Econ1020 Study Guide Midterm 3
Econ1020 Study Guide Midterm 3 Econ1020
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This 7 page Study Guide was uploaded by Cory Sarrett on Thursday April 14, 2016. The Study Guide belongs to Econ1020 at Tulane University taught by Toni Weiss in Spring 2016. Since its upload, it has received 95 views. For similar materials see Macroeconomics in Economcs at Tulane University.
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Date Created: 04/14/16
ECON1020 MIDTERM 3 Study Guide 1 What is the opportunity cost of The interest we are NOT earning! holding cash? Why do we hold on to money given 1. So we can spend, make daily we could earn interest on? transactions 2. “What ifs” what if something happens to credit card machines? What tradeoff do we discuss when Individual level: how much cash in we discuss the demand for money? hand we desire and in the bank Economy as a whole: how much bash and short-term government savings bonds we are NOT talking about a desire for more income or wealth What are the determinants of 1. Interest rates: the price of demand for money? holding money 2. Income: the greater the income, the more cash you need 3. Average price level: when prices go up, you need more cash on hand to pay for things *you want 2 and 3 constant How do interest rate changes affect Interest rate: movement along curve the money demand (M ) curve? Income: shift of entire curve Income changes? Price level Price level: shift of entire curve changes? When the government needs to Issue bonds! Once they issue them, borrow money, what do they do? they can be bought and sold “on the open market.” What is a Federal Open Market When the Fed buys or sells bonds on Operation? the open market REMEMBER: -the Fed is NOT the government! Bond purchases always go through bond dealers How do you increase the money Buying bonds! Cash from the supply? government gets out to the people. How do you decrease the money Selling bonds! Take the cash away supply? from the pockets of the public. What is the difference b/w Treasury Treasury: prints money, funded by Department and Federal Reserve? the government Fed: not funded by the government, orders money to replace cash to be ECON1020 MIDTERM 3 Study Guide 2 shredded Why would anyone want to buy a 1. More security in a bond than a bond? loan 2. Cash on hand goes down and bonds increase 3. Decrease the money supply Why would the Fed want to buy 1. Banks have more cash to banks’ bonds? distribute 2. Increase the money supply How does the Fed alter the money 1. Open market operations supply? (buy/sell short-term bonds) 2. Changing the required reserve ration (not really used though) 3. Changing the Discount Rate (the rate NOT determined by supply and demand but rather set by the Fed) 4. Interest earned on reserves What is the relationship between What happens to money is the money supply and bonds? opposite of what happens to bonds! P bonds↓, r↓↑ If the price of a bond is too high, people go elsewhere to earn money on interest (interest rates decrease when prices increase so people choose bonds) In regards to the interest rate, why They buy bonds to maintain the would the Fed want to buy bonds? interest rate/stabilize interest rate because it’s CONSTANTLY changing. What is the next best alternative for Short-term bonds! M1 money for the economy? What happens to the price of bonds M ↓↑, P bonds↓ when the demand for money An increase in demand increases the changes? Why does this occur? interest rate, and the increase in interest rate decreases the price in bonds. A decrease in demand decreases the interest rate, and the decrease in interest rate increases the price of bonds. What is monetary policy? The buying and selling of bonds in order to increase or decrease the money supply in order to decrease or increase the interest rate in order ECON1020 MIDTERM 3 Study Guide 3 to manipulate the economy. it is the bridge that has to be crossed b/w the money supply curve and the APE curve Who controls the supply and who Supply: Fed!! controls demand? Demand: Us!! When does monetary policy work? ONLY when people are sensitive to changes in the interest rate What needs to occur during a 1. Fed buys bonds s recession? 2. M ↑ ≣ supply of bonds ↓ 3. Interest rate ↓ ≣ Pbonds 4. C and I ↑ 5. APE ↑ 6. Inventory ↓ 7. GDP ≣ Y ↑ What needs to occur during 1. Fes sells bonds inflation? 