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Unit 5 Test Review
Terms in this set (33)
What is the money market?
The market where the Fed and the users of money interact thus determining the nominal interest rate (i%).
2 Types of Money demand
1.) Transaction Demand
2.) Asset Demand
Who controls the money supply in the US?
Changes in money supply
-Only the Fed determines this
-Expansionary Monetary Policy
-Contractionary Monetary Policy
Changes in money demand (explanation)
-Money demand is dependent on both the Price Level and Real GDP which together comprise the Nominal GDP
What is investment?
-Money spent on expenditures in the hopes of a positive outcome
-Ex of investments: New Factories, Capital Equipment (machinery), Tech, New Homes, and Inventories.
How does Business determine the amount of investment to undertake?
By implementing cost/benefit analysis
Shifts in Investment demand (factors)
-Cost of Production
-Stock of capital (focus on this)
Instability of Investment (factors)
-Irregularity of Innovation
-Variability of Profits
-Variability of expectation
What does instability of investment cause?
It causes some of the variability in the business cycles and causes changes in the aggregate demand.
Characteristics of free enterprise
-Private Property & freedom to enter into contracts
Role of the Entrepreneur
-They bring together people, resources, & equipment to make a profit.
-They motivate the economy by always coming up w/ new ideas & ways of doing things
-Because of all the money that they make, this means others people want to go into business & compete, making all of us better off.
Role of the Consumer
-They are people like you and me who buy things & pay for services
-We rule the free enterprise economy
-Our choices decide what is made, bought, & sold in the economy
Role of the Govt
-They function as the procter (enforcing laws), provider & consumer, and regulator (making rules for businesses).
Displays the trade off between unemployment and inflation
Long Run Philips Curve
-The vertical line essentially the LRAS curve on a different graph
Short Run Philips Curve
Downward sloping curve. Displays the trade off between unemployment and inflation
Philip's Curve Trade Off
-high unemployment, less inflation
-low unemployment, high inflation
-economies must decide which is better for them
demand for money as a medium of exchange (independent of the interest rate)
demand for money as a store of value (dependent on the interest rate)
Expansionary Monetary Policy
-increase in MS
-used in times of high unemployment
-MS-> , i% decreases
Contractionary Monetary Policy
-decrease in MS
-used to slow inflation
-MS<-, i% increases
Changes in money demand (factors)
-Changes in disposable income
-Changes in tastes & preferences
-Changes in Expectations
-Changes in price of related goods
Changes in Money Equilibrium
-Political gain (MS & MD)
-Inflation expectations (MS & MD)
Real (r%) v. Nominal (i%)
Nominal is the observable rate of interest. Real subtracts out inflation (pi%) & is only known after the fact
Capital has a long life span, therefore once it is built there is no immediate need for further investment
Irregularity of innovation
Innovation doesn't proceed in a smooth linear fashion, instead there are bursts of innovation followed by periods of relative stability
Variability of Profits
Profitability is subject to the forces of competition, cyclical changes in the economy, and human management decisions
Variability of Expectation
Political, social, and natural phenomenon shape our positive & negative expectations of the future
You gave the choice in which job and factors you chose, but businesses chose which workers they want
People & businesses aren't forced to do business with each other, but they are better off if they do so.
Private Property & freedom to enter into contracts
-People have the right to do what they what with their own property
-Contracts are agreements made between people to buy & sell
-You are legally bound to keep your agreement
the force that makes people and businesses want to get more money
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