Studied by 5 people
what shape is supply’s curve
upsloping
what shape is demand’s curve
downsloping
surplus
quantity supplied exceeds the quantity demanded; market forces will push the price back down toward equilibrium
shortage
quantity demanded exceeds the quantity supplied; market forces will push prices back up toward equilibrium`
money market demand graph
depicts the relationship between the supply of money and the demand for money
an economist who favors expanded government would recommend during a period of inflation or recession
increases in government spending during recession and tax increases during inflation
3 main tools of monetary policy
open market operations, discount rate, and reserve requirement
open market operations
fed buys and sells government bonds/securities to change the money supply and interest rate
what happens when the buying of bonds happens
increase money supply + reduce interest rates
what happens when the selling of bonds happens
reduce money supply + increase interest rate
how do we achieve full employment over time
aggregate demand = aggregate supply
market for loanable funds
determines the real interest rate and how much is loaned out; supply of loanable funds based on savings; demand for loanable funds based on borrowing
aggregate expenditures model
relates aggregate expenditures to real GDP; total/aggregate expenditures in the economy = amount of output produced
equilibrium GDP
when total expenditures = GDP
injections
investments, exports, government spending
leakages
savings, imports, and taxes
recessionary gap
amount that aggregate expenditures fall short of GDP at a full employment level of output
inflationary gap
amount that aggregate expenditures are above GDP at full employment
multiplier effect
government spending intended to stimulate the economy causes increases in private spending that additionally stimulates the economy
how can the fed reduce the federal funds rate
buy out government securities from a group of banks > those banks hold fewer securities and more cash reserves > they lend out them out in fed funds market to other banks
phillips curve
shows the inverse relationship between inflation and unemployment; AD shifts right > inflation inc. > unemployment falls
basic problem portrayed on phillips curve
in the long-run there is no tradeoff between inflation and unemployment
rightward shift of the nation’s LRAS is equivalent to
economic growth
appropriate fiscal policy for a recession
expansionary fiscal policy
an improvement in productivity would do what to aggregate supply
shift it rightward
multiplier
how much does an initial transaction spread throughout the economy; 1 / MPS
what will cause the demand for money to shift on money market demand graph
level of income and real GDP, price level, expectations, transfer costs, and consumer preferences
what will cause an outward shift in the PPC
when the economy grows and all other things remain constant; we can produce more
reserve ratio
commercial banks required reserves / commercial banks checkable deposits
excess reserves
total reserves - required reserves
total reserves
cash in vault + deposits at the fedba
relationship between bank reserves and reserve requirements
bank reserves are calculated by multiplying its total deposits by the reserve ratio
MPC
marginal propensity to consume; the amount that is consumed after a change in income
MPC formula
change in consumption / change in disposable income
how do we use money
medium of exchange, unit of account, and store of value
medium of exchange
buy/sell goods and services
unit of account
measures value
store of value
saving money for later use
how do you calculate the federal budget surplus
government’s total income - government’s total expendituressa
scarcity problem
every society must determine how it will allocate the scarce economic resources (land, labor, capital, and entrepreneurial ability)
M1
currency and checkable depositscu
currency
paper money and token money; coins issued by the us treasury and paper money is fed reserve notes
checkable deposits
checking accounts; commercial banks and thrift establishments
determinants that would cause an increase in aggregate supply
cheaper input prices, better technology, higher levels of productivity, less government regulations or lower taxes, government subsidies
determinants of aggregate demand
changes in consumption spending (C) , changes in investment spending (Ig) , government spending (G), and changes in net exports (Xn)
changes in consumption spending (C)
consumer wealth (more income = more spending, vice versa), consumer expectations, household indebtedness, and taxes
changes in investment spending (Ig)
interest rates and expected rates of return (business taxes, technology, stock of capital already on hand, expected future business conditions)
changes in net exports (Xn)
national income abroad and exchange rateswja
what is the relationship between LRAS and PPC
they are synonymous with one another
tax multiplier
government imposes a tax and MPC is x how much does it impact consumptionta
tax multiplier formula
-MPC / MPS
what is the impact interest rates have on net exports and domestic investment
real interest rate increases > expected return on domestic assets rises relative to foreign assets
foreign exchange market
the market where currencies are exchanged with one another
exchange rate
the amount/rate in which one currency is exchanged for another
appreciation
value of currency has gone up; high real interest rates, net exports decrease, tastes and preferences for goods increases, inflation decrease, and incomes decrease
depreciation
value of currency has gone down; low interest rates, net exports increase, tastes and preferences for goods decrease, inflation increases, and incomes increase
types of unemployments
frictional, structural, and cyclical
frictional unemployment
temporary, seasonal; recent graduates and people who quit their job to find something better
structural unemployment
skills no longer needed; people who are replaced by technology or new industries (creative destruction) these people need to retrain or move to find work
cyclical unemployment
due to recession; people who are laid off because the economy is weak (downturn in the business cycle)
sticky prices
tendency of prices to remain constant despite changes in supply and demand
sticky wages
when workers earnings don’t adjust quickly to changes in market conditions
GDP through the expenditures approach
C + Ig + G + Xn
what would cause an increase in AD
rise in C, Ig, G, Xn, increase in price and GDP as a result of the shift, and unemployment rate lower than the natural rate of unemploymentw
what would cause a decrease in AD
result of a decrease in C, Ig, Xn, G, decrease in price level and GDP as a result of the shift, and unemployment rate higher than the natural rate of unemployment
what would cause a decrease in AS
higher input prices, lower productivity levels, and more government regulations / raised taxes
what happens when the reserve ratio decreases
lower the amount of cash that banks have to hold in reserves > more loans to consumers and businesses > money supply increases = expands economy
what happens when the reserve ratio increases
increases the amount of money banks have to hold in reserves > less loans > decreases money supply > interest rates go up
nominal interest rate formula
real interest rate + inflation premium
stagflation
high inflation and economic stagnation, slow growth and a high unemployment rate accompanied by inflation
net export effect
where we take our money can determinate how far it may gohigh
what happens to our currency when we have higher interest rates
higher-valued currency
what happens to our currency when we have lower interest rates
lower-valued currency
the capital, current, and financial account must all equal to what
0
what goes into the capital account
foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve
what goes into the current account
goods, services, income, and current transfers
what is the reserve ratio domino effect
related goods
complementary and substitute goods'; a change in the demand for related goods causes the demand curve to shift
input prices
SRAS; when the price level changes and firms produce more in response to that > move along the SRAS curve
comparative advantage
what we have an advantage in and it does not cost us a lot to have an advantage in it
absolute advantage
who can produce the most the fastest regardless of cost
how to calculate opportunity cost
ratio approach, fraction approach
ratio approach to calculating comparative costs
gain : give-up; used when opportunity cost and output are the same unit of measurement
fraction approach to calculating comparative costs
opportunity cost : gain / give-up; used when output and opportunity costs are not measured in the same metric
SRAS shocks impacts
any change that makes production different at any possible price level will shift the SRAS curve; they aren’t anticipated
Note
Flashcard