ECO211 - Macroeconomics Midterm Exam Study Guide

These flashcards cover key concepts from Chapters 31, 32, and 34, focusing on inflation, monetary policy, and the Federal Reserve System.

What is inflation?

An increase in the average level of prices as measured by a price index.

What phenomenon is sustained inflation considered?

A monetary phenomenon.

What is the Fisher effect?

The tendency of the nominal interest rate to increase with expected inflation.

Define real shocks in economic terms.

Shocks that are analyzed through shifts in the Long-Run Aggregate Supply (LRAS) curve.

What is the role of the Federal Reserve?

To control the money supply and conduct monetary policy.

What is the purpose of money as a medium of exchange?

To eliminate the double coincidence of wants required in a barter system.

What is the Federal Open Market Committee (FOMC)?

It consists of the seven governors and other regional bank presidents and meets to discuss monetary policy.

How does the central bank influence the money supply through open market operations?

By buying or selling government bonds.

What is moral hazard in the context of financial institutions?

The risk that institutions take on excessive risk, believing they will be bailed out.

What does the money multiplier (MM) refer to?

The ratio of the amount of money in the economy to the reserves held by banks.

Explain the concept of a liquidity trap.

A situation in which monetary policy becomes ineffective because nominal interest rates are at or near zero.

What is a liquid asset?

An asset that can be quickly converted into cash without a significant loss in value.

What does systemic risk mean?

The risk that the failure of one financial institution can cause widespread disruptions in the financial system.

Define aggregate demand shock.

Shocks that affect the aggregate demand curve, analyzed by shifts in that curve.

What is disinflation?

A decrease in the rate of inflation.

What is the quantity theory of money?

A theory that states there is a direct relationship between money supply and price level.

Define the term 'nominal price'.

The price of goods or services measured in current dollars, not adjusted for inflation.