# Shared Flashcard Set

## Details

Macro 102 USF Muzzi Quiz 3
Macro 102 USF Muzzi Quiz 3
164
Economics
04/21/2013

Term
 What is "fiscal policy"? (4/2)
Definition
 Actions or programs taken by Congress and POTUS in order to have an effect on macroeconomics (production, prices, unemployment.)
Term
 Who conducts Fiscal Policy? (4/2)
Definition
 President & Congress (in U.S.)
Term
 What are 3 tools that affect fiscal policy? (4/2)
Definition
 Taxes, Government Purchases, Transfer Payments
Term
 What is the most effective fiscal policy tool? (4/2)
Definition
 No good answer, but can be divided between Demand-Siders and Supply-Siders
Term
 What do Demand-Siders believe is the most effective tool for fiscal policy? (4/2)
Definition
 Government Purchases (Increasing) because it goes straight into economyY= C+I+G+NXEx. G/200=Y/800
Term
 When do transfer payments register in GDP? (4/2)
Definition
 When they are spent.
Term
 What is the simple [spending] multiplier? (4/2)
Definition
 1/(1-mpc)
Term
 If the government gives me \$200 in transfer payments, MPC is 0.75, how much does Y change? (4/2)
Definition
 1/1-0.75 => 1/0.25 => 4TP/+200 => C/150 => Y/600Answer: +\$600
Term
 If the government increases taxes and the MPC is 0.75, how much does Y change? (4/2)
Definition
 1/1-0.75 => 1/0.25 => 4Tax Cut/ - \$200 => DI/ +\$200 => C +\$150 => Y/\$600Answer: Y increases by \$600 (Tax Cut = Increase in Disposable Income)
Term
 What is the main difference between Demand-Siders and Supply-Siders? (4/2)
Definition
 Demand-Siders are focused on spending. Way to grow econ is to get people, investors, foreigners, & gov't to spend more \$, thinking it will create jobs and those people will spend \$, which will create more jobs. So supply-siders are focused on output, incentivizing work, incentivizing investment, incentivize production.
Term
 From the government's point of view, which costs more to change the economy: Government Spending, Tax Cuts, or Transfer Payments? (4/2)
Definition
 Even if the government spends the same amount on each one, or loses the same amount through tax cuts he biggest impact comes from an increase in G (government purchases).
Term
 Which is the most effective for changing the economy? Transfer Payments or Tax Cuts? (4/2)
Definition
 They are the same.
Term
 Why don't Supply Siders think that spending will grow the economy? (4/2)
Definition
 Supply-siders thinks if it were as simple as spending money, then the gov't should employ everyone to dig holes, cover them back up, then spend our paychecks. Except, if we all do that, no one could buy anything like bread because everyone would be digging holes.
Term
 According to Supply Siders, what is the most effective fiscal policy tool? (4/2)
Definition
 Cutting taxes (4 ways) 1) Cut Income Taxes 2) Cut Taxes on Savings Income 3) Cut Capital Gain Income Taxes 4) Cut Taxes on Corporations
Term
 According to Supply Siders, how does cutting income taxes grow the economy? (4/2)
Definition
 Income Taxes =>  L => Y If you take less of of someone's income, they will want to work more because they get to keep more of what they earn. L goes up, Y goes up.
Term
 According to Supply Siders, how does cutting taxes on income generated by savings grow the economy? (4/2)
Definition
 Income Taxes =>  K => Y If you cut taxes, people will save more and loan more, which allows businesses to have more loanable funds. They can use that money to buy equipment in order to produce more. Loans increase Kapital = Increases output, which makes the AS curve shift to the right.
Term
 According to Supply Siders, how does cutting taxes on Capital Gain Income grow the economy? (4/2)
Definition
 Kapital Gain Income Taxes =>  K => YPeople pay taxes on profits from investments (Stocks, bonds, gold, reselling a house) If taxes are cut, we incentivize people to buy more stocks, bonds; save more. That increases the amount of loanable funds, which increases the amount of K (Capital) in the economy, which increases Y (Output)
Term
 According to Supply Siders, how does cutting Corporate taxes grow the economy? (4/2)
Definition
 Corporation Taxes => K (human & physical), and/or L, and/or Technology => Yif corporations have more \$, they can increase L, or K (human & physical), or Technology, which increases Y (Output).
