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34 Cards in this Set

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What is Say's Law?
What do classical economists believe?
Say's Law says that supply creates its own demand. No overproduction or underproduction of goods. Classical economists believe that insufficient demand in the economy is unlikely, that wages, prices and interest rates are flexible, the economy is self regulating, and laissez faire is the sensible policy to implement
Supply & Demand
What is Inflationary Gap?
The Real GDP is greater than the Natural Real GDP. The Unemployment rate is less than the Natural Unemployment rate, there is a shortage in the labor market
shortage- labor
What is Recessionary Gap?
The Real GDP is less than the Natural Real GDP. The unemployment rate is greater than the Natural unemployment rate, a surplus exists in the labor market
What is Laissez Faire
A public policy of not interfering with market activity (classical economist believed in it) If the economy becomes ill, it will heal itself through changes in wages and prices
What is Keynes theory?
He disagreed with say's law. thought the economy could reach equilibrium and be in a recessionary gap too. Believed the economy may not be able to heal itself. Wage rates and prices are inflexible downwards, employees would resist wage cuts because prices would not be cut. Believed that consumption could fall by more than investment would increase, which would lower spending and aggregate demand in the economy
wage rates, consumption
What are Keynes 3 ideas on consumption & disposable income?
Consumption depends on disposable income, they move in the same direction, and as disposable income changes, the consumption changes by less
movement and changes
What is the consumption function?
Consumption = autonomous spending (C0) + Marginal Propensity to Save (MPS) X's Disposable Income (Yd)
C = Co + (MPS)(Yd)
What is Marginal Propensity to Save?
The change in saving divided by the change in disposable income
What is the Marginal Propensity to consume?
the change in consumption divided by the change in disposable income
What is autonomous consumption or autonomous spending?
The part of consumptions that is independent of disposable income
What is the multiplier effect?
The number that is multiplied by the change in autonomous spending to find the real GDP
m = 1/(1-MPC)
How do you find the GDP with the multiplier?
multiplier X's the change in autonomous spending
m X's Co
What is fiscal policy?
changes in government spending and or taxes to achieve particular economic goals.
Expansionary - refers to increases in government spending and/or decrease in taxes
Contractionary - refers to decreases in government spending and\or increases in taxes
What is budget deficit and budget surplus?
Budget Deficit is government spending greater than tax revenues
Budget surplus is tax revenues greater than government spending
What is Money? What are the three functions of it?
Money is any good that is widely accepted in exchange for goods and services and in the repayment of debts.
It serves as a medium of exchange, which is anything that is generally accepted in exchange for goods and services. It serves as a Unit of Account, which is a common measure in which relative values are expressed. It also serves as a store of value, which is the ability of an item to hold value over time
What is M1 and M2?
M1 is reffered to as the narrow definition of the money supply, or transaction money, it can be used directly for everyday transactions
M1 = currency held by outside banks + checkable deposits + traveler's checks

M2 is the broader definition of money
M2 = M1 + Savings deposits +small denomination time deposits + money market mutual funds
What is Fractional Reserve Banking?
A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities
What are federal reserve notes, checkable deposits,and demand deposits?
A federal reserve note is paper money issued by the federal reserve district bank. A checkable deposit is a deposit on which checks can be written. A demand deposit is a type of checkable deposit where the checking accounts pay no interest
What are Required Reserves?
What is the required reserve ratio?
The minimum amount of reserves a bank must hold against its checkable deposits as mandated by the Fed.
r X's Checkable deposits.
Ratio is a percentage of each dollar deposited that must be held on reserve (at the Fed's bank vault)
What is money creation through loans?
excess reserves are used to extend loans. The banks credit the borrowers' checking accounts and increase the money supply. When banks reduce the volume of loans outstanding, they reduce checkable deposits and reduce the money supply
What is the Federal Reserve System?
The central bank of the United States has 8 responsibilities.
control the money supply
supply the economy with paper money
provides check clearing services
holds depository institutions' reserves
supervise member banks
serve as the government's banker
serve as the lender of last resort (for banks suffering cash management or liquidy problems)
Serve as a fiscal agent for the treasury
What is the money multiplier?
The reciprocal of the required reserve ratio
Maximum change in checkable deposits = 1\r X's the change in reserves resulting from the original injection of funds
What is the Federal Reserve System?
The central bank of the United States.
Has 8 responsibilities:
Control money supply
Supply economy with paper money
provide check clearing services
hold depository institutions' reserves
supervise member banks
serve as the goverment's banker
serve as the lender of last resort(for banks suffering cash management or liquidity problems)
serve as a fiscal agent for the treasury
Who are the board of governors?
They control and coordinate the activities of the FED. there are 7 members each appointed to a 14 year term
What is the FOMC?
Federal Open Market Committee, a major policymaking group within the Fed, they have the authority to conduct open market operations
There are 12 members, the 7 board of governors, and 5 Federal Reserve District Bank Presidents, the president of the New York district has a permanent seat on the FOMC.
What are open market operations?
The buying and selling of government securities by the FED
What is Monetary Policy?
Changes in the money supply, it is the rate of change of the money supply to achieve particular macroeconomic goals
What are the effects of Required Reserve changes, discount rate, and open market operations?
An increase in the required reserve ration leads to a decrease in the money supply and vice versa.
An increase in the discount rate relative to the federal funds rate leads to a decrease in the money supply and vice versa.
An open market purchase by the Fed increases the money supply and vice versa.
What is monetarism?
The equation of exchqange is an identity that states that the money supply multiplied by velocity must be equal to the price level times the Real GDP
Velocity- the average number of times a dollar is spent to buy final goods and services in a year.
Who is Karl Marx?
german economist. Believed everything had to do with making goods and service that humans wanted, he classified people according to their role in making those goods and services, claimed that these people worked for the best of their group rather than themselves. Theory was the value of the things we make is determined by the value of the work we put into them
Who is Paul Volcker?
Chairman of the Federal Reserve in 1979, he constricted the money supply to stop runaway inflation, but the U.S. went into a deep recession
Who is Alan Greenspan?
Chairman of the Federal reserve (1987),at the end of the recession of the 1980's
What is Bush's Fiscal Policy?
Government spending is bad. Entitlement spending, defense spending, and homeland security spending can grow.
What is Aggregate Demand?
What does the curve show?
Aggregate demand is the quantity demanded of U.S. goods and services or the quantity demanded of the Real GDP, at various price levels
The curve shows the quantity demanded of goods and services at different price levels
quantity demanded