Term
| Two general types of policies to address macro problems: |
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Definition
Fiscal Policy
Monetary Policy |
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Term
| Money Market in the Keynesian Transmission Mechanisms |
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Definition
| Routes traveled from money market to the goods and services markets (aggregate supply and aggregate demand) |
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Term
Money Market in the Keynesian Transmission Mechanisms
Demand for money (balances) |
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Definition
| Inverse relationship between demand for money and interest rates (i.e. the opportunity cost) |
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Term
Money Market in the Keynesian Transmission Mechanisms
Supply of money |
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Definition
| Vertical line determined by Federal Reserve |
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Term
Money Market in the Keynesian Transmission Mechanisms
Equilibrium in the money market |
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Definition
| Quantity demanded of money = quantity supplied |
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Term
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Definition
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Term
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Definition
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Term
| Keynesian Mechanism – Indirect |
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Definition
+ M excess supply
- Int. rate
+ I
AD shifts right; unemployment rate declines |
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Term
| Keynesian Mechanism may get blocked from impacting goods and services market if: |
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Definition
| Interest-insensitive investment market |
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Term
| Interest-insensitive investment market |
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Definition
| Liquidity Trap states that under certain circumstances money demand curve horizontal which means that increases in money supply will not lower interest rate |
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Term
| Bond Prices, Interest Rates and the Liquidity Trap |
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Definition
Market interest rate is inversely related to price of old bonds rates
Understand bond pricing!
Liquidity trap: bond prices so high (low interest rates) individuals feel that rates will have to come down so hold money and wait |
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Term
| Monetarist Transmission Mechanism: Direct |
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Definition
Increase in Money supply creates excess supply of M which is spent. Direct link.
Monetary Policy Recessionary / Inflationary Gaps
Increase Money Supply – shift AD curve to right
Inflationary Gap – reverse |
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Term
Monetary Policy and Activist – Non-Activist Debate
Activists Case |
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Definition
Economy does not equilibrate quick enough
Monetary Policy has worked
Flexible/ responsive |
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Term
Monetary Policy and Activist – Non-Activist Debate
Nonactivist Case (rules based monetary policy) |
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Definition
Nonactivist Case (rules based monetary policy)
Economy equilibrates quickly
Policies may not work
May be destabilizing |
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Term
Monetary Policy and Activist – Non-Activist Debate
Nonactivist monetary policy proposals: |
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Definition
Constant growth rate in M
Predetermined growth rates
Taylor Rule |
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Term
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Definition
| Fed Funds Target = 1.5 (inflation rate) + .5 (GDP gap) +1 |
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