Term
 What are criticisms of supply-side tax cut policies? (4/2)
Definition
 1) Cutting these taxes may create large budget deficit & debt. 2) Cutting taxes may increase income inequality. 3) Capital gains tax cuts impact AD more than AS because tax cuts make more disposable income, increasing Consumption. 4) Cutting income taxes may make people work less because they have more money and don't need to work as much. 5) Political/ Philosophical difference btw big or small government.
Term
 Multiplier including leakages. (4/2)
Definition
 Y = (1/1-b+bt+m) (a + I + G + X-M)
Term
 b is what?
Definition
 MPC (Marginal Propensity to Consume);equal to slope (4/2)
Term
 C = ?
Definition
 C=a+by (4/2)
Term
 what is bY?
Definition
 MPC * Output (need to verify) (4/2)
Term
 DI = ?
Definition
 DI = Y-Yt (4/2)
Term
 NX = ?
Definition
 NX = X - M - mY (4/2)
Term
 what is t?
Definition
 t = income tax rate (4/2)
Term
 what is m?
Definition
 m = MPM Marginal Propensity to import money spent on foreign goods (4/2)
Term
 what is I?
Definition
 I = autonomous investment
Term
 what is i?
Definition
 i = autonomous imports
Term
 Reduce this equation so that Y is alone on the left side:Y=a+b(Y-Yt)+I+G+X-i-m(Y-Yt)
Definition
 Y=a + b(Y-Yt)+I+G+X-m(Y-Yt) Y= a + bY –bYt + I + G + X – mY + mYt Y – bY + bYt + mY – mYt = a + I + G + X Y(1 – b + bt + m – mt) = a + I + G + X Y = ___1___ (a + I + G + X) (1-b+bt+m-mt)
Term
 Why is the multiplier from the second half of the semester so much lower than the multiplier form the first half?
Definition
 Because it includes leakages (4/4)
Term
 What are the 3 functions of money? (4/4)
Definition
 1) Medium of Exchange2) Unit of Accounts?3) Store of Value
Term
 How is money a medium of exchange? (4/4)
Definition
 It is the object(s) used to buy & sell other items i.e. goods/ services (textbook) For example, we can exchange something like us washing Muzzi's car for him teaching us. But if we don't have anything he wants (double coincidence of wants,) we need a medium of exchange (\$). (4/4)
Term
 What is a "double coincidence of wants"? (4/4)
Definition
 When we have something that another person wants and they have something we want. Eg. A farmer who grows corn wants peanuts and the farmer who grows peanuts wants corn. Without monetary system, each farmer needs to find someone who wants his crop. (textbook)
Term
 How is money a Unit of Account? (4/4)
Definition
 Standard unit for quoting prices (text). measure of value (4/4) When \$ becomes Med of Exchange, it becomes the Unit of Account (text) Eg We don't say that a car is worth 40,000 McNuggets
Term
 How is money a Store of Value? (4/4)
Definition
 "item used to store wealth from one point in time to another (text). e.g., we don't use bananas because they don't last e.g.. Zimbabwe's dollar failed so they asked to be paid in USD
Term
 What is Commodity money? (4/4)
Definition
 object in use as medium of exchange that also has substantial value in alternative (nonmonetary) uses cigarettes, cattle, etc (text) something that has intrinsic value ie.e gold (4/4)
Term
 What is Fiat money? (4/4)
Definition
 money that is decreed as such by the government. Little value as commodity money (text)
Term
 Fiat V. Commodity (4/4)
Definition
 Commodity money has intrinsic value i.e., gold. Fiat money maintains its value as medium of exchange because people have faith that the issuer will stand behind the paper & limit production
Term
 What are desirable characteristics of money? (4/9)
Definition
 1) durability 2) portablity 3) uniformity 4) fixability 5) no counterfeitability 6) divisibility
Term
 Why does money need to be uniform to be a good medium of exchange? (4/9)
Definition
 To be easy to recognize (text)
Term
 What is Gresham's Law? (4/9)
Definition
 You are hoarding and not using the nice crisp \$ bills. Commodity money more susceptible (i.e prettier shells) Wikipedia:"When government overvalues one type of money and undervalues another, undervalued money will leave country or disappear from circulation into hoards, while overvalued money will flood into circulation. Commonly stated as: Bad money drives out good".
