Study Econ Test Two Flash Cards

 
Pile Management Card
Econ Test Two

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Money Multiplier (checkable deposits) and how money is made
m=1/rr
Max amount of money made by a bank: (Amount deposited*(1-rr)*m
Game theory
Dominant strategy equalibrium
Nash equalibrium (coordination games)
DSE: There is a better choice for a decision maker regardless of what the other chooses.
Nash: Choosing choice based on which is most beneficial overall to both chooser and other chooser.
Reserve Requirements(rr)
% of money from a deposit that a bank is required to keep in it's vault.
Total Money Demand
Transaction demand+Asset Demand graphs.
Asset Demand
Amt. of money demanded to hold as storage of wealth. Inversely proportional to nominal interest rate.
Transaction Demand
Amt. of money demanded for transactions. Not affected by nominal int rate.
Liquidity
The ease with which something can be used to buy another thing.
M3
= M2 + large time shares/less liquid assets
M2
= M1 + savings accounts, MMDAs, small time deposits, MMMF.
Used in calc. money demand curve
M1
= currency + checkable deposits
Full-Employment Deficit/Surplus
=Actual Def/Surp -- Cyclical Def/Surp
Balanced-budget multiplier
When government spending and taxes increase or decrease by an equal amount, GDP increases or decreases by that same amount.
Amount that a given change in taxes/spending will change GDP=
=given change X MPS X M

B/c part of initial money is absorbed by saving immediately and is never used in consumption.
Multiplier
M=1/MPS
or 1/(1-MPC)

Occurs because money is used more than once in consumption.
Investment Schedule
Amount of investment at different levels of GDP. This is a horizantal line detirmined by the amount investment given by the invest demand curve.
Investment Demand Curve
In terms of int rate or rate of return (same graph effect) and amount of cumulative investment
Real interest rate
nominal int rate--inflation premium
profits=
=revenue--cost of production--cost of investment
Expected rate of return=
=profits/cost of investment
Marginal-benefit-marginal-cost analysis
The way bizs make decisions. As long as expected rate of return (marginal benefit)>real interest rate for borrowing $ (marginal cost), biz will make investment. See investment demand curve.
Progressivity of Taxes
Progressive
Proportional
Regressive Taxes
Progressivity: Amount of built in stability in a system.
Progressive -- Taxes increase as GDP inc.
Proportional -- Taxes same as GDP inc.
Regressive -- Taxes decrease as GDP inc.
Detirminants of Consumption and Saving
Wealth
Expectations of Price or Income
Taxation
Household Debt
*Consumption and Savings are inversly related
Average Propensity to Save
APS=S/DI
or 1-APC
Average Propensity to Consume
APC=C/Disposable Income(DI)
or 1-APS
Marginal Propensity to Save
MPS=Change in S/Change in DI
or 1-MPC
Marginal Propensity to Consume
MPC=Change in C/Change in DI
or 1-MPS
Long Run Aggregate Supply Curve
Analogous to Production Possibilities Frontier
Vertical line b/c AS is not dependant on PL in the long run (wages are eventually adjusted and a constant number of people are employed in the long run.
Graph a growing economy
AS and AD to the right, stable PL
Decrease in AS causes...
cost-push inflation
The Crowding Out Effect
When the government borrows money from the public, the demand for money increases, which means the interest rate at which debts must be paid back with increases. This in turn discourages (crowds out) some investors, and Ig decreases, partly offsetting the expansionary fiscal policy.
Draw demand-pull inflation and the fiscal policy response
Inflationary graph.
FP:
Raise Taxes
Reduce Spending
Consquences:
Budget Surplus
-Sit on money (politically unpopular)
-Pay back debt to public
Problem:
Somewhat negates contractionary effect b/c it transfers money back into market.
Draw an economy in recession and the fiscal policy response.
Recessionary graph.
FP:
Lower Taxes
Increase Spending
Consequences:
Budget Deficit
-Funded by making more money
-Or selling bonds to public
Problem:
Crowding out effect may occur
Detirminants of Aggregate Supply
Changes in CELL prices and market power (monopolies etc)
Changes in productivity
Changes in legal environment (taxes/subsidies and regulation)
Detirminants of Aggregate Demand
AD=C+Ig+G+Xn
So:
Change in Consumer spending
Depends on:
-Consumer wealth
-Consumer expectations
-Household indebtedness
-Taxes
Change in Investment spending
Depends on:
-Real interest rate
-Expected returns
Change in Government spending
Change in Net Export spending
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