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Terms in this set (41)
3 Functions of money
Money as a medium as exchange
Money as a unit of account (the measure in which prices are quoted)
Money as a store of wealth (means for holding wealth)
M0= Currency (value of all cash in the economy)
M1= currency + checking accounts
MB= Monetary base = currency + reserves
M2= M1 + savings accounts + money market mutual funds + small time deposits
Owners equity = assets - liabilities
For banks, one assets is reserves (along with loans)
Deposits: money deposited in belongs to depositors and the bank must give it back therefore its a liability.
Law requires banks to hold some amount of their deposits If they did not do this it could cause a collapse of the bank. rr is used to represent the required reserve ratio.
$200 deposits and rr= 15% which puts $30 in reserves.
Extra amount of money in reserves that is not part of the required reserve ratio.
Excess reserves = reserves - required reserves
Federal Reserves 3 main jobs
1) Monetary Policy
2) Central banking
3) Bank regulation
Adjusting interest rates and the money supply in order to reduce economic fluctuations.
The Discount Rate
The interest rate the Fed charges when it makes a loan to a bank.
The Fed is a bank for banks and the lender of last resort.
Sets the required reserve ratio (rr) among other things.
Expansionary Monetary Policy
The Fed increases the money supply. First the Fed buys bonds which increases the supply of loanable funds.
Contractionary Monetary Policy
The Fed decreases the money supply. This is a tool for fighting inflation. First the Fed sells bonds to decrease the money supply, less money in the economy means less loanable funds.
Expectations and the Phillips curve
The effectiveness of monetary policy may depend on weather people anticipate it or not.
The curve is a short run tradeoff between inflation and unemployment.
People form expectations based on their past experiences.
Rational Expectations Theory
Holds that people form expectations on the basis of all available information.
3 Uses of GDP
Measure living standards = can find the country's average income.
Measure economic growth = finding the growth rate of real GDP
Measure business cycles = can tell us if the economy is expanding or contracting.
Factors that Shift AD
Income and wealth
Expected future prices
Expected future income
Value of the $
Factors that shift SRAS
Expected future prices
Anticipated monetary policy
Factors that shift LRAS and SRAS
Expansionary Fiscal Policy
The gov increases spending or decreases taxes. It helps to stimulate the economy in the AS-AD model.
Contractionary Fiscal Policy
Occurs when the gov decreases spending or increases taxes.
Marginal Propensity to Consume
If income rises by $1 then consumption rises by the amount of the MPC.
3 Shortcomings of Fiscal Policy
1) Recognition Lags: takes time to know if we are in a recession or not.
2) Implementation lags: changes in fiscal policy have to be passed in congress. Tends to take longer than changes in monetary policy.
When private spending falls in response to increases in government spending.
Increases in G, decreases in taxes will be financed by tax hikes and spending cuts in the future. They'll react to expansionary fiscal policy by saving more. This will leave them prepared for when the spending cuts and tax hikes happen. MPC would fall, decreasing the multiplier.
Supply-side fiscal policy
Attempts to shift AS.
An illustration of the relationship between tax rates and tax revenue. (the curve that is a half circle.)
Payments made to groups or individuals when no good or service is provided in return. (unemployment insurance, social security)
When the government buys goods or services. Also a component of GDP (does not include transfer payments)
Government spending + transfer payments + interest
comprise spending that can be altered when the government is setting its annual budget
comprise government spending that is determined by ongoing long-term obligations. Also called entitlement programs. A new law is needed for mandatory outlays to be changed.
Average Tax Rates
The total tax paid divided by the amount of taxable income.
Marginal tax rate
The tax rate paid on an individuals next dollar of income.
If one company goes bankrupt, then it cannot pay all its debts to the companies it has borrowed from. Then these companies lose money and may go bankrupt as well, setting off a chain reaction.
3 main factors for acceleration
Social Security and Medicare
Policies to mitigate the Great Recession
Individual income tax
Social insurance tax
Corporate income tax
Active monetary policy
The strategic use of monetary policy to counteract macroeconomic expansions and contractions.
Passive monetary policy
Central banks purposefully choose to only stabilize money and price levels.
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