Term
 Why does money need to be uniform? (4/9)
Definition
 If not uniform, it will lead to Gresham's Law.
Term
 Why does money need to be limitable? Fixable? Controllable? (4/9)
Definition
 fixed amount of money. meaning a fifty dollar bill always amounts to the same
Term
 Why does money need to be divisible? (4/9)
Definition
 It needs to be easy to divide. Eg. it would be difficult to chisel off a piece of gold. Or cut up a piece of a cow to buy 2 apples.
Term
 How does the government measure the supply/ amount of money in the economy? (4/9)
Definition
 M1 and M2. Not credit cards.
Term
 What is M1? (4/9)
Definition
 1) Currency & coins2) "checking deposits" aka demand deposits checking acounts3) Traveler's checks (~1% of M1)
Term
 What is M2? (4/9)
Definition
 1) M12) savings acounts3) money market rate accounts
Term
 How much of M2 is M1? (4/9)
Definition
 M2 is about 4 xs the amount of M1. M2 ~ \$8T and M1 is ~\$2T
Term
 Why aren't credit cards counted in the money supply? (4/9)
Definition
 It's not money that we have, it's money we have to pay back.
Term
 How are money market rate accounts different than checking accounts? (4/9)
Definition
 Money Market Rate Accounts pay interest. (different than checking accounts)
Term
 What comprises the majority of M2? (4/9)
Definition
 Savings Accounts and Money Market Rate Accounts
Term
 What are the origins of banking? (4/9)
Definition
 Gold was not portable/ easily divisible, so people deposited with goldsmiths for a receipt. Then, people asked for multiple receipts, which became paper notes. Goldsmiths => banks (each had different notes) Banks noticed peeps used receipts, rarely came back to exchange for gold, so banks could loan & make more \$. Stopped charging to hold & started paying interest.
Term
 How was gold a good form of money and how was it not? (4/9)
Definition
 Good: uniform and hard to counterfeitNot good: not portable, not easily divisible
Term
 How do banks make \$ - Part I? (4/9)
Definition
 They charge borrower's a high interest rate while paying depositors a low interest rate.
Term
 GIve an example of how a bank makes \$, part 1. (4/((
Definition
 \$100K deposits, 1% to depositors, loan \$80K at 5% is \$4K-\$1K= \$3K minus operating costs \$2K = \$1K profits
Term
 What is RRR? (4/9)
Definition
 RRR = Required Reserve Ratio?
Term
 What is RRR in the U.S.? (4/9)
Definition
 RRR in the U.S is 10%
Term
 How do banks make \$ - Part II? (4/9)
Definition
 [add chart w/ assets & liabilities] Banks loan out a % to another bank, then that bank loans, and so on.
Term
 What is the simple [money] multiplier? (4/9)
Definition
 (1/rrr)*∆ monetary base= ∆ Money Supply (M1)
Term
 What is ERR? (4/9)
Definition
 ERR = Excess Reserve Ratio; the amount in excess of RRR; typically not more than 20%
Term
 What is the Actual Money Multiplier? (4/9)
Definition
 (1/(rrr+err))* ∆ monetary base= ∆ change in money supply
Term
 If Assets = Liabilities, what is the net equity? (4/9)
Definition
 Net equity is zero.
Term
 What is the monetary base? (4/9)
Definition
 The monetary base is how much cash is in the financial system.
Term
 What is a Moral Hazard? (4/9 & 4/11)
Definition
 an incentive to behave badly (4/9) any situation that makes you behave badly (4/11)
Term
 How does the banking system create a moral hazard? (4/9)
Definition
 Banks borrow your \$, make a profit of loaning it out, and may or may not share. If they don't make a profit, they don;t lose because it's your money.
Term
 What is the difference between a bank run and a bank panic? (4/9)
Definition
 bank run = 1 bankbank panic = systemwide
Term
 Why did we create the FDIC? (4/9 & 4/11)
Definition
 created because of bank runs (4/9 & 4/11)
Term
 What is the current U.S. unemployment rate?
