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27 Cards in this Set

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Aggregate Demand is negative sloped because (3 reasons): substitution effect
2.inter-temporal substitution effect
3.real wealth effect
int'l, inter-temporal, wealth
International substitution effect:
as Pus, Xus goes down, and Mus (X-M does down so AD goes down)
easiest to remember
Inter-temporal substitution effect:
if Pus temporarily, C,I,G,X go down temporarily and M temporarily causing AD to go down
temporary changes to CIGXM
Real Wealth Effect:
keeping expected lifetime Y the same, if Pus goes down, purchasing power  so C and I
purchasing power changes
Current account
trade balance (X-M) + loan payments + direct foreign investments
trade balance plus two exogenous things
Purchasing Power Parity (PPP)
absolute: P$ = ($/l)*Pl
relative: P$ = ($/l)*Pl + constant tax difference + constant tranportation costs -> P$ growth = ($/l) growth*Pl growth
difference between abs and rel
Aggregate Expenditures Approach of GDP
AE=AD=GDP= C + I + G + X - M
private vs. public savings
GDP = Y = C + I + G + X - M
Y - C - G - I = X - M
(Y - C - T)+(T - G)-I=X-M
private savings = Y - C - T
public savings = T - G
S - I = X -M
derivation of AD to capital account balance=trade balance
deposit multiplier
larger multiplier = larger shifts in AD -> mpc is large and mpm is small
think mpc and mpm
mpc and mpm
mpc = mpm = 0 is totally rational
mpc grows with irrationality
3 Requirements of Money
1.medium of exchange(method of payment)
2.unit of account(can value all goods/services) of value(can be used now or saved for later)
exchange, account, vale
Quantity Theory of Money
Money Supply*Velocity=Price*GDP, where V and GDP are determined exogenously and holds only in long run
money multiplier
the amount of money created by one deposit based on our fracitonal reserve system
Reserve ratio
required amount that banks must not lend on every deposited dollar; as the money multiplies increases rr down
3 Goals of the FOMC and the Fed:
1.low unemployment
2.stable prices
3.stable exchange rate
employment, inflation, e
currency in circulation
currency in bank reserves
oldest, includes least
currency in circulation
travellers' checks
checking deposits
middle of the road
currency in circulation
travellers' checks
checking deposits
savings deposits
time deposits
mutual fund deposits
most inclusive
contractionary policy
more effective
less lending, r up, dollar appreciates (X down and M up)
pull on a string
expansionary policy
less effective
more lending, r down, dollar depreciates (X up and M down)
push on a string
contractionary methods
raise required reserves (rr): AD shifts left and S($) shifts left
raise federal funds rate (ffr): sell more gov bonds, M2 goes down, reserves go down so lending decreases, r increase and ffr increases
expansionary methods
lowering rr: AD shifts right, S($) shifts out
lowering ffr: buy more gov bonds, M2 increases, reserves increase so lending increases, r decreases and ffr decreases
rr up, lending down, r up:
C down because S up
I down because r up so mpk up (p.c.) and I down (d.r.)
G unchanged
X down because dollar appreciates
M up because dollar appreciates
Start with rr (think UP), then lending, then r...
rr down, lending up, r down:
C up because S down (low r)
I up because r down=mpk down (p.c.) and I up (d.r.)
G unchanged
X up because $ depreciates
M down because $ depreciates
Start with rr (think DOWN), then lending, then r...
Why is it easier to reduce AD (pull string) than to increase AD (push string)?
2 Reasons
1.risk up and ffr might not fall low enought to offset
2.rational banks will just raise nominal rates to cover long-term inflation with no change in real rate charged
risk and rationality (inflation)
The role of risk when trying to increase AD:
Risk up during downturns, so bank’s costs up, but the ffr may not fall low enough to offset the rising risk
The role of rationality when trying to increase AD:
Rational banks know expansionary policy leads to inflation, which raises their costs when borrowing cost (ffr) falls; long run rates should be unaffected because banks will just raise nominal rates to cover the long-term inflation with no change in the real rate charged (which is what affects saver and firm decisions).