37 terms

Macro Test 2


Terms in this set (...)

If imports were banned under the Keynesian framework.....
This would stimulate economic growth and not have any effect on exports
(This is false because eventually the ROW would have no dollars to purchase US goods with)
Crowding out effect
- When the Govt borrows money it crowds out some private borrowing by driving up interest rates
- Keynesians argue that this cant be empirically proven and that they are really just borrowing banks' idle funds
- They point to a more global outlook to prove that the crowding out effect is negligible
- Classicists argue back that the crowding out effect takes place in the exports market not the loan-able funds market
- The crowding out effect shows up in the global economy through the deficit
The Great Mediation
- from 1982 - 2007 recessions were about ten years apart instead of the usual five and were less extreme.
- Causes
1) Alan Greenspan: "We're smarter"
2) Global economy stabilizes
3) Accelerator principle

- Keynesians don't tend to dwell on this and attribute it to "animal spirits"
Accelerator Principle
1) Inventory has a destabilizing impact on the economy
2) In a modern economy there is less and less inventory than in previous times because:
- inventories are computerized
- more service oriented
Automatic Stabilizers
- Fiscal Policy (what president and congress do to control the economy directly) that requires no action by the president or congress
- Progressive Income Tax
- Farm Support Programs
- Unemployment
Progressive Income Tax
When your wage rises the amount that you pay in taxes also rises
Farm Support Program
When the economy goes into a recession farmed goods prices fall and the government purchases them
Money Multiplier
change Money supply * Km = Change money supply final
Tools of the Fed
1) add more money to the money supply through buying or selling bonds
2) change the reserve requirements to alter the economy
3) Change the discount rate (the interest rate the Fed charges banks when they borrow money)
4) Pay interest on excess reserves held at the Fed
Discount rates
High discount rates encourage banks to be more conservative and low interest rates encourage banks to be more aggressive
Keynes Summary
The economy is a ship that can be steered (demand side economics)
Austrian Summary
-The economy is like a school or fish or flock of birds
- When the Fed intervenes in the economy they make it worse
- disCoordination: resources are misallocated when people are given false signals in the market by the fed
Classical Summary
- MV = PQ
LM Curve
Ms = Md
What erodes the multiplier?
1) Taxes
2) Imports
3) Interest Rates
IS Curve
Solve for y
C + I + G + (X -M)
Demand deposit
Time deposit
Cash, Coins, Demand Deposits
Time Deposits, Investments
Transaction Demand
The you are holding for spending
Precautionary Demand
The money you hold for purchases you can't anticipate
Speculative Demand
People hold money on the change they'll see a future investment opportunity
Agg Demand =
Agg Supply
C =
As + MPC(yd)
M =
m^0 + MPM(yd)
yd =
y - taxes
Taxes =
Change in Y =
change in aggD * Ka
FV =
PV(1 + i)^yr
ln(A*B) =
ln(A) + ln(B)
ln(A/B) =
ln(A) - ln(B)
lnA^B =
Goods market
Money market
Money multiplier
1/reserve requirement