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11 Cards in this Set
- Front
- Back
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GDP gap |
ID: It's a difference between the real equillibrium GDP (Ye) and the non-inflationary full-employment GDP (Y*), and Y*>Ye.
Sig: It indicates the macroeconomics problem which is unemployment and it measures the economics cost of unemployment |
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Three functions of money |
1) Medium of exchange: goods that trade for material goods and services. It facilitates the exchange.
2). Store of value: It allows the purchasing power to be stored over time.
3.) Unit of account: It facilitates the calculation of comparative values |
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How inflation affects creditors |
1) Unanticipated inflation redistributes the real values from creditors to borrowers, because they are paid back less due to the inflation.
2). As the inflation is experted, then the creditors will try to increase the interest rate to avoid the decrease of fixed nominal value |
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Use the Quantity Theory of Money to explain inflation |
ID: %ΔM^s +%ΔV=%ΔP+%ΔQ
Sig: If %ΔV = 0, %ΔP (inflation or deflation) rate depends on %ΔMs compared to %ΔQ. For example, if %ΔMs > %ΔQ then %ΔP > 0 (Inflation). |
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Use the Quantity Theory of Money to explain Deflation |
ID: %ΔM^s +%ΔV=%ΔP+%ΔQ
Sig: If %ΔV = 0, %ΔP (inflation or deflation) rate depends on %ΔMs compared to %ΔQ. So if %ΔMs < %ΔQ then %ΔP < 0 (Deflation). |
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If you were a member of the Federal Reserve Board of Governors, what three policies would you suggest to combat inflation? Why? |
Excess reserve=Total reserve-legal reserve requirement, then the ms mill decrease
1.) Increase legal reserved requirement
2.) increase discount rate: increase the interest rate, then PV
3.) Open market operation: selling bonds, selling bonds so there will be less money supply in the economy market.
An on above, the policies are trying to decrease the M^s because the cause of inflation is that the rate of M^s is too fast |
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Excess Reserves |
ID: Total Reserves-Legally REquired Reserves
Sig: Excess reserves are the only legal source of funds that commercial bank can lend. If commercial banks hold excess reserves, money supply changes are not as big as possible. |
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3 Types of Unemployment |
Structural: Joblessness caused by changes in the structure of labor demand. It describes workers who lack marketable skills due to changes in the structure of labor demand.
Frictional: Workers who are temporarily out of work due to changing jobs or as new entrants come into labor force. It's economically desirable because it is often associated with increasing productivity.
Cyclical: Joblessness due to downturn in the business cycle or overall level of economic activity
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Frictional unemployment |
ID: Workers voluntarily changing jobs and new entrants into the labor force.
Sig: Frictional unemployment is desirable when it increases the worker productivity or efficiency, and improves job matches |
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Inventory adjustment mechanism |
If planned TE=/ ASk then the economy is not equilibrium. Inventory adjustments are more likely to bring the economy to rest. If, for example, planned TE>ASk there will be a decrease of inventories, but if planned TE |
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Consumer Wealth |
Id: Consumer's hard and liquid assets including cash, savings and durable goods held for a certain time period
Sig: An increase in consumer wealth will shift the consumption function upward while a reduction caused by financial losses in the stock market may cause consumption function to shift downward |
