GDP and Monetary Policy Flashcards

Flashcards on GDP and Monetary Policy

Short-Run Model of GDP

Short-run movements in GDP are determined predominantly by the level of expenditures.

Expenditure Model

Short-run fluctuations in GDP are rooted in movements in planned aggregate expenditures made by households, firms, government, and the foreign sector.

Macro Equilibrium

Equilibrium exists when the planned spending of all economic agents combined (households, firms, government, and foreigners) matches the actual output of the economy, RGDP.

Unplanned Investment (Iu)

Unplanned or unwanted changes in inventory which the firms must absorb.

Autonomous Consumption

Spending independent of income.

Induced Consumption

Spending prompted by having an extra dollar of income

Marginal Propensity to Save

The change in Savings divided by the change in Income.

Dissaving

Drawing funds from savings accounts to spend more than one makes.

Investment

Spending by firms; independent of current income, thus autonomous.

Fiscal Policy

Manipulation of the government budget to effect change in the economy.

Dual Mandate

The Fed's legal requirement to pursue both price stability and maximum employment.

Recessionary Gap

Condition where Ye< Y N

Inflationary Gap

Condition where Ye > Y N

Money

Anything that is generally accepted in payment for goods and services or in the repayment of debts

Fiat Money

Money whose intrinsic value is less than its value as money

M1

Currency outside the Fed banks, the U.S. Treasury, and vaults of depository institutions

M2

M1 + Small-denomination time deposits + Balances in retail money funds

Interest Rate

The cost of borrowing or the price paid for the rental of funds

Credit Risk

The probability that you won’t get all or part of your principal back

Monetary Policy

Manipulation of the money supply and interest rates by the Fed to effect change in the growth rate of RGDP or general price level of the economy

Required Reserves

Reserves that banks are required to keep with the Fed.

Required Reserve Ratio

The fraction of deposits banks are required to keep as reserves.

Excess Reserves

Reserves held by banks above the level of required reserves.

Discount Rate

The interest rate that the Fed charges banks when they borrow reserves from it.

Federal Funds Rate

The interest rate on the loans that commercial banks make to each other overnight.

Open Market Operations

The purchase and sale of U.S. government bonds by the Fed.

Interest Rate on Reserves (IOR)

The interest rate the Fed pays banks on their reserve deposits held at the Fed.

Money Multiplier

The percentage increase in the money supply for each percentage point reduction in the reserve requirement.