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Econmics
Macroeconomics
25
Economics
Undergraduate 1
04/27/2011

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Term
Money
Definition
a medium of exchange
Term
M1
Definition
elements that can be used as a medium of exchange
Term
M2
Definition
includes everything in M1 plus time deposits; must be converted into M1 to buy goods and services
Term
Why are credit card charges not considered part of the money supply?
Definition
they are essentially short term loans from financial services; they also have to be paid off with the money from M1 or M2
Term
What backs or gives value to the money supply today?
Definition
the only thing that backs the money supply is the belief that the U.S. dollar will remain constant
Term
5 functions of the Fed
Definition
clear and collect checks; supervise member banks; act as a fiscal agent for the U.S. government; supply the economy with paper money; control the money supply
Term
Why do banks and other financial institutions accept deposits?
Definition
allowed to make loans with the funds deposited
Term
Legal Reserve Requirement
Definition
the percentage of deposits that banks cannot loan out, but must be held in the form of required reserves
Term
money multiplier
Definition
the ratio of the change in the money supply that the banking system can create to the original amount of excess reserves available
Term
Difference between legal required and excess reserves
Definition
legally required reserves cannot be loaned by banks; excess reserves are above and beyond the amounts that are legally required
Term
Open Market Operations
Definition
involve the purchase or sale of government bonds by the Fed
Term
What monetary policy tools are available to the Fed to increase or decrease the money supply?
Definition
increase: lower legal reserve requirement, purchase government bonds, reduce discount rate; decrease: opposite
Term
chain of causation associated with Keynesian monetary policy
Definition
undertake actions to increase money supply
Term
Liquidity Trap
Definition
further increases in money supply would not cause the rate of interest to decline, which might not stimulate additional investment spending
Term
monetary policy working in the same direction
Definition
lower legal reserve requirement, lower the discount rate, or buy government bonds
Term
monetary and discretionary fiscal policies working in the same direction
Definition
increase government expenditures or reducing taxes
Term
How did the Classical economist use the quantity theory of money?
Definition
long run movements of the price level
Term
How do the modern Monetarists use the quantity theory of money?
Definition
money is held for the purpose of buying goods and services
Term
Velocity of the money supply
Definition
average number of times each dollar is spent to purchase a part of the economy's GDP in a given year
Term
Quantity theory of money written as demand schedule for the holding of money balances
Definition
MV=GDP
Term
What are the principle policies advocated by Monetarists today, and how do they differ from those advocated by Keynesian monetary economists?
Definition
Monetarist believe that the Fed should not engage in constantly monitoring and changing the money supply
Term
Phillips Curve
Definition
shows combinations of inflation rates and unemployment rates
Term
Phillips curve in long and short run
Definition
long run is vertical; short run is negatively sloped
Term
Natural rate of unemployment
Definition
the unemployment rate associated with the level of real GDP at which the vertical AS schedule is drawn
Term
Explain how changes in the money supply cause the rate of interest to change in Keynesian monetary theory
Definition
an increase in the money supply will cause a reduction in the rate of interest
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