AP Macroeconomics Final

currency

the paper bills and coins used to buy g/s

Money

is any generally accepted means of payment

medium of exchange

is what people trade for g/s

barter

involves the trade of g/s in the absence of a commodity accepted medium of exchange

double coincidence of wants

occurs when each party in an exchange transaction happens to leave what the other party desires (uncommon so thats why we create a medium of exchange)

Commodity money

involves the use of an actual good for money (gold/silver)

commodity-backed money

money you can exchange for a commodity at a fixed rate (quarters made of real silver in 1964) (ties the value of the holders money to something real, limits amount of money, limits inflation)

fiat money

money with no value except as a medium of exchange, there is no inherent or intrisinc value of the currency (can create inflation rapidly. does not rely on precious resources and if they are avaliable or not)

Balance sheet

on accounting statement that summarizes a firms key finacial information

assets

items a firm owns

liabilities

fincial obligations a firm owes to others

owners equity

the difference between a firm assets and its liabilites

reserves

portion of bank deposity that are set asside and not loaned out (currency in the banks vaul that the bank holds in deposits at the federal reserve)

fractional reserve banking

occurs when banks hold only a fraction of deposits on reserve

bank run

occurs when money depositers attempt to withdraw their funds from a bank at the same time

required reserve ratio (RR)

portion of deposits that banks are required to keep on reserve

excess reserves

only bank reserves hold in excess of those required (total reserves-required reserves)

FDIC

federal deposit insurance corporation

moral hazard

is the lack of incentive to guard against risk where one is protected from its ocnsequences

how do banks create money?

simple money multiplier

simple money multiplier

the rate at which banks multiply money when all money is deposited into banks and they hold no excess reserves (1/rr)(represents the MAXIMUM size of the money multipolier)

Monetary policy

countroling the US money supply and regulating it to offset macroeconomic fluctuations

centeral banking

bank for banks

bank regulation

ensuring the finacial stability of banks & determination of reserve requirements

federal funds

deposits that private banks hold on reserves at the federal reserve

Federal funds rate

interest rate on loans BETWEEN PRIVATE BANKS

discount loans

loans from the federal reserve to private banks

discount rate

interest rate on discount loans made by the federal reserve to private banks

open market operations

involve the purchase or sale of bonds by a centeral bank

quantitative easing

targeted use of open market operations in which the centeral bank buys securities specifically targeting certain markets

Maturity on bonds

how long it will take to give you your principle + interest

liquidiity

assets that can quickly be converted into cash

m1

liquid money (easy medium of exchange)

physical currency (coins and paper money) in circulation, demand deposits (checking accounts), other checkable deposits ``

m2

currency you have evenaully (m1+saving+money market)

Why do banks hold reserves

prevent bank runs & satisfiy reserve requirements

do banks perfer to borrow from other banks?

yes because its more efficient and cheaper

expansionary monetary policy

occurs when a centeral bank wants to increase the money supply in an effort to stimulate the economy (buying bonds, decrease required reserves, decrease interest rates)

How does monetary policy impact real vs nominal effects

monetary policy can have immediate real short run effects but as prices adjust in the LR, effects wear off

contractionary monetary policy

occurs when a central bank acts to decrease the money supply (occurs when the economy is expanding rapidly) (sells bonds in the loanable funds market, which takes funds out of the market) (interest rates rise increase, investment decrease, AD decrease, GDP decrease, unemployment increase)

monetary neutrality

idea that the money supply does not affect real economic variables

how does unexpected inflation impact fixed wage workers

harms them

phillips curve

indicates a short-run negative relationship between inflation and unemployment (monetary expansion stimulates the economy and brings some inflation which reduces unemployment)

adaptive expectatoins theory

holds that peoples expectations of future inflation are based on their most recent experience

stagflation

combonation of high unemployment and high inflation (goes against phillips curve)

rational expectation theory

holds that people form expectations are the basis of all avaliable information

How does unemployment get impacted by suprise inflation

unemployment is only impacted if the inflation is a suprise

active monetary policy

strategic use of monetary policy to contract macroeconomic expansion and contractions

positive monetary policy

typically refers to actions taken by a central bank, such as lowering interest rates or increasing the money supply, to stimulate economic growth, reduce unemployment, and manage inflation

what do nominal interest rates equal?

interest on NEWLY issue government bonds

what is on the axis of the money market graph

nominal interest rates on y axis and quantity of money on x axis

what is the money market graph

tradeoff between liquid assets and new bonds (illiquid assets)

what type of graph is it if you see nominal interest rates in the question

money market (monetary policy)

what shifts the money demand

changes in price level (if pl increase we will demand more money which will cause demand for m1 to increase because it costs more to buy stuff), change in income (if you have less money you have less of a demand for money), change in taxation that affects personal investment (changes capital gains tax would charge them demand for money), techonology impact how people demand money

what are on the axis of the bond market

x axis- quantity of bonds

y axis - price of bonds

what is the concept behind the bond market?

bond prices are inversely related to nominal interest rates, because nominal interest rates reflect the yeild of new bonds printed by the fed

where are recessions on the phillips curve?

right on SRPC of the LRPC

where are peaks on the phillips curve?

left of SRPC of the LRPC

what do supply shocks do the the phillips curve?

shift the srpc

Federal reserve market graph

Transaction

People demand money to make everyday purchases. This is NOT affected by the interest rate.

