Unit Five Exam Review

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Aggregate Demand

Back 1

shows the relationship between the overall price level and the quantity of aggregate output demanded by households, firms, the government, and the rest of the world

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Aggregate Supply

Back 2

shows the relationship between the price level and the quantity of total output supplied

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Short Run

Back 3

shifts when the cost of production for businesses is affected

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Long Run

Back 4

marks the level of full employment in the economy

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Stagflation

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caused by supply shock; falling output leads to rising unemployment, and people feel that their purchasing power is squeezed by rising prices

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Negative Supply Shock

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shifts the SRAS curve left, raising Price Level and lowering Real GDP

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Positive Supply Shock

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shifts the SRAS curve right, lowering Price Level and raising Real GDP

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Negative Demand Shock

Back 8

shifts the AD curve left, lowering Price Level and Real GDP

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Positive Demand Shock

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shifts the AD curve right, raising Price Level and Real GDP

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Adam Smith

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CLASSICAL; wealth of nations; "invisible hand;" father of modern economics

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Jean-Baptiste Say

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CLASSICAL; Say's Law states "supply creates its own demand"

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David Riccardo

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CLASSICAL; Value Theory - accumulation of capital adds riches without decreasing the value of things traded, which may bring the various economic actors to a win-win

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Alfred Marshall

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CLASSICAL; explained classical economics using the costs of production to explain prices instead of utility

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Classical Idea of Competition

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better and cheaper products; more choices

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Classical Idea of Long Run

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long run is important to focus on

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Classical Idea of Government Role

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government should stay out of the economy

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John Keynes

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KEYNESIAN; Great Depression; government intervention to fix and prevent problems; spenders should be government; Social Security; hand-in-hand with New Deal policies

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Paul Krugman

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KEYNESIAN; aggressive fiscal policy; New Trade Theory (new way to look at comparative advantage)

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Keynesian Idea of Government Role

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government should intervene and be the major spender

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Keynesian Criticisms of Classical

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reject classical Long Run employment; disagreed with the Invisible Hand

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Keynesian Idea of Stabilizers

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safety nets for people such as Social Security

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Keynesian Idea of Fiscal Policy

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aggressive

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FED

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MONETARY

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Paul Volcker

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MONETARY; chairman of the FED in 1979 and 1983

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Bernanke

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MONETARY; chairman of the FED in 1987-2006

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Monetary Criticisms of Keynesian and Classical

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believes that Keynesian is not timed well; tax cuts create inflation; interest rates control Aggregate Demand

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Money: Medium of Exchange

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anything that is readily acceptable as payment

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Money: Store of Value

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an item that people can use to transfer purchasing power from the present to the future

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Money: Unit of Account

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money provides a means of comparing the values of goods and services

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Characteristics of Money

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durable, portable, divisible, uniform, acceptable, liquidity

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Commodity Money

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intrinsic value or value in and of itself such as gold and silver

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Flat Money

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money because of a government decree and does not have intrinsic value

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Currency

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the paper bills and coins in the hands of the public

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Demand Deposits

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balances in bank accounts that depositors can access on demand by writing a check

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Money Supply

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all the money available in the United States economy

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M1

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money that people can gain access to easily and immediately to pay for goods and services; assets that have liquidity

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M2

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near money; all assets in M1 plus several additional assets; examples include deposits in savings accounts and mutual funds

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FED

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serves as the nation's central bank; designed to oversee the banking system and regulate the quantity of money in the economy and promote price stability; created in 1914 after a series of bank failures convinced Congress that the U.S. needed a central bank

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Board of Governors

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runs the Fed; seven members appointed by the president and confirmed by the Senate; most important member is the chairman

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Regional Federal Reserve Banks

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12 Federal Reserve banks for each district; each bank has 9 directors, 3 appointed by the Board of Governors and 6 elected; New York is the most important

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Open Market Committee

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the main policy-making organ of the Federal Reserve System; determine monetary policy; made up of the chairman, president of the Federal Reserve Bank of New York, and the presidents of the other regional Federal Reserve Banks; meets about every six weeks to review the economy

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Functions of the FED

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maintains price stability; regulates banks; acts as a banker's bank; conducts monetary policy by controlling the money supply

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Money Demand

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Transaction Demand - demand for money as a medium of exchange (independent of interest rate)
Asset Demand - demand for money as a store of value (dependent of interest rate)

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Money Supply

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determined by the Federal Reserve because the Fed has monopoly control over the supply of money

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Contractionary Monetary Policy

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used to counteract inflation

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Expansionary Monetary Policy

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used to counteract recession

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Reserve Requirement

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the amount (%) of a bank's total reserves that may not be loaned out

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Discount Rate

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the interest rate the Fed charges banks for loans

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Open Market Operations

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when the Fed buys government bonds from or sells government bonds to the public

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Federal Funds Rate

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the interest rate that banks charge one another on overnight loans of reserves held at the Federal Reserve Banks