2. M ↓ ≣ supply of bonds ↑ 3. Interest rate ↑ ≣ Pbonds 4. C and I ↓ 5. APE ↓ 6. Inventory ↑ 7. GDP ≣ Y ↓ What is the Bounceback Effect (aka The economy keeps “bouncing” and the Feedback Effect)? getting smaller and smaller with each “bounceback” until everything evens out/settles As one market is thrown out of equilibrium, in its attempt to get back to equilibrium, it throws the other market out of equilibrium. We end up somewhere in the middle of the initial demand/APE and the first “bounce” What is crowding out? When increases in public expenditures come at the expense of private expenditures. When will Fiscal Policy be most If C and I are insensitive to changes effective? in the interest rate, and there will be less crowding out. What is aggregate demand? Aggregate demand answers the question: “at what level of GDP will there be ECON1020 MIDTERM 3 Study Guide 4 equilibrium in the money market and APE at any given price level?” Equilibrium in the money market + APE curve = aggregate demand (AD) How do the money market (M / M ) d The equilibriums in the money curves come together with the APE market AND the APE curve at curve to create the AD curve? different price levels make up each point along the AD curve (the horizontal axis on both the APE and AD curves are the same) What does a change in price level do A change in price level is a to the AD curve? movement along the AD curve. What causes a rightward shift in the An increase in: G, I , AD curve? M (r↓M ↓C+I ↑), a, NX A decrease in: taxes What causes a leftward shift in the An increase in: taxes AD curve? A decrease in: G, I , M (r↑M ↑C+I ↓), a, NX What is aggregate supply? It answers the question: “what must the price level be to support different levels of GDP?” Why are the slopes different along the different the parts of the short- P run aggregate supply curve? 3 2 1 Real GDP 1. UNDERPRODUCING, so there ≣ Y is a plethora of resources and no need for price competition horizontal 2. A. Some resources are better than others, so as resources increase, we sacrifice quality (since we start picking the best ones) and we must pay more to supply. B. As more resources are demanded (greater ECON1020 MIDTERM 3 Study Guide 5 competition), the price increases. 3. OVERPRODUCING, so the capacity of resources has been hit vertical What do we know about aggregate 1. The economy produces at its supply in the long run? potential level of GDP 2. The economy produces at its natural level of unemployment 3. All markets clear the LAST to clear is the labor market (moves to equilibrium) What causes a movement along the A change in GDP! SRAS curve? What causes the SRAS to shift? Right: decrease in the price of capital NOT due to a change in GDP Left: increase in the price of capital NOT due to a change in GDP EX) natural disaster, war, oil price changes What happens when production We need a higher price level to increases? support the new increased production. When are we operating on the SRAS We are always operating on the curve? the AD curve? SRAS curve BUT we are only on our AD curve when we are in equilibrium in our money market and APE curves. What happens when the price level Consumers don’t buy and inventroy is too high? increases! When are we producing more than when APE is less than GDP expenditures? ECON1020 MIDTERM 3 Study Guide 6 When are we producing less than when APE is more than GDP expenditures? What do we call a shift up in the UP: decrease SRAS curve? DOWN: increase a shift down? What happens to the AD curve when The AD curve shifts right b/c people consumer confidence increases? are buying more. The price level will increase until a new equilibrium is reached. The price of which resource is held ***LABOR*** constant among any given SRAS -wages are stickiest of all prices curve? (take the longes to change) What happens when government COMPLETE crowding out! spending increases? 1. ↑G 2. APE ↑ 3. GDP ↑ 4. M ↑ 5. r↑ P 6. C and I ↓ (crowding out) 7. GDP↓ (bounceback) New GDP is higher than the original but less than full multiplier 8. AD↑ (shift right) 9. P↑ 10. GDP ↓ even more (exacerbating crowding out) Cut the short run: Cue the long run! 11. wages ↑ 12. SRAS ↑ shift up 13. GDP back to where we started!!! HELPFUL RESOURCES Khan Academy Aggregate Demand and Supply https://www.khanacademy.org/economics-finance- domain/macroeconomics/aggregate-supply-demand-topic/aggregate-supply- demand-tut/v/aggregate-demand Demand for Money ECON1020 MIDTERM 3 Study Guide 7 Aggregate Demand
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