Macro Ch.28-29

Front 1

Monetary Regime

Back 1

Predetermined rule with which policy is conducted.

Father of this notion is - Milton Friedman

Front 2

Inflation

Back 2

a general rise in price level

Front 3

Phillips Curve

Back 3

1. There is an inverse relationship b/w inflation & unemployment.

2. Trying to fight inflation; that is keeping it low meant higher unemployment & vice versa.

Front 4

Stagflation

Back 4

high inflation & high unemployment

ex. oil price hikes that were influenced by OPEC policies.

Front 5

Monetarist View of Inflation

Back 5

Quantity theory of money MV=PQ

P= price level, Q= real output (fixed), V= velocity of money (fixed), M= amount of money

Increase in money supply will lead to inflation.

1. Velocity is constant
2. Real output is independent of money supply
3. A change in money supply leads to a change in price level.

ex. change in money supply = change in price level

Front 6

Institutionalist View

Back 6

MV=PQ(<---)

Money supply is endogenously determined.

Increase in prices force government to increase the money supply.

Front 7

Monetary Policy

Back 7

Policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy.

Front 8

Central Bank

Back 8

a type of banker's bank whose financial obligations underlie an economy's money supply.
It is the central bank's ability to create money that gives it the power to control monetary policy.

Front 9

Expansionary Monetary Policy

Back 9

Monetary policy aimed at reducing interest rates and raising the level of aggregate demand.

Front 10

Contractionary Monetary Policy

Back 10

Monetary policy aimed at increasing interest rates and thereby restraining aggregate demand.

Front 11

What group of the Fed decides monetary policy?

Back 11

Federal Open Market Committee (FOMC)

Front 12

Duties of the Fed

Back 12

1.Conducting monetary policy (influencing the supply of money and credit in the economy)
2. Supervising and regulating financial institutions
3. Serving as a lender of last resort to financial institutions
4. Providing banking services to the U.S. gov.
5. Issuing coin and currency
6. Providing financial services (such as check clearing) to commercial banks, saving and loan associations, saving banks, and credit unions.

Front 13

Monetary Base

Back 13

Vault cash, deposits at the Fed, plus currency in circulation.

Front 14

Open Market Operations

Back 14

The Fed's buying and selling of government securities.

Front 15

When the Fed buys bonds, is it expanding or contracting the money supply?

Back 15

To expand the money supply, the Fed buys bonds.
To contract the money supply, the Fed sells bonds.

Front 16

Reserve requirement

Back 16

the percentage the Federal Reserve System sets as a minimum amount of reserves a bank must have.

Front 17

Money multiplier equation

Back 17

(1+c)/(r+c)

c= ratio of people's cash to deposits
r= percentage of each dollar that banks hold in reserves

Front 18

Discount rate

Back 18

the rate of interest the Fed charges for loans it makes to banks.

Front 19

Fed funds

Back 19

loans of excess reserves banks make to one another

Front 20

Federal funds rate

Back 20

the interest rate banks charge one another for overnight reserve loans

Front 21

Federal funds market

Back 21

the market in which banks lend and borrow reserves

Front 22

Real interest rate =

Back 22

Nominal interest rate - expected inflation rate

Front 23

rational expectations

Back 23

the expectations the economists' model predicts

ex. if inflation was 2% last year and 4% this year but the economists' model predicts 0%, then individuals rationally expect 0%.

Front 24

adaptive expectations

Back 24

expectations based in some way on the past.

ex. if inflation was 2% last year and 4% this year, then the prediction of inflation will be around 3%.

Front 25

extrapolative expectations

Back 25

expectations that a trend will continue

ex. if inflation was 2% last year and 4% this year, then the expectations would predict 6% next year.

Front 26

Two Types of Interest Rates

Back 26

Long Term Int. Rates: influence assets w/ long periods of maturity.

Short Term Int. Rates: Influence assets w/ short periods of maturity.

Front 27

Money serves as...

Back 27

1. Medium of exchange
2. Store of wealth & creator of value
3. Unit of account

Front 28

Neoclassical & Orthodox View of Money

Back 28

1. Money eliminates the problem of barter by serving as a convenient medium of exchange.
2. Money serves as a "numeraire."
3. There is utility in holding money.
4. Money is neutral and it is also the cause of inflation.
5. The role of money is to facilitate commodity exchange

C-->M-->C
commodity-->money-->commodity

Front 29

Post-Keynesian or Heterodox View of Money

Back 29

1. Money originates out of debt relations.
2. Money is a creature of the state.
3. Inflation is only a monetary feature after the economy reaches its potential and we're at full employment.
4. Money is not neutral

M-->C-->M
money-->commodity-->money

Front 30

sound finance

Back 30

Government's budget should be balanced except in wartime.

Front 31

nuanced sound finance

Back 31

if we have a recession, we must maintain sound finance. however in a depression, throw sound finance out and use gov't spending.

Front 32

functional finance

Back 32

gov'ts should make spending and taxing decisions on the basis of their effect on the economy, not on the basis of some moralistic principle that budgets should be balanced.

Front 33

Abba Lerner: Functional finance and gov't deficit

Back 33

1. Gov't deficit not too much of a problem
2. Gov't spending must be judged by its functions that is its effect on the economic system.
3. Money in the economy based on +taxes or -taxes.

Front 34

crowding out

Back 34

offsetting effect on private expenditures caused by the gov't's sale of bonds to finance expansion policy.
Increases of gov't spending will crowd out private investors because the price level increases scaring investors.
+G --> +AD

Front 35

Fiscal policy problems

Back 35

1. Fiscal policy can have offsetting effects (crowding out)
2. We simply do not know potential income and output.
3. There is lag b/w policy and action.
4. The gov't might not know what situation the economy is in. If the forecast is incorrect then the policy is incorrect.
5. Size of the gov't debt matters.
6. Fiscal policy can have some negative effects on other gov'ts.

Front 36

Automatic stabilizers

Back 36

Counter cyclical measures that are in place to maintain incomes and mitigate the negative effects of a recession.
- unemployment compensation
- welfare payments
- income tax when economy is good.
States by federal law cannot have a debt. They must keep a balanced budget year to year.

Front 37

Robert Lucas (New Classical Public Finance)

Back 37

1. Accepts Ricardian debt equivalence theorem.
2. We will always have complete crowding out.
3. Prices and interest rates serve as signals to the representative agent in the aggregate economy - rational expectations

Front 38

Purpose of the Multiplier Model

Back 38

the goal is to figure out how initial changes in expenditures are amplified in the economy.

Front 39

procyclical fiscal policy

Back 39

changes in gov't spending and taxes that increase the cyclical fluctuations in the economy instead of reducing them.

Front 40

measure of money

Back 40

M1: cash, paper-money, coins, checking accounts, travellers checks. Makes up 18% of total money.

M2: made up of M1 plus savings deposits, mutual funds, money market accounts, small denomination time deposits.

M1 is more liquid

Front 41

Aggregate Expenditures

Back 41

Autonomous Expenditures
D1- does not vary with income
Induced Expenditures
D2- varies with income.

Front 42

Demand for money

Back 42

1. transactionary motive
2. speculative motive
3. precautionary motive

Front 43

Limitations of the Multiplier Model

Back 43

1. It is incomplete
2. Assumes no inflation
3. Expenditures depend on more than income

Front 44

Marginal Propensity to Expend

Back 44

MPE= change in expenditures/change in income