Definition
 March 2013 = 7.6%
Term
 What does FDIC stand for? (4/11)
Definition
 Federal Deposit Insurance Corporation
Term
 What is the problem with banks? (4/11)
Definition
 They are subject to bank runs
Term
 When was the Fed Reserve created?
Definition
 Legislation created 1913, enacted 1914
Term
 Why was FDIC created? (4/11)
Definition
 The govt' decided a rumor about bank would cause a bank run and the bank would go bankrupt
Term
 How much does the FDIC insure? (4/11)
Definition
 \$250K per bank account, per bank. Note: you could spread it out among banks, or put it under their name as long as the have a taxpayer ID #
Term
 How much did FDIC insurance go up in 2008? (4/11)
Definition
 \$100K => \$250K
Term
 How does the FDIC worsen the moral hazard of banks? (4/11)
Definition
 Formerly, people wanted to what their banks invested in; now they don't care; nor do banks and may make more investment risks. (seatbelt example)
Term
 What is the Federal Reserve bank? (4/11)
Definition
 Central bank of the U.S.; the big bank; the bank's bank
Term
 Is the Fed Reserve run by the government? (4/11)
Definition
 not exactly. It's quasi-governmental
Term
 How would FDIC pay what they have insured if the gov't has no \$? (4/11)
Definition
 print the money (like Zimbabwe)
Term
 What is the analogy for explaining the reasoning behind the FDIC? (4/11)
Definition
 house on fire, can't let it burn because there is a strong wind? no, you put out the fire and try to make rules about smoking cigarettes in bed.
Term
 are banks allowed to invest in stocks? (4/11)
Definition
 no, they are too risky
Term
 How many territories does the Fed Reserve have? (4/11)
Definition
 12 district banks in 12 territories (12 slices)
Term
 Who owns the Fed Reserve? (4/11)
Definition
 the banks that operate in that territory, but they don't get the profits (e.g. owning a house and not living in it nor collecting rent)
Term
 Who controls the Fed Reserve (4/11)
Definition
 Board of Governors
Term
 Who appoints the Fed Reserve Board of Governors and about how much are they paid? (4/11)
Definition
 The President of the U.S. ; ~\$250-350K
Term
 How many members does the Fed Board of Governors have? (4/11)
Definition
 7 members, overlapping 14-year terms (impartiality) Chair (currently Ben Bernanke), 4-year terms
Term
 How is each of the 12 Fed Reserve district's president appointed and how much are they paid? (4/11)
Definition
 Each of the 12 Fed Reserve district's president appointed by its member banks; ~ \$1M
Term
 Who gets Fed Reserve profits? (4/11)
Definition
 U.S Treasury gets Fed Reserve Bank profits
Term
 What are the Fed Reserve Bank's purposes? (4/11)
Definition
 1) uniform currency 2) regulatory 3) control money supply 4) lender of last resort 5) bank's bank 6) monetary policy
Term
 Explain the Fed's role in uniform currency. (4/11)
Definition
 got rid of all the different types of notes that were floating around; made a uniform currency
Term
 Explain how the Fed is a regulator? (4/11)
Definition
 to supervise the banks (that it owns) to make sure they are not investing riskily
Term
 What does it mean that the Fed is a lender of last resort? (4/11)
Definition
 if a bank can't get another bank to loan them any money (overnight lending,) they go to the Fed
Term
 What is overnight lending? (4/11?)
