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87 Cards in this Set
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- Back
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What is monetary policy?
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The actions the Fed takes to manage money supply and interest rates to pursue its economic objectives.
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What are the goals of monetary policy?
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1. Price Stability
2. High Employment 3. Economic Growth 4. Stability of Financial Markets and Institutions. |
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What is contractionary monetary policy?
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The Fed’s adjusting the money supply to increase interest rates to reduce inflation
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When would contractionary monetary policy be used?
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When the Fed believes inflation is a threat.
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What is expansionary monetary policy?
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The Fed’s increasing the money supply and decreasing interest rates to increase real GDP.
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When would expansionary monetary policy be used?
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When the fed wants to raise the inflation rate.
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Describe how contractionary monetary policy works on the economy.That is, trace through the chain of events that occurs when the money supply rises or falls. What happens to the interest rate, investment spending, consumption spending, aggregate demand, the price level, and GDP?
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The money supply decreases and interest rates rise-> Investment, consumption, and net exports all decrease-> The AD curve shifts to the left-> Real GDP and the price level fall.
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Describe how expansionary monetary policy works on the economy.That is, trace through the chain of events that occurs when the money supply rises or falls. What happens to the interest rate, investment spending, consumption spending, aggregate demand, the price level, and GDP?
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The money supply increases and interest rates fall-> Investment, consumption, and net exports all decrease-> The AD curve shifts to the right-> Real GDP and the price level rise.
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What are the 3 tools of monetary policy?
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1. Open market operations
2. Discount policy 3. Reserve requirements |
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What is open market operations?
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The buying and selling of Treasury securities by the Fed in order to control the money supply.
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What does the FOMC do?
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The Federal Open Market Committee is the Fed committee responsible for open market operations and managing the money supply.
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What are discount loans?
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Loans the Fed makes to banks.
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What is the discount rate?
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The interest rate the Fed charges on discount loans.
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What are reserve requirements?
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Reserves that banks are legally required to hold.
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What is macroeconcomics?
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The study of the economy as whole, including topics such as inflation, unemployment, and econ. growth.
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What is the unemployment rate?
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The percentage of the labor force that is unemployed.
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What is structural unemployment?
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Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of the job.
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What is cyclical unemployment?
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Unemployment caused by business cycle recession
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What is frictional unemployment?
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Short term unemployment arising from the process of matching workers with jobs.
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What is the natural rate of unemployment?
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The normal rate of unemployment, consisting of structural unemployment plus frictional unemployment.
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What is a discouraged worker?
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A person who is available for work but has not looked for a job during the previous four weeks because they believe no jobs are available for them.
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What is inflation rate?
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The percentage increase in the price level from one year to the next.
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What is the labor force?
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The total number of people who have jobs plus the number of people who do not have jobs but are actively looking.
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Multiplier Formula
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multiplier = 1/(1-mpc)
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The change in GDP is equal to...
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The change in equilibrium GDP
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New GDP is equal to...
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Old GDP + change in GDP
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Unemployment Rate Formula
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U/[U + E]
where: U = number unemployed E = number employed |
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Money Supply Multiplier: Deposit
The change in deposits in the banking system as a whole is equal to... |
change in deposits in banking system as a whole =
(1/RR) x initial deposit into banking system |
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Money Supply Multiplier: Deposit
The change in money supply is calculated by... |
change in money supply = change in deposits in banking system as a whole - initial deposit
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Money Supply Multiplier: Withdrawal
The change in deposits in the banking system as a whole is equal to... |
change in deposits in banking system as a whole =
(1/RR) x (-initial withdrawal from banking system) |
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Money Supply Multiplier: Withdrawal
The change in money supply is equal to... |
change in money supply =
change in deposits in banking system as a whole (this will be negative)+ initial withdrawal |
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Expected Rate of Inflation
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Payment to lender for the increase in the value of money
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If true or actual inflation is greater than expected inflation, then...
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If true or actual inflation is greater than expected inflation, then the lender loses because inflation is mispredicted, the loss is equal to the difference between actual and expected inflation
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Multiplier Formulas:
Change in Investment Spending |
chngI x M = chngGDP
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Multiplier Formulas:
Change in Government Spending |
chngG x M = chngGDP
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Multiplier Formulas:
Change in Net Export Spending |
chngNX x M = chngGDP
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Multiplier Formulas:
Change in Consumption Spending |
chngC x M = chngGDP
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The key idea behind the aggregate expenditure model
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The level of gross domestic product (GDP) is determined mainly by the level of aggregate expenditure.
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GDP is equal to...
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C+I+G+NX=AE=GDP
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If aggregate expenditure is equal to GDP, then...
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Inventories are unchanged and the economy is in macroeconomic equilibrium.
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If aggregate expenditure is less than GDP, then..
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Inventories rise and GDP and employment decrease.
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Inventories rise or fall?
GDP and employment increase or decrease? |
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If aggregate expenditure is greater than GDP, then..
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Inventories fall and GDP and employment increase.
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MPC Formula
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Change in Consumption/
Change in Disposable Income |
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GDP Deflator Formula
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A measure of the price level, calculated by dividing nominal GDP by real GDP, and multiplying by 100
(Nominal GDP/Real GDP)x100 |
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What are the main causes of economic growth?