Asset Demand for Money

People demand money as a liquid asset because they prefer it to other non-liquid assets like real estate.

why is the supply of money vertical in the money market graph

because the total quantity of money is fixed, or set exogenously, by a central bank (like the Federal Reserve). Because this amount is determined by policy rather than the interest rate, the quantity of money supplied remains constant regardless of whether interest rates rise or fall, making it perfectly inelastic.

when the fed buy/sells bonds what does that represent with the demand of bonds?

an increase in demand/decrease in demand

when does supply shift in bond market

changes in government fiscal policy (deficits/surpluses), expected economic conditions, and inflation expectations. Increased borrowing needs to fund budget deficits are the main drivers of a rightward shift (increased supply), while improved economic conditions can increase corporate bond issuance.

what does monetary policy do the the phillips curve

results in a slide along the SRPC

Aggregate deamand

total demand for final g/s in an economy

aggregate supply

total supply of final g/s in an economy

What makes up AD?

Consumer+Investment+government spending+net exports (exports-imports)

price level

not of any specific g/s but rather a general level for the whole economy (GDP deflator)

What happens to QD when PL decreases?

increases

wealth

net value of ones accumulated assets

Wealth affect

change in the quantity of aggregate demand that results from wealth changes due to the price level changes

What happnes to wealth if PL falls?

it increases, QD to increase

What causes slides on the AD?

Wealth effect, interest rate effect, international trade effect

interest rate effect

As price level goes up, savings decreases, interest rates increase and credit is more expensive. Thus, these purchases decrease. 

International trade effect

occurs when a change in the PL leads to a change in the quantity of net exports demanded

What happens when U.S. PL increases

g/s become more expensive than foreign goods so demand for U.S. g/s fall

What causes shifts in consumption? (shift to AD)

peoples current welath (if your current wealth increases you will spend more), expected future income (consumer confidence)(when people expect higher income in the future they spend more today), taxes (when consumers pay lower taxes they can spend more)

What causes shifts in investment? (shift to AD)

Changes in business firm confidence (when the future of the industry is positive they will spend more on tools to increase production and future profits), interest rates (increase in interest rates makes investment more expensive causing AD to decrease), increasing quantity of money (more money creates lower interest rates allowing firms to borrow more)

What causes shifts in government spending? (shift to AD)

Changes in government budget (when government budget increases, AD increases)

What causes shifts in net exports? (shift to AD)

Foreign income (when income of people in foreign nations grows, their demand fo U.S. g/s increases which increases NX and increases the quantity of AD), Exchange rates (when the value of the dollar increases, americans find that imports are less expsnvei but exports are more expensive which reduces NX and decreases the quantity of AD)

What is LRAS?

period of time sufficient for all prices to adjust (input costs unstick)

price level does not affect

vertical (full employment output)

What is SRAS

period of time in which some prices have not adjusted (input prices stay sticky)

What shifts LRAS?

Changes in resources, technology, and institutions (new research)

What are input & output prices in SRAS?

sticky input prices (no sticky output prices)

if inflation increase prices, you will increase ouput prices, but your input prices will continue to stick

Costs dont rise but revenues do, so you should increase output

Menu costs

if PL is increasing, but firms dont adjust price of menu costs, consumers will have more of its ouput, causing the quantity of AS to increase

Money illusion

occurs when people interpret nominal values as real values (if ouput decreases but workers do not accept nominal pay decreases, they reinforce sticky input prices and firms reduce output)

Why is SRAS positively sloped?

because of sticky input prices

what causes SRAS to shift?

change in input prices, supply shock

Change in input prices

when input costs decrease, firms increase output

supply shock

suprise events that change a firm’s production costs (negative lead to higher production costs)

What happens in an AD-AS model?

in the long run, prices naturally adjust towards equilibrium

What happens to SR and LR when AD increases

SR: real gdp increases, unemployment decreases, PL increases

LR:real gdp returns to equilibirum, unemployment returns to equilibrium, and PL increases more

What happens to SR and LR when AD decreases

SR: real gdp decreases, unemployment increases, PL decreases

LR:real gdp returns to equilibirum, unemployment returns to equilibrium, and PL decreasrs more

Real gdp

economys output of g/s corrected for the growth in the economy

What is the LRAS made up of?

4-6% unemployment, 2% inflatoin, 2-3% gdp growth

Who is the first to benefit in a booming economY?

investors and firms. The last people to benefit are minimum wage employees and those on a contract for wages

Real

adjusted for inflation

Nominal

the analysis of economic data—such as GDP, wages, or interest rates—measured in current, raw market prices without adjusting for inflation or deflation

What happens according to the wealth affect if there is an increase in PL?

People feel poorer and spend less