Macro exam 2

What is the reserve requirement set by the Fed?

The minimum percentage of deposits that banks must hold as reserves, which influences the money supply.

What role does the Federal Funds Rate play in the economy?

It is the interest rate at which banks lend reserves to each other overnight, influencing other interest rates and economic activity.

What is the impact of households holding more currency?

It reduces bank reserves, leading to fewer loans and a decrease in the money supply.

What is the effect of paying interest on reserves?

It can influence banks' willingness to hold reserves versus lending, affecting the money supply.

What are bank liabilities?

Obligations of a bank, including deposits and borrowed funds.

What occurs when banks hold more reserves than required?

They make fewer loans, which can lead to a decrease in the money supply.

What is the primary tool the Fed uses to control the money supply?

The reserve ratio, which determines how much money banks can create through lending.

How does the Fed respond to financial institutions in trouble?

By providing loans to stabilize the financial system and prevent further economic downturns.

What is the impact of changing the reserve ratio?

A lower reserve ratio increases the money multiplier, while a higher ratio decreases it, affecting the overall money supply.

What is the relationship between the money supply and economic activity?

Changes in the money supply can influence interest rates, investment, and overall economic growth.

What is inflation?

An increase in the overall level of prices.

What is deflation?

A decrease in the overall level of prices.

What is hyperinflation?

An extraordinarily high rate of inflation.

How does inflation affect the value of money?

Inflation drives up prices and drives down the value of money.

What does the Quantity Theory of Money assert?

The quantity of money determines the value of money and explains long-run determinants of the price level.

Who developed the Quantity Theory of Money?

David Hume and classical economists.

What determines the money supply (MS) in the real world?

The Federal Reserve, the banking system, and consumers.

What is money demand (MD)?

The amount of wealth people want to hold in liquid form.

What are the motives for holding money?

Transactions motive, precautionary motive, and speculative motive.

What is the relationship between money demand and price?

Money demand is positively related to price but negatively related to the value of money.

What is the classical dichotomy?

The theoretical separation of nominal and real variables.

What does monetary neutrality propose?

Changes in the money supply do not affect real variables.

What is the velocity of money?

The rate at which money changes hands.

What is the formula for the velocity of money?

V = P x Y / M, where P is the price level, Y is real GDP, and M is the money supply.

What happens when the money supply (M) changes according to the Quantity Theory?

A change in M causes nominal GDP (P x Y) to change by the same percentage.

What is nominal GDP?

The total value of all goods and services produced in an economy measured in current prices.

What is real GDP?

The total value of all goods and services produced in an economy adjusted for inflation.

What are nominal variables?

Variables measured in monetary units, such as nominal GDP and nominal interest rates.

What are real variables?

Variables measured in physical units, such as real GDP and real interest rates.

What is the effect of a monetary injection?

If the Fed increases the money supply, the value of money falls and prices rise.

What does the term 'money neutrality' imply?

That changes in the money supply do not affect real economic variables.

What is the relationship between nominal and real variables according to classical economists?

Monetary developments affect nominal variables but not real variables.

What is the significance of the velocity of money in economics?

It indicates how quickly money circulates in the economy.

How do credit cards affect money demand?

They can increase money demand by providing easier access to liquid funds.

What impact does technology have on real GDP?

It can increase real GDP by improving productivity.

What happens to the inflation rate if real GDP is constant?

Inflation rate equals the money growth rate.

What is the relationship between inflation and money growth when real GDP is growing?

Inflation rate is less than the money growth rate.

What causes inflation according to the Quantity Theory of Money?

Excessive money growth causes inflation.

What is hyperinflation defined as?

Inflation exceeding 50% per month.

What principle states that prices rise when the government prints too much money?

One of the Ten Principles of economics.

What is the inflation tax?

Revenue from printing money that causes inflation, acting like a tax on money holders.

What determines the real interest rate?

The real interest rate is determined by saving and investment in the loanable funds market.

What is a common misconception about inflation?

That inflation erodes real incomes.

What are menu costs?

The costs associated with changing prices, such as printing new menus.

How does inflation affect nominal income and taxes?

Inflation makes nominal income grow faster than real income, leading to higher taxes.

What is an arbitrary redistribution of wealth due to unexpected inflation?

Higher-than-expected inflation transfers purchasing power from creditors to debtors.

What are the costs of deflation?

Menu costs, relative-price variability, and redistribution of wealth toward creditors.

What happens to the after-tax real interest rate when inflation increases?

It lowers the after-tax real interest rate.

In the case of 0% inflation and 10% nominal interest, what is the real value of a $1000 deposit?

It grows the most compared to a case with 10% inflation.

What is the impact of inflation on savers' tax burdens?

Inflation increases savers' tax burdens.

What does the chapter conclude about the effects of money in the long run?

Money is neutral in the long run, affecting only nominal variables.

What will be explored in later chapters regarding money?

Money's important effects in the short run on real variables like output and employment.

What is the relationship between inflation and the Consumer Price Index (CPI)?

Inflation causes the CPI and nominal wages to rise together over the long run.

What is the effect of inflation on long-range planning?

Inflation complicates long-range planning and the comparison of dollar amounts over time.

What is the impact of inflation on the allocation of resources?

It leads to misallocation of resources due to relative-price variability.

What is the effect of inflation on the purchasing power of debtors?

Debtors can repay their debt with dollars that aren't worth as much due to inflation.

What is the relationship between economic growth and money growth?

Economic growth increases the number of transactions, requiring some money growth.

What are the three groups the Bureau of Labor Statistics classifies the adult population into?

Employed, Unemployed, Not in the labor force

What does the labor force participation rate measure?

The percentage of the adult population that is in the labor force.

What is the role of government employment agencies in the labor market?

They provide information about job vacancies to speed up the matching of workers with jobs.

What is the significance of the unemployment rate as an economic indicator?

It provides a useful barometer of the labor market and overall economy health.

What limitations exist in the unemployment rate as an indicator?

It excludes discouraged workers and does not distinguish between full-time and part-time work.