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Classical Economics
belief that a capitalistic economy employs its resources fully
Keynesianism
belief that an economy doesn't always operate at full employment and needs governmental action
Monetarism
view that the main cause of changes in aggregate output and the price level are fluctuations in the money supply
equation of exchange
MV=PQ (M is the money supply, V is the velocity of money, P is the Price level, Q is the physical volume of final goods and services produced)
velocity of money
the number of times per year the average dollar in the money supply is spent for final goods and services
natural rate hypothesis
economy is stable in the long run at the natural rate of unemployment; Phillips curve is vertical; Recessions will be short lived because wages will go down to get economy back to potential output
demand-pull inflation
increase in aggregate demand causes increase in price level
cost-push inflation
reduction in aggregate supply (higher resource costs) increases price level
Supply-Side Economics
emphasis on costs and aggregate supply in explaining inflation, unemployment and economic growth
Determinants of Money Supply
controlled by the central bank (federal reserve in USA); changed by changes in reserve requirement, discount rate, and open market purchases and sales
Contractionary Monetary Policy
used to control inflation; increase reserve requirement, increase the discount rate; or make open market sales of bonds (indirectly raises the federal funds rate)
Expansionary Monetary Policy
used to fight a recession or reduce unemployment; decrease reserve requirement, decrease the discount rate; or make open market purchases of bonds (indirectly lowers the federal funds rate)
discount rate
the interest rate the Federal Reserve Bank charges commercial bank for loans
federal funds rate
the interest rate commercial banks charge other banks for loans
Determinants of Money Demand
changes in income, price level, and technology can change the curve to a new position
Investment Demand
negative relationship between quantity and interest rates; Optimism or pessimism(recession) can shift the curve
Money supply
M1: cash, demand deposits (checking accounts) and travelers checks
M2
includes M1 and less liquid forms of money such as savings accounts, money market accounts, and time deposits, but not stocks, bonds, or real estate assets
required reserves
A dollar amount the bank must keep.
excess reserves
Any commercial bank reserves held beyond the required amount. The difference between (total) reserves and required reserves. May be used for loans or to buy bonds.
long-run macroeconomic equilibrium
the point at which the short-run macroeconomic equilibrium is on the long-run aggregate supply curve; so short-run equilibrium aggregate output is equal to potential output.
self-correcting economy
shocks to aggregate demand affect aggregate output in the short run but not in the long run. SRAS will shift back to long-run equilibrium because wages will adjust.
sticky wages
are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
flexible wages
unemployed compete for jobs by offering their services at lower wages, as wage rates decline, more workers are hired
Stagflation
a period of slow economic growth and high unemployment while prices rise
crowding-out effect
rise in interest rates and decrease in investment spending due to increased money market borrowing by the government.
loanable funds market
the market where savers supply funds for loans to borrowers
economic growth
an increase in the amount of goods and services produced per person over a period of time. Caused by increases in human or physical capital, technology, or land resources.
expansionary fiscal policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
contractionary fiscal policy
used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.
T account
a tool for analyzing a business's financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right)
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
Natural Rate of Unemployment (NRU)
The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment (only frictional and structural) and the economy is achieving its potential output.
Asset
something you own.
Liability
something you owe to someone.
T accounts
Balance sheet: shows assets and liabilities of banks and other business.
Reserve requirement
the percent of a banks demand deposits it must keep as cash and not lend out: currently at 10%
Federal reserve
America´s central bank: controls money supply-monetary policy.
monetary policy
changes in OMO, discount rate and RR that change the money supply:: carried out by the federal reserve bank.
Open market operations
The buying and selling of securities by the federal reserve to control the money supply:used most often of the three tools.
Discount rate
the interest rate the FED charges banks when they take out a loan.
Rational expectations theory
business firms and households take action for their own personal interest to counteract monetary and fiscal policy.
New Classical economics
economy is stable at the full employment level of output in the long run because of price and wage flexibility, despite short run instability.
Wage-price Controls
a policy which legally fixes the maximum amounts wages and prices may be increased in any period
Laffer curve
relationship between tax rates and government tax revenues: illustrates maximum tax revenues.
Reaganomics
Policies of Reagan administration based on supply-side economics and intended to reduce inflation and the unemployment rate.
Autarky
A situation in which a country cannot trade with other countries.
Free trade( Open economy)
An economy unhindered by the government: no government involvement in regulating imports and exports.
Tariff
A tax levied on imports.
Import quota
A legal limit on the quantity of a good that can be imported.
Balance of payments
Summarizes a country ´s transactions with the rest of the world.
Trade balance
Difference between a country´s imports and exports of good: included in the balance of payments: X-M
Current account
records a nation´s exports and imports of good and services, net investment income and net transfers.
Financial account
Records the flows of money from the purchase and sale of real and financial assets(stocks, bonds, real estate) at home and abroad .
In a financial account
Debit=Negative-using foreign currency to make a transaction.
In a financial account credit
Positive- earns foreign currency.
foreign exchange market
Market in which currencies are exchanged.
Exchange rates
The price at which currencies are traded.
Appreciation
When a currency rises against another currency.
Depreciation
When a currency falls against another currency.
Equilibrium exchange rates
Matches the quantity of that currency supplied to the foreign exchange market to the quantity demanded.
Fixed exchange rates
Rates the government actively regulates( or ¨ fixes¨) :china
Floating exchange
Exchange rates that fluctuate freely in the open market; most of the world has currency markets that are base on supply and demand.
Foreign exchange reserves
reserves used to buy any surplus of a country´s currency.
Philips curve(Long run)
Shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust(vertical line)
Philips curve( short run)
Negative short run relationship between unemployment rate and the inflation rate-Downward sloping/ negative or inverse relationship.
Economic growth determinants
Technology and productivity, Human capital, Physical capital and public policy.
Technology
More technology shifts PPC to right.
Human capital
More human capital=More productivity
physical capital
Building, structures, factories and tool.
Public policy
values and institutions that influence markets, Coorporate tax incentive.
changes in supply for money market
Federal reserve banks.
Changes in demand for money market
price level, nation income or GDP.
changes in supply for loanable funds market
Changes in reserve requirements, people save more or less.
Changes in demand for loanable funds market
the rate of return on any investment spending will increase. The for loanable funds will increase, which leads to a higher real interest rate.
Investment demand market
for businesses to invest, interest has to be higher that investment loans. Its also downward sloping.
Expansionary monetary policy Options
you can do this by lowering interest rates, decreasing banks' reserve requirements, and buying government securities.
contractionary monetary policy
trying to decrease the rate of demand for goods and services but not stop the demand.
Contractionary monetary policy Options
you can do this by increasing interest rates, increasing banks' reserve requirement, and selling government securities.
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