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51 Cards in this Set

  • Front
  • Back
Average number of times per year a dollar is spent on a good or service that is part of GDP.
Quantity Theory of Money
The view that the velocity of currency is stable or constant.
Equation of exchange
M*V = P*Y

M= money supply
V= velocity
P= price level
Y= real GDP
Classical School of Macroeconomice Thought
Any deviation of real GDP from long-run equilibrium is extremely short term.

Prices adjust rapidly so that the economy will return to long-run equilibrium in two years or less
Monetarists argued for
small, predictable increases in the money supply
____________, the most famous monetarist asserted that the velocity of currency was predictable, if not stable.
Milton Friedman
Most people today believe that the velocity of currency is not predictable enough to...
be able to reach target levels of nominal GDP, Real GDP and the price level if a central bank always increases the money supply by a small predictable amount especiallly when major shocks hit the economy
Bracket creep
Some taxpayers could move into a higher tax bracket on last dollars earned if they recieve an increase in nominal income but not an increase in real income. Thus they have a higher real tax liabilities but the same real income
Menu costs
Costs of changing preices (i.e negotiating, strategizing)
Some costs of inflation
1. Bracket creep
2. Menu costs
3. Arbitrary Redistribution of Purchasing power between lenders and Borrowers when Actual Inflation is Greater than or less than its expected value
actual inflation is greater than expected
lender loses borrower gains
actual inflatioon is less than expected
Lender gains borrower loses
MAcroeconomic goals of government policy
1. Real GDP growth
2. Low unemployment rates
3. Price stability or low inflation
Before the great depression government policy goals were mainly
1. to provide goods and services that people believed were underprovided by the private sector
2. to have a balanced budget
budget deficit
G+ TR -T
a Budget deficit less than zero is called a
Budget surplus
During the 1920s what factors led to the most significant downturn in US history?
bank failures, stock market crash in 1929, crop failures and other factors
Contractionary gap
If the economy was initially in long-run equilibrium before the decrease in AD, at the new short-run equilibrium, the economy would be in a contractionary gap.
Keyned and Keynesian economics
observed that wages and salaries are very slow to decrease in a downturn because most employers lay off workers rather than use across the board pay cuts
Price levels fall slowly in a downturn due to
Wage rigidity

Thus SRAS may not shoft outward enought to close a contractionary gap
The economy may get stuck at a lower level or real GDP- take way too long to return to Y* w/ out policy changes
Fiscal Policy tools
1. Increase(decrease) Government Purchases
2. Increase(decrease) taxes
3. Increase(decrease government transfer payments
To increase real GDP the government could
Increase Government purchases
Decrease taxes
Increase Government Trasfer payments
Analogy : Throwing a pebble into the ocean maked a very small splash. A larger meteorite makes a much larger splash. Is the New Deal effort or the WWII effort more like the meteorite?
WWII- Meteorite

New Deal-pebble
Macroeconomic Policy goals for Monetary policy
1. price stablility or low inflation
2. real GDP growth
3. low unemployment rates
Benefit of monetary policy
Much faster to recognize problems(s),
debate and impliment solution(s).

You don't need to go thru House, Senate , WHite house
Benefit of Fiscal policy
Once policy change has been made, Impact on the economy is usually faster
Required reserves ratio
percentage of deposits that banks must hold to guard against unforseen withdrawls
Discount ratio
interest rates that the Fed charges with loaning to troubled banks
Open MArket Operations and the Federal Funds Rate
the above interest rate, the one that the fed is most interested in when the borrowing bank needs reserves to meet reserve requirements. the loans are frequently short term
Expansionary POlicies include( to increase real GDP)
Buy bonds in open MArket operations to lower Fed. Funds rate

Decrease discount rate

Decrease rrr
Contractionary policies would include( to lower real GDP)
sell bonds in open MArket operations to raise Fed. funds rate

raise discount rate
raise the rrr
To be considered unemployed in Bureau of Labor statistics a worker must be out of work and either
1. have sought employment in the previous four weeks or

2. be wiating to be recalled after a layoff
discouraged worker effect
unemployed workers counted as " not in labor force" rather than unemployed because they gave up looking for a job ( did not seek job in last 4 weeks)
- increases during downturns
- means that unemployment data understate severity of downturns
Frictional unemployment
switching jobs, job search, relocation
Structural unemployment
mismatch between skills of workers and skills sought by employers
cyclical unemployment
increases during recessions, decreases during booms
Natural rate of unemployment u*
u*= frictional + structual unemployment
total rate of unemployment
frictional + structural + cyclical
central bank
organization charged with oversight of banking system and in charge of regulating money supplu through monetary policy
Monetary policy
setting money supply and interest rates through policy tools
Federal reserves bank ( the FED)
the central bank in the United States
Federal Open Market Committee
Twelve member committee (7 members of board of Governors, 5 regional bank Presidents) setting monetray policy at the Fed in the USA
The Phillips curve was originally interpreted as a...
menu of policy choices
sacrifice ratio
employment ( or output) loss associated with a one-percentage-point reduction in the rate of inflation

Ub- UA / Ib-IA
sacrifice ration equals
1/ [ slope of the short run Philips curve]
an increase in AD causes a move to the
Northwest along a given SRPC
A decrease in aggregate demand causes a move to the
SOutheast along a given SRPC
why did the break down of the Philips curver in the 1970s occurr?
* Previous results just a coincidence without economic significance

* AS shocks shft the short run Philips Curver
How are prices and inflation related?
Positively, If inflation goes up Prices go up
How are real GDP and unemployment rates related?
Negatively, If output increases unemployment rates go down
If Y > Y* then
U< U*