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### 59 Cards in this Set

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 how does the money market affect the goods market? (what variable)what is the link. r what is the link from the goods market to the money market Y M1= C + D money multiplier equation Change in M1= initial change in M1 x (1/rr) investment multiplier 1/mps tax multiplier -mpc/mps leakages and injections equation s + T = I + G Saving identity S=Y-C flow variable must attatch a time period like in GDP stock variable does not need a time period What determines C for HHs? 1. income 2. wealth 3. interest rates 4. expectations about future planned agg. expenditure identity AE=C+I+G equilibrium condition for AE Y=AE Disequilibrium scenarios: 1.AEY 1.inventories are increasing, expenditures are greater than production, actual I is greater than I 2. inventories are depleting, sales are greater than production, actual I is less than I Why does the multiplier eventually have an end? because some of the money leaks from the system as savings investment multiplier 1/MPS investment multiplier formula change in Y=change in I (1/MPS) Y identity Y=C+S+T what does gov't spending include? federal, state and local (7% and 12% of GDP) who controls the spending? congress and the president when congress can't decide on a budget continuing resolution, same budget as previous year budget effective from when to when? Oct 1-Oct 31 net taxes equation =taxes-transfer payments which are SS, welfare, etc. budget deficit equation =G-T disposable income indentity =Y-T tax multiplier equation change in Y= NEG change in T (MPC/MPS) is the tax or gov't multiplier bigger? Government because it has a 1 on top instead of MPC why is the tax multiplier equation negative? because GDP and taxes are inversely related Balanced Budget multiplier equation change in Y=change in G (1) evern though the balance budget isn't changed, Y is still affected who gives budget numbers? BEA how should we compare deficits? as a % of GDP, 2005=4% of GDPwhich is historically average treasury bond maturity date greater than one year treasury bill maturity date less than one year how is the gov. budget affected by economy? 1.tax revenues 2.gov. expendtures 3.automatic stabilizers 4.fiscal drag 5.full-employment budget purpose of full employment budget helps establish a benchmark for evaluating fiscal policy structural deficit deficit that remains at full employment cyclical deficit that occurs because of a downturn in business cycle uses of money 1.medium of exchange 2.store of value 3.unit of accout(consistent way of quoting prices) liquid money to less liquid currency and coin checks time deposit (CD) retirement account commodity money has intrinsic value like gold coins fiat money has no intrinsic value like USA's money what kind of money is M1? transactions money, more liquid =currency outside of banks and demand deposits and traveler's checks and other checkable deposits demand deposits checkaing accounts and savings accounts what kind of money is M2? broad money =M1+savings accounts with time restrictions and money market accounts and other monies money market accounts checking accounts with time restrictions jobs of the Fed 1.regulate and monitor private banking system 2.control monetary policy 3.loans to private banks current chair of board of governors of federal reserve system Ben Bernanke (prev. Alan Greenspan) 18 year term limit what kind of system do banks operate on? fractional reserve system required reserve ratio rr=R/D currently 10% how many regional Fed banks? 12 tools of monetary policy 1.reserve requirement 2.discount rate 3.open market operations moral suasion previous pressure Fed exerted on member banks to discourage heavy borrowing from Fed what does supply curve for money look like when Ms isn't influenced by interest rate? vertical line FOMC federal open market committee is in charge of monetary policy, headed by Bernanke, regular meetings every 6 weeks to decide money supply changes discount rate rate to borrow from the Fed fed funds rate rate to borrow from other bank is fed funds or discount rate higher? discount (6.25 vs 5.25%) why is money demand curve downward sloping? because at higher interest rates, ppl will want to hold more bonds than at lower rates 2 things that shift Md curve 1. change in income/output Y 2. change in price level P