- The Community Reinvestment Act (CRA) of 1977 forced banks to make loans in their surrounding communities
- The Monetary Control (Reform) Act in 1980 began to deregulate the US banking system and break down some of the Glass-Steagall firewalls
- The Financial Institution Reform Recovery and Enforcement Act (FIRREA) of 1989, as put into action by Bill Seidman helped clean up the savings and loan crisis
- The Riegle-Neil Act of 1994 allowed interstate banking
Marshall's, Picgou's, and Fisher's Macroeconomics
- Say's Law is true if interest rates, wages, and prices are flexible
- the government should use a full gold standard
- tje velocity of money is highly stable
- the government should not run budget defeicits during recessions
- The Fisher equation states that the nominal interest rate equals the real interest rate (real rate of return) plus inflationary expectations
Keynes' General Theory
- The fundamental problem in mature, capitalistic economies is a surplus of labor
- Wages and prices are not flexible downward in mature capitalistic economies
- deficit spending should be used by the government during a depression
- the velocity of money is not stable
Balancing Bank Sheet
- actual reserves: vault cash + deposits at the Fed
- Reserve requirements - % * demand deposits
- A bank can loan Actual Reserves - Reserve Requirements
Problems With GDP as a measure of Welfar
- housewives are not included in GDP
- GDP does not deal very well with changes in the desire for more leisure and less work
- international comparison of GDP are not straightforward and easy to make
- Pollution clean-up costs are not subtracted from GDP
- GDP does include depreciation of capital equipment eventhough depreciation is an intermediate good
Eisenhow Administration 1953 - 1960
Kennedy/Johnson 1960-1963
- Inflation was low and GDP growth was low
- unemployment rate was under the 100 year avg
Kennedy Johnson:
- expansion was longest in US History
- had high M2 growth
- Johnson - great society also wanted to fight vietnam war. classic economic comparison between guns and butter - higher inflation
1974 - low GDP growth; high inflation
1974 - Alan Greenspan: Chair of council of econ advisors did a good job
1976 - had strong GDP growth
1979-1980 - CDP double digits - really high
1977-1979 - unemployment rate decreased from 7.1%-5.8%
- cut taxes
- without cuts in federal spending tax cuts created huge deficits
- 1982 was bad economic year
- Reagan had longest peace time expansion, formed a commission to go back on a full gold standard
1987 - Alan Greenspan chair of Fed
- stock market crash
- Greenspan made fed lender of last resort
Bush 1 Administration
- promised "no new taxes"
- took office, raised taxes
- economy went into recession
- Clinton was right - said 1st 3 years were the worst econ years in terms of GDP growth of any president since Great Depression
- D+ from Happel
Equation of Exchange
- M= Money supply - should hava a cost amendment keeping it at an annual 5% growth
- V= Velocity, stable
P= Price Level, about 1%
Q= Real GDP/Output potential of 4%
- Friedman thought that gov't should legalize drugs, have flat tax, and M2 should have annual growth of 5%
simple money multiplier
1/(reserve requirement)
complex multiplier
[1/(reserve requirement)] * Excess Reserves - for banking system as a whole
Economic Performances of Bush Administration
- low GDP growth with recesson
- in 04 and 05 strong growth and low unemployment
- inflation rate has accelerated
The Period 1913-1933
- Europe went off the gold standard when WWI broke out
- The Fed followed a tight monetary policy from 1926 until the Crash of 1929
- Between the stock market crash in 1929 and 1933, the Fed decreased the money supply
- The US Treasury hoarded gold after the 1929 stock market crash
The US from 1630 - 1811
- "Country Pay" was commodity money, and the money supply growth was unstable under Country Pay
- England stopped letting the colonies issue their own coins in the 1600's
- To finance the Revolutionary War, the Continental Congress issued paper money called Continentals, and it was easy money that lead to inflaction
- Alexander Hamilton, as the first secretary of Treasury, led the fight for the First Bank of the US
- There was sound money from 1791-1811 and the First Bank of the US cracked down on state banks
- a primary function of money is to serve as a medium of exchange
- an effective medium exchange has properties that include being divisible, durable, and hard to counterfeit
- the first universal money was gold and silver nuggets
- the first gold and silver coins were full-bodied coins
- the first goldsmiths' recepts were gold backing
Class Discussion
- Production Questions: What to Produce, How much to produce, and how to produce
- the politicalprocess refers to government command solving economic problems
- all countries in the world today use a combination of the social process, political process, and market process to solve economic problems
- pure capitalism means that all proerty is privately owned and the market process solves all economic problems
- pure communism as an economic system means that the political process solves all economic problems and all property is publicly owned
US period 1811 - 1863
- after the charter of the First Bank of the US expired in 1811, there was a sharp increase in money supply and the number of banks increased significantly from 1811 to 1816
- Nicholas Biddle, as President of the Second Bank of the US, pursued a tight (sound) monetary policy
- From the early 1830's to the start of the Civil War was an era of easy money and a loosely controlled banking system
- At the start of the Civil War in 1861, 7000 legal bank notes circulated as paper money in the US
- The National Bank Act (1863) was a victory for the sound money forces
Circular Flow Diagram
- There are real flows and financial flows
- firms represent the demand side of labor markets
- households represent the demand side of product (goods) markets
- government purchases and investment are injections
- imports are leakages
US from 1863 to 1907
- 1865, Congress levied a 10% tax on the issue of new state bank notes, causing the number of state banks to decrease significantly
- The Crime of 1873 was the US government no longer minting silver dollars
- in 1879 the US government began redeeming greenback for gold, and the US for all intents went on a gold standard
- the panic of 1907 occured because US banks did not have enough gold to pay off depositors, and JP Morgan agreed to lend the US government his gold during the panic of 1907, so he served as the lender of last resort
3 Problems Facing Bush Administration
- war in iraq
- rapidly increasing M2
- baby boomer spending
Inflation, unemployment, and growth
- inflation is an increase in an overall (absolute) price index (like CPI) and it necessarily means that more prices are going up than down
- unanticipated inflation hurts creditors and savers
- demand-pull inflation is the only type of inflation according to Milton Friedman, and it is defined as "too much money chasing too few goods"
- The labor force includes those working and those actively seeking work
- High real GDP is closely associated with longer life expectancy and other measures of social welfare
Federal Reserve
- the primary reason the Federal Reserve was created in 1913 was to serve aas the lender of last resort
- there are 12 district federal reserve banks and each is independent of the US government
- The Federal Reserve was also created to finish an elastic currency
- The Board of Governors consists of 7 members
- The Federal Open Market Committee consistsof 12 voting members