Econ Final

Front 1

AD/AS graph

Back 1

- 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

Front 2

Pure Gold Standard

Back 2

- 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

Front 3

Milton Friedman and his monetarist beliefs if false

Back 3

- 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

Front 4

Monetary Aggregate

Back 4

- 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

Front 5

GDP accounts

Back 5

- 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

Front 6

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:

Back 6

There has been inflation and real GDP is the same in both years

Front 7

The Period 1933 - 1973

Back 7

- 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

Front 8

U.S. banking from 1975 - 1994

Back 8

- 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

Front 9

Marshall's, Picgou's, and Fisher's Macroeconomics

Back 9

- 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

Front 10

Keynes' General Theory

Back 10

- 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

Front 11

Balancing Bank Sheet

Back 11

- actual reserves: vault cash + deposits at the Fed
- Reserve requirements - % * demand deposits
- A bank can loan Actual Reserves - Reserve Requirements

Front 12

Problems With GDP as a measure of Welfar

Back 12

- 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

Front 13

Eisenhow Administration 1953 - 1960
Kennedy/Johnson 1960-1963

Back 13

Eisenhower:
- 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

Front 14

Nixon/Ford/Carter

Back 14

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%

Front 15

Reagan

Back 15

- 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

Front 16

Bush 1 Administration

Back 16

- 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

Front 17

Equation of Exchange

Back 17

MV = PQ
- 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%

Front 18

simple money multiplier

Back 18

1/(reserve requirement)

Front 19

complex multiplier

Back 19

[1/(reserve requirement)] * Excess Reserves - for banking system as a whole

Front 20

Economic Performances of Bush Administration

Back 20

- low GDP growth with recesson
- in 04 and 05 strong growth and low unemployment
- inflation rate has accelerated

Front 21

The Period 1913-1933

Back 21

- 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

Front 22

The US from 1630 - 1811

Back 22

- "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

Front 23

Money

Back 23

- 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

Front 24

Class Discussion

Back 24

- 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

Front 25

US period 1811 - 1863

Back 25

- 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

Front 26

Circular Flow Diagram

Back 26

- 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

Front 27

US from 1863 to 1907

Back 27

- 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

Front 28

3 Problems Facing Bush Administration

Back 28

- war in iraq
- rapidly increasing M2
- baby boomer spending

Front 29

Inflation, unemployment, and growth

Back 29

- 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

Front 30

Federal Reserve

Back 30

- 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