Monetary Theory and Policy (2nd unit for final exam)

Consumer Confidence Falls

• 2003

  • Dropped from 6.5% to 1.0%

    • Brought about by waning consumer confidence, weaker capital spending, and 9/11

  • First time ever it stayed at 1.0% for a year

• 2004-2006

  • 1.0% to 5.25%

  • Inflationary pressure

• 2006-2007

  • Stayed at 5.25% for more than a year

• December 2008

  • Between 0% and 0.25%

  • Remained at a record low for seven years

• Greater FED transparency as a Policy Tool

• 1995

  • Fed chairman was Alan Greenspan

  • FOMC started issuing a brief statement after each meeting

    • Target for the federal funds rate

• April 2011, Fed Chairman Ben Bernanke

  • Began holding press conferences after about half of the FOMC meetings

• This continued with Chairwoman Janet Yellen, 2014

Demand for Money

the relationship between the interest rate and how much money people choose to hold

Equation of Exchange

the quantity of money, M, multiplied by its velocity, V, equals nominal GDP, which is the product of the price level, P, and real GDP, Y or

• M x V = P x Y

Velocity of Money

the average number of times per year each dollar is used to purchase final goods and services. 8.5 is the average

Quantity Theory of Money

if the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP

Stress Test

bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy

Shadow Banking System

financial institutions, such as mortgage companies and brokerage firms, that do not rely on customer deposits to make loans

Quantitative Easing

fed purchases of long-term assets to stabilize financial markets, reduce long-term interest rates, and improve the investment environment

Hysteresis

The theory that the natural rate of unemployment depends in part on the recent history of unemployment; a long period of high unemployment can increase the natural rate of unemployment.

Faking It - APP Chapter 14

• The Supernote = Counterfeit $100 note

• Began circulating in 1990

• Extremely high quality

• Sequential numbers

• Polymer security thread

• Suspected origin: North Korea

• Other counterfeit money

• Using copy machines, printers, computers

• To help combat technological improvements in counterfeiting 

• Redesign every 7 to 15 years

• Additional colors

• 3-D security images, a security thread, and a bell that shifts inside a copper colored inkwell

• Most popular counterfeit

• Domestic: $20 note

• International: $100 note

• Colombia 

• World’s largest source of bogus American currency (because neighboring Ecuador uses U.S. dollars as its currency)

1890s

Rule of Law” index: lowest: Nigeria, highest: Switzerland.

Body Mass Index

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