Macroeconomics Review Flashcards

Flashcards to help review key concepts in macroeconomics.

What is the Pigou effect?

The Pigou effect describes how changes in the price level impact wealth and aggregate demand. Inflation decreases wealth and aggregate demand, while deflation increases wealth and aggregate demand.

What is a demand-induced recession?

A demand-induced recession occurs when aggregate demand falls, leading to decreases in output, employment, and prices.

What are animal spirits of capitalists?

Animal spirits refer to the degree of optimism and confidence the business community has in their long-run profitability. High confidence leads to investment booms, while low confidence leads to investment slumps.

What is overheating in economics?

Overheating occurs when the actual output of the economy exceeds the potential output, causing shortages of labor, capital, and materials, which leads to inflation.

What is stagflation?

Stagflation is an economic condition characterized by both declining output and employment along with increasing price inflation.

What is an adverse supply shock?

An adverse supply shock is when the aggregate supply curve shifts to the left, decreasing output and employment while increasing price inflation.

What is commodity money?

Commodity money is money that has value both as a medium of exchange and as a commodity in itself, such as gold or silver.

What are M1 and M2?

M1 is a narrow measure of the money supply, including currency and checkable bank deposits. M2 is a broader measure that includes M1 plus near money, such as liquid savings accounts.

What is the main function of 'medium of exchange'?

The basic function of money, where money serves to facilitate transactions by acting as an intermediary in trade.

What is the 'store of value' function of money?

Money serves as a way of transporting purchasing power over time and space, maintaining its value for short periods and within the same economic area.

What is the 'unit of account' function of money?

Money serves to denominate prices and write contracts for trades.

What are required reserves and excess reserves?

Required reserves are the percentage of deposits a bank must hold in reserve. Excess reserves are the remaining amount that the bank can use for lending.

What is a liquidity problem in banking?

A liquidity problem occurs when a bank cannot meet its obligations because its liquid assets are insufficient to cover withdrawals.

What is an insolvency problem in banking?

An insolvency problem occurs when a bank's losses exceed its capital, meaning it has more liabilities than assets.

What is a lender of last resort?

A lender of last resort is when a central bank provides emergency loans to a failing financial institution to prevent a panic.

What is the Fed’s Dual Mandate?

The Fed’s Dual Mandate is from the congress, it consists of two elements which are price stability and high employment.

What are open market operations?

Open market operations are the Federal Reserve's buying and selling of government bonds to influence the money supply and credit conditions.

What are open market purchase and open market sale?

Open market purchase is when the fed purchase bonds to exapnd the money and credit supply. Otherwise open market sale, is when the fed sell bond in order to shrink the money and credit supply.

Federal Open Market Committee

The committee is made up of 7 board of government and the 12 presidents of the regional federal reserve banks, they meet every 6 weeks, for 2 days to discuss monetary policies and voting.

Federal funds rate.

Is the interest rate the fed reserve sets when it conducts monetary policies. When they engage in an open market purchase they increase the money and credit supply and the federal funds rate decrease. While for the sales in open market they raise the federal funds rates.

How economic define money?

The define money as that which performs the function of money, which include; medium of exchange; where money if the most convenient way of making transaction, convinence or Value: transport purchasing power over time and apce Unit of account: to denominate all prices in dollar or write a contracts

What are the principal assets and liabilities of banks?

Assets of reserves, which banks hold against deposit, bonds; an assets they can sell for cash, secondary assets and loans; high yield but risky assets. Liabilities: Deposit; cheap sources of fund they can use to make loans, Borrowed Funds: get from creditors which are more expensive but more stable and elastic and Capital of bank: owners own contribution to the bank usually 7% of the total

What is the Fed’s Dual Mandate?

Dual mandate is the federals two goals given by the congress. Goal one is to obtain price stability. Goal 2 is to have high employment.