Definition
 banks get in trouble when they don't have enough cash (RRR); if customers withdraw a lot, and bank doesn't have enough cash (RRR), they have to get more cash before midnight from other banks or, as a last resort, Fed
Term
 How is the Fed "banks' bank?" (4/11)
Definition
 Banks store some of their money at the Fed
Term
 How does the Fed control the money supply? (4/11)
Definition
 They have the authority to tell The Mint to print money
Term
 Does the Fed actually print money? (4/11)
Definition
 No, they tell The Mint to print
Term
 What is the Fed's Dual Mandate from Congress? (4/11)
Definition
 Conduct monetary policy to provide 1) price stability 2) full employment
Term
 What are the Fed's 3 Tools for conducting monetary policy? (4/11)
Definition
 1) RRR 2) Lending money to banks 3) Open Market Operations (most important)
Term
 If the RRR decreases, what happens to the money supply and how? (4/11)
Definition
 it increases through the multiplier. eg if rrr goes from .1 (10) to .05 (20), the multiplier (when divided by 1) goes from 10 to 20
Term
 What is monetary policy? (4/11)
Definition
 Monetary Policy is when the Fed Reserve Bank has plan or program to affect the 3 variables in macroeconomy (production, prices, employment)
Term
 Who sets the RRR? (4/11)
Definition
 The Fed
Term
 How does the Fed conduct monetary policy by lending? (4/11)
Definition
 They can print money and let banks borrow it. Maybe they reduce the interest rate making people want to borrow from Fed, then borrow from other banks
Term
 Why are rrr & lending money the 2 least important of the 3 tools for the Fed to conduct monetary policy?
Definition
 1) rrr hasn't changed since 1993 because it's risky to do so 2) the only time they lend is when banks are in trouble (we'd prefer they borrow from other banks)
Term
 What are Open Market Operations? (4/11)
Definition
 The Fed either buys or sells bonds in the Bond Market.
Term
 From whom does the Fed buy bonds or to whom do they sell? (4/11)
Definition
 the banks
Term
 What is a bond? (4/11)
Definition
 a bond is a piece of paper. One buys a bond, and the gov't gives a piece of paper that promises to pay x interest on certain annual date and the principle on x year; whomever owns it receives the payments (so you can sell it)
Term
 If Fed wants to increase money supply in economy, what do they do? (4/11)
Definition
 Print money, go to open market and buy back bonds from banks. Fed gives cash to banks. Banks give bonds to the Fed, bonds go out of economy, now cash is in economy, banks loan out cash
Term
 How does Fed Control \$ supply in economy? (4/11)
Definition
Term
 If Fed wants to decrease money supply in economy, what do they do? (4/11)
Definition
 They sell bonds to banks, which takes cash out of the economy
Term
 Draw bond market showing what happens when Price of bonds go up (4/11)
Definition
Term
 Draw money market when bonds go up (4/11)
Definition
Term
 If Fed buys bonds, what happens to the Price of bonds? (4/11)
Definition
 It goes up
Term
 If the Price of bonds goes up, what happens to the Money Supply (MS)? (4/11)
Definition
 MS goes up (shifts right)
Term
 If MS goes up, then what happens to r (interest rates)? (4/11)
Definition
 r goes down
Term
 If r goes down, what happens to I (investment)? (4/11)
Definition
 AE goes up (AE demand curve shifts right)
Term
 Why are banks attracted to bonds? (4/16)
Definition
 Buying binds is attractive to banks because they receive interest payments and the bonds are pretty much guaranteed to be paid back
Term
 Why would you want to buy bonds when the price is low? (4/16)
Definition
 When bond is issued, the gov’t receives \$100K and gives note promising to pay back \$100K in 5 years and 5% on that every year from today. Owner of that paper receives \$5k each year and \$100K at end of 5 years. If I sell it to someone, does that change the ink the value? No; it’s still going to pay annual interest and \$100K when it matures. What bond is obligated to pay does not change, but the price varies with supply and demand. So wouldn’t you love to buy that bond at a low price?
Term
 What is the equation of the price of bonds? (4/16)
Definition
 P bond= Σ[Future Payments/(1+r)^n]P bond = summation of [Future Payments of Bonds over 1+r to how many times you get payments]Price of a bond (or any asset) is determined by how much that asset will pay you in the future divided by 1+r.
Term
 What is the relationship between the Price of bonds and r (interest rate)? (4/16)
Definition
 they are inversely related. If denominator grows, quotient shrinks; if denominator shrinks, quotient grows. eg 1/2 = 0.5; 1/4= 0.25
Term
 What is the FOMC? (4/16)
Definition
 Federal Open Reserve Market Committee
Term
 How many people are on the FOMC and who are they? (4/16)
Definition
 12 total. 7 BOG from Fed, President of NY Fed Reserve bank; 4 remaining rotate between other regions
Term
 Why is NY Fed pre always on FOMC? (4/16)
Definition
 east Coast bias, NYC is "financial capitol"
Term
 From Keynesian viewpoint, why would Fed buy bonds?