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technological change, human capital, labor productivity
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Define: Per-Worker Production Function
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The relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant.
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Labor Productivity
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The quantity of goods and services that can be produced by one worker or by one hour of work.
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Technological Change
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Change in the ability of a firm to produce a given level of output with a given quantity of inputs
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Human Capital
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The accumulated knowledge and skils that workers acquire from education or from life their experiences.
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An increase in the labor force or the capital stock shifts the short-run aggregate supply curve...because...
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Right, because more output can be produced at every level.
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An increase in productivity shifts the short-run aggregate supply curve...because...
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Right, because costs of producing the output fall.
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An increase in the expected future price level shifts the short-run aggregate supply curve...because...
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Left, because worker and firms increase wages and prices.
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An increase in workers and firms adjusting to having previously underestimated the price level shifts the short-run aggregate supply curve...because...
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Left, because workers and firms increase wages and prices.
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An increase in the expected price of an important natural resource shifts the short-run aggregate supply curve...because...
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Left, because the costs of producing the output rise.
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The short run effect of a decrease in aggregate demand is...
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A recession
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The long run effect of a decrease in aggregate demand is..
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A decrease in price level
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The short run effect of an increase in aggregate demand is...
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An increase in real GDP.
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The long run effect of an increase in aggregate demand is...
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An increase in price level.
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The short run effects of a supply shock are...
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A recession and an increase in price level.
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The long run effects of a supply shock are...
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Short Answer: Adjustment back to potential GDP.
Long Answer: The recession caused by supply shock eventually leads to falling wages and prices, which shifts the SRAS curve back to its original position. |
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Stagflation
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A combination of inflation and recession, usually resulting from a supply shock.
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What makes up Aggregate Demand?
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The price level and the quantity of real GDP demanded by households, firms, and the government.
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What makes up Short Run Aggregate Supply?
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The short run relationship between price level and the quantity of real GDP supplied by firms.
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What shifts the Aggregate Demand Curve?
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1. Changes in gov't policies
2. Changes in expectations of households and firms 3. Changes in foreign valuables Basically: Any variable that affects the willingness of households, firms, and the government to spend other than the price level. |
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What is the long-run aggregate supply curve?
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A curve that illustrates the long-run relationship between the price level and the quantity of real GDP supplied.
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An increase in interest rates shifts the AD curve...because...
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Left, because higher interest rates raise the cost to firms and households of borrowing, reducing consumption and investment spending.
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An increase in government purchases shifts the AD curve...because...
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Right, because government purchases are a component of AD.
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An increase in personal income taxes or business taxes shifts the AD curve...because...
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Left, because consumption spending falls when personal taxes rise, and investment falls when business taxes rise.
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An increase in households' expectations of their future incomes shifts the AD curve...because...
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Right, because consumption spending increases.
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An increase in firms' expectations of the future profitability of investment spending shifts the AD curve...because...
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Right, because investment spending increases.
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An increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP shifts the AD curve...because...
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Left, because exports will fall, reducing net exports.
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An increase in the exchange rate (value of the dollar) relative to foreign currencies shifts the AD curve...because...
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Left, because imports will rise and exports will fall, reducing net exports.
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What shifts the SRAS curve?
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Any variable other than the price level.
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What moves us along the SRAS curve?
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Any change in price level
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What moves us along the AD curve?
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Any change in price level.
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What are the 5 most important variables that cause the SRAS curve to shift?
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1. Increases in the labor force and in the capital stock
2. Technological change 3. Expected changes in the future price level. 4. Adjustments of workers and firms to errors in past expectations about the price level. 5. Unexpected changes in the price of an important natural resource. |
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What is Long-Run Equilibrium?
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The equilibrium that occurs when we are at potential GDP, and when everyone who wants a job has one, except the structurally and frictionally unemployed, and firms are operating at their normal level of capacity.
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Monetary Growth Rule
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A plan for increasing the money supply at a constant rate that does not change in response to economic conditions.
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What is contractionary fiscal policy and when would it be used?
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Congress and the president can decrease government purchases or raise taxes to fight rising inflation. This shifts the AD curve out less, reducing the increase in real GDP and price level.
This is used to fight inflation. |
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What is the purpose of expansionary fiscal policy and when would it be used?
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The purpose of expansionary fiscal policy is to increase aggregate deman by either having the government directly increase its own purchases or by cutting taxes to increase household disposable income and, therefore, consumption spending. This is used to fight a recession.
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Nominal Interest Rate
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The stated interest rate on a loan.
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Real Interest Rate
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The nominal interest rate-the inflation rate.
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Fiscal Policy
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Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
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Tax Multiplier
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The change in equilibrium real GDP divided by the change in taxes.
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Government Purchases Multiplier
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The change in equilibrium real GDP divided by the change in gov't purchases.
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How does an expansionary monetary policy affect real GDP and the price level?
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Lowers interest rates to increase consumption, investment, and net exports. This causes the AD curve to shift out more, raising the level of real GDP and the price level.
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How does a contractionary monetary policy affect real GDP and the price level?
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Raises the interest rates to decrease consumption, investment, and net exports. This decreased spending causes the AD curve to shift out less, reducing both the level of real GDP and the inflation rate below what they would be in the absence of policy.
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