macro economics exam 2

reserves

deposits that banks have received but have not loaned. All deposits are help as reserves. There is no change in the supply of money.

Steps taken to gather statistics to calculate CPI and inflation rate

fix the basket (which goods and how much everyone buys), find the prices at each point in time, compute the basket’s cost, choose a base year and compute the index.

core cpi

a measure of the cost of consumer goods and services excluding food and energy

substitution bias

Problem #1 with cpi. When prices change from one year to the next, some prices rise more than others, and some even fall, so consumers buy less of the goods with large price increases and more of the goods with small price increases or price declines.

introduction of new goods

problem #2 with cpi. consumers have more variety from which to choose, which in turn reduces the cost of maintaining the same level of well-being. More choices=money is more valuable.

unmeasured quality change

problem #3 with cpi. the quality of a good declines from one year to the next while its price remains the same, you are getting a lesser good for the same amount of money, so the value of a dollar falls. Similarly, if the quality rises from one year to the next, the value of a dollar rises.

gpd deflator differences

reflects the prices of all goods and services produced domestically, group of goods and services used to compute the GDP deflator changes automatically over time

regional price parities

measure differences in the cost of living from state to state

price indexes

used to correct for the effects of inflation when comparing dollar figures from different times

productivity

the quantity of goods and services produced from each unit of labor.

physical capital

The stock of equipment and structures used to produce goods and services

factors of production

Recall that the inputs used to produce goods and services—labor, capital, etc

human capital

knowledge and skills that workers acquire through education, training, and experience.

technological knowledge

the understanding of the best ways to produce goods and services

cpi differences

reflects the prices of all goods and services bought by consumers, basket of goods and services is fixed

producer price index

PPI. a measure of the cost of a basket of goods and services sold by domestic firms

consumer price index

cpi. monitors changes in price of living from year to year. Monitored by BLS

fractional reserve banking

banks loan out money, hold back some of the reserves in case someone wants their money back.

reserve ratio

fraction of money held back as reserves vs portion loaned out

legal reserve requirement

minimum of reserves set by the fed required by law

excessive reserves

reserves above the legal minimum, used to make loans which create money.

multiple deposit expansion process

money grows as it’s loaned out to different hands more and more.

money multiplier

=1/reserve ratio. so, as reserve ratio goes up, money multiplier goes down.

fdic

federal deposit insurance corporation, insures up to $250,000 in deposits

open-market operations, discount rate, reserve requirements

what the fed can do

open market operations

purchase and sale of us government binds

federal funds rate

rate at which banks lend each other money. Key rate the fed targets

discount rate

interest rate for loans to member banks from fed. higher discount=reduced money supply.

fed challenges

only indirectly control money supply, don’t control reserves held or loanes taken

fisher effect

real interest rate is the nominal interest rate less the inflation rate

long-run result

higher inflatin rate leads to higher nominal interest rate