Definition
 If they buy bonds, it will increase the monetary base through expansionary monetary policy
Term
 What is Expansionary Monetary Policy and why is it Keynesian? (4/16)
Definition
 increasing money supply because production went up, so price goes up. Keynesian because it is focused on spending, shift right; reduced interest rates encourage Y (thru K and more) so econ expands
Term
 What is the Money Transmission Mechanism equation?
Definition
 Fed buys bonds=> MB => [goes through MM] MS => r =>  I => AE => AD ⇒shifts right (Keynesian)If Fed wants to step on gas, buys bonds. If Fed wants to slow down, it sells bonds.
Term
 What happens when Fed sells bonds (Contractionary Monetary Policy)? (4/16)
Definition
 Fed sells bonds=> MB => [goes through MM] MS => r =>  I => AE => AD ⇐shifts left If Y falls & general Prices fall (deflation) (Keynesian)
Term
 Why would Fed want to sell bonds? (4/16)
Definition
 To slow down the economy
Term
 What are 2 types of Hoarding that result from low interest rates? (4/16)
Definition
 1) Individual - People are hoarding when they don't put cash in bank because r is low, increasing multiplier 2) Banks hoard less ERR and loan more, increasing multiplier even more
Term
 Draw a money market graph w/ upward sloping supply curve. (4/16)
Definition
Term
 Draw a Money Supply Curve (4/16)
Definition
Term
 Why is the Money Demand Curve negatively sloped? (4/16)
Definition
 when the interest rate falls, people want to carry more money; the price you pay to hold \$
Term
 How and why is the Supply Demand Curve affected by r? (4/16)
Definition
 If you hold cash in your pocket, and r is low, you don't lose much by doing so. If r is high, you make more \$ by keeping cash in bank. So high r = high MS
Term
 Explain: when r is high, MS is high; when r is low, MS is low. (4/16)
Definition
 1) When r is low, people hoard (keep cash on person, not in bank). If high, we put more \$ in bank, which goes through multiplier. Therefore, MS is higher. 2) Also, banks will hoard less (less ERR), and loan more, increasing multiplier even more
Term
 Why is MS curve upward sloping? (4/16)
Definition
 Because there is less hoarding when r is high.
Term
 What makes MS shift right? (4/16)
Definition
 The Fed. through Expansionary Monetary Policy
Term
 What makes MS shift left? (4/16)
Definition
 The Fed through Contractionary Monetary Policy
Term
 What makes you carry more or less money besides interest rates? (4/16)
Definition
 Income & Price. If Income is higher, people carry more \$, there are more transactions, they want to carry more cash. eg parents carry more \$ because they make more \$. Price eg person from 1910 carried less because prices were less.
Term
 What causes MD to shift right? (4/16)
Definition
 An increase in Y (output, transactions in econ), MD will shift right
Term
 What causes a shift in MD? (4/16)
Definition
 Changes in Prices and Income
Term
 What cause a movement in MD? (4/16)
Definition
 Changes in r
Term
 What causes movement along money supply curve? (4/16)
Definition
 Changes in r
Term
 What causes shift in MS curve? (4/16)
Definition
 The Fed (but not just through printing \$ if it just sits there)
Term
 Would the Fed printing money cause a shift on the MS curve? (4/16)
Definition
 Not if it just sits there. But yes, if it sells bonds.
