unit 4 + 5 macro

Store of value

durable, doesn’t depreciate

Unit of account

how we measure value

M0

Currency in circulation + Bank Reserves (this is also known as the monetary base)

M1

Currency in circulation plus money that can easily be liquidated (bank deposits, savings deposits as of May 2020)

M2

all M1 plus money market accounts and small-time deposits

Required Reserve Ratio

percentage of a deposit banks are required to hold as reserves (March 2020: ratio reduced to 0, but historically it ranged from 3 to 10%)

Required Reserves

amount of money a bank must hold in reserves

Excess Reserves

amount of money a bank holds beyond the required reserves (can loan it out or buy bonds)

Demand Deposits

accounts from which depositors can withdraw money (part of M1 money supply)

Owners Equity

profit owed to bank owners (doesn’t factor in to our analysis)

Assets

Required reserves, Excess reserves, Treasury securities (bonds), Loans

Liabilities

Demand deposits, Owner’s equity

Banks are inherently illiquid

cannot meet all potential claims

Bank run

large numbers of depositors close their accounts

FDIC

Federal Deposit Insurance Company insures depositors will be paid up to $250,000 per account even if bank cannot come up with funds. Prevents bank runs (to an extent)

Federal Funds Rate

interest rate banks charge each other

Discount window

Federal Reserve lends money to banks in trouble at a discounted rate

Deposit Multiplier

1 / rr

Open Market Operations

For money supply multiplier, there is an immediate effect on money supply (unlike deposits)

Quantitative Easing

Form of open market operation where Fed buy/sell various financial assets, not just short-term government bonds. Examples: private corporate bonds, mortgage backed securities

Money Demand

Demand for money in cash form or bank deposits (as opposed to interest-bearing accounts)

Transactionary

purchase goods and services

Precautionary

protection against unexpected need

Speculative

store of wealth (common in deflationary periods or to engage in currency exchanges)

Money Supply

Does NOT change based on interest rate, so curve is VERTICAL. The money available at any given point in time is available regardless of the interest rate

Bond

debt issued by governments or companies used to finance various projects. Bond price is inversely related to interest rates.

Administered rates

rates that are determined by Fed, as opposed to market forces

Actual Money Multiplier

Ms / Mo

Expansionary fiscal policy

leads to higher real interest rates

Contractionary fiscal policy

leads to lower real interest rates

Cyclically Adjusted Budget Balance

Estimate of what the budget balance would look like if we are at full employment

Intragovernmental

debt a government owes itself.

Public

debt owed to foreign investors and governments, private investors (pensions, mutual funds, etc.), and anything else not included in intragovernmental debt

Crowding out effect

results of public spending changes are partially offset by private spending changes

Cost-push

decrease in aggregate supply

Demand-pull

increase in aggregate demand

Aggregate Demand Increase Effect on Unemployment and Price Level

Unemployment Decreases, Price Level Increases

Shift in Aggregate Demand

creates movement along the short-run Phillips curve

Shift in Aggregate Supply

create shifts of the Phillips curve (inflation and unemployment can both increase or both decrease). Therefore, anything that shifted SRAS would shift the SRPC

GDP Per Capita

Real GDP / Population

Physical capital

Increases in capital stock increase economic growth (tied to investment spending and interest rates)

Technological advancements

includes anything that makes existing inputs produce more (inventions, assembly line)

Aggregate Production Function

shows diminishing returns to physical capital

Convergence Theory

High income nations are growing at a lower rate than middle income (and some low income) nations

Savings Investment Spending Identity

Savings and Investment spending are always equal for the economy as a whole

Budget Surplus

when tax revenue exceeds government spending

Budget Deficit

when government spending exceeds tax revenue

Budget Balance

the difference between tax revenue and government spending

Capital Inflow

is the net inflow of funds into a country

Default

when a borrower fails to make payments as specified by the loan or bond contract

Liability

requirement to pay money in the future

Loan-backed security

an asset created by pooling individual loans and selling shares in that pool

Financial intermediary

an institution that transforms the funds it gathers from many individuals into financial assets

Policy rate

The benchmark interest rate set by the central bank; everything else (mortgages, business loans, savings rates) moves in response to it.

Inflation expectations

What households and firms believe future inflation will be; if anchored near the target, wages and prices don't spiral preemptively.

Anchored expectations

When people trust the central bank will hit its target, so their own inflation forecasts stay stable, making self-fulfilling inflation much less likely.

Equation of exchange (MV = PQ)

M × velocity = price level × real output; the identity linking money supply to nominal spending in the economy.

Velocity of money (V)

How many times a unit of currency changes hands in a period; if V falls (e.g. during a crisis), money expansion may not raise prices.

Natural rate of output

The economy's potential output at full employment; monetary policy cannot permanently raise output above this without accelerating inflation.

Monetary financing

When a central bank directly funds government spending by creating money; blurs the line between monetary and fiscal policy and risks high inflation.

Output gap

The difference between actual and potential GDP; monetary policy aims to close it by stimulating when negative and tightening when positive.

Monetary Neutrality

The long-run principle that changing the money supply affects only nominal variables like prices and wages, leaving real variables like output and employment unchanged.

Inflation Targeting

A framework where the central bank sets an explicit inflation goal (typically 2%) and adjusts interest rates up or down to keep actual inflation near that target.

Quantity theory of Money

The idea that the money supply and price level move proportionally, captured by MV = PQ: if you increase M without a corresponding rise in real output, prices must rise.