Term
 How does high r increase money supply? (4/16 & 4/18)
Definition
 If r is high, less hoarding, money in bank multiplies, increasing the \$ supply
Term
 What is the Monetarism theory? (4/18)
Definition
 Theory that change in MS has direct effect on GDP (not thru long Money Transmission Mechanism); aka increasing \$ increases GDP
Term
 What is the Monetarism Equation of Exchange? (4/18)
Definition
 M*V = P*YM=Money SupplyV=VelocityP= General Price LevelY = Real Output aka Real GDP aka Real Production of Goods & Services
Term
 What is another way of arranging M*V = P*Y? (4/18)
Definition
 V=P*Y/ M
Term
 What is P*Y in Monetarism Equation of Exchange (M*V = P*Y)? (4/18)
Definition
 P= General Price Level * Y = Real Output aka Real GDP aka Real Production of Goods & Services = Nominal GDP
Term
 What is V in Monetarism Equation of Exchange (M*V = P*Y)? (4/18)
Definition
 V = Velocity is the amt of times that \$ turns over in economy. Eg if only 1 person pays cab driver \$20 bill who spends that on breakfast, whose resto owner goes to a movie = \$60
Term
 Is Velocity constant or variable? (4/18)
Definition
 Velocity is constant. Also, moves at same pace as Real GDP
Term
 How long is Velocity typically measured? (4/18)
Definition
 Annually
Term
 How do monetarists move from equation into theory? (4/18)
Definition
 They found through stats (Friedman) that V and Y constant; moves at same pace as Real GDP
Term
 What was average annual growth rate of Real GDP since the 1950s? (4/18)
Definition
 ~3%/ year. ~1% from pop. growth; ~2% from tech growth
Term
 If you increase M in M*V = P*Y, what happens to P and what does that cause? (4/18)
Definition
 If M goes up, then P goes up (even though Y&V grow constant at their own pace) then you have inflation
Term
 What did Milton Friedman say about inflation? (4/18)
Definition
 "Inflation is always and everywhere a monetary phenomenon."
Term
 GIve the title of the book by Milton Friedman & Anna Schwartz and describe it. (4/18)
Definition
 "The History of Money" Went back as far as Roman Times and found only 1 reason for inflation: increase in MS causing increase in P. Concluded that Inflation is caused by increase in MS
Term
 Does printing \$ make production (Y) go up? (4/18)
Definition
 No, all it does is increase Price levels. Y is inceased by increase in K, L, etc.
Term
 Keynesians v Monetarists (4/18)
Definition
 Monetarists say increasing MS increases nom GDP, but has no effect on Y. Keynesians say yes, it does. You lower r, then I increases & that's real effect. Rebut: Mntrsts say it may look like GDP grows, really only M&P go up, but that's just inflation. (Always, everywhere mon phenom)
Term
 What is Self-Correction v Gov’t Action? (4/18)
Definition
 C: don’t do anything yet, might get worse, will self-correct. Eg, recession from cyc unemploy causes wages to go down or peeps not buying so prices go down, then demand goes back upK: gov’t should solve recession thru increase in TP, tax cuts, increase G
Term
 What is Tax Cuts v Gov’t Action? (4/18)
Definition
 C: Supply-siders: increase in G increases spending, but not Y, so cut taxes to increase YK: Demand-Siders: best way is to increase G, which causes people to spend more
Term
 What is Crowding Out v Crowding In? (4/18)
Definition
 C: increase G, increases AE (shifts up), AD shifts right, P & Y go up, which makes MD increase (right), which would make r go up & I go down. So gov’t spending crowding out private investment K: But K say not important, because Animal Spirits go up (optimism) because Y & P go up, which will make I go back up.
Term
 What is Quantity Theory v Monetary Transmission? (4/18)
Definition
 C: Monetarists Increases Money, increases inflation, Y stays same K: Fed buys bonds=> MB => [goes through MM] MS => r =>  I => AE => AD ⇒shifts right, so Y & P increase. Essentially, saying printing \$ makes Real Y go up (people produce more)
Term
 What is AS Vertical v AS Positive Slope? (4/18)
Definition
 C: Monetarists: AS curve is vertical; when AD shifts right, only Prices go up, then Costs of Production go up, then Profits (Y) are constant, so no incentive. K: AS curve has + slope; when AD shifts right, both Prices and Y go up. So print \$; so Prices go up, Cost of Production is constant = higher profits = increase Y, giving biz more incentive to produce
Term
 What is Rule V. Discretionary Policy? (4/18)
Definition
 C: Pick a rule and stick with it. i.e only give antibiotics if temp above 103K: Make decisions on facts from past: (I, G, etc), and adjust. Eg driving through rearview mirror. They do so because we don’t get GDP Q1 until a month later, then it gets adjusted again twice, final # 90 days
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