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investment function shifts
- relationship neg interest rate to investment level
- ROI/GDP/captial utilization up
- investment demand curve shifts right
- down shifts left
- cost of captial up investment demand curve shifts left
- down shifts right
- up capital production possiblity curve up and outward long term shifts AS curve right
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purpose of federal reserve
- the centeral bank for the united states
- supplies currency, holds reserves, processes and routes checks, makes loans to banks, banker for US govt & sets key interest rates
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automatic stablizer (define)
govt program that tends to reduce fluctations in GDP automatically (progressive taxes & transfer payments)
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fiscal policy (define)
use of govt expenditures & taxes to influence level of economic activity
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discretionary fiscal policy (define)
changes in govt spending &/or taxation aimed at achieving a policy goal
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deposit multiplier
Md = change in D/change in R = 1/rrr
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demand for money (define)
relationship between quantity of money people want to hold & the factors that determine that quantity
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medium of exchange
anything that is widely accepted as means of payment
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GDP = C + I + G + X
- GDP = Y (real GDP or income)
- AE = C + I + G + X
- Y = AE
- C = 70%
- I = 10%
- G = 19%
- X = 1%
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consumption function shift
- change Yd (income) causes movement along curve
- shifts up real wealth and consumer confidence up
- shift down real wealth and consumer confidence down
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aggregate expenditure relationships
- AE < real GDP - real GDP shifts up
- AE = real GDP - real GDP no change
- AE > real GDP - real GDP shifts down
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45 degree reference line
line that shows all points at which AE = real GDP (equilibrium
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MPC
- marginal propensity to consume
- change in consumption/ change in disposable personal income
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MPS
- marginal propensity to save
- change in personal savings/change in disposable personal income
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autonomous consumption
- real GDP at any level at which AE curve interestects with vertical axis
- or
- min level of consumption that still exists even if consumer has 0 income
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unplanned inventory (application)
Real GDP minus AE
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APC
- average propensity to consume
- consumption/disposable income
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APS
- average propensity to save
- savings/disposable income
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MPC vs APC
- MPC is change in consumption
- APC is average consumption
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savings vs investment comparison
- investment is up
- consumption down
- savings up
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required reserves
% times checkable deposits
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excess reserves
total reserves minus required reserves
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M1
- narrowest of fed money supply
- currency in circulation, checkable deposits & travelers checks
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M2
- broader of Feds money supply
- all M1, small savings accounts, money market mutual funds, CDs
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federal actions
knowledge of tools
- expansionary action - buy bonds
- contractionary action - sell bonds
- lender of last resort for banks
- sets reserve requirements for banks
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reserve ratio
- % required reserves times deposits
- rrr = D/R
- rrr = required reserve ratio
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required reserves (define)
amount of bank assets required to be held as cash in vaults & deposits with fed reserve
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unit of account
consistent means of measuring the value of things
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store of value
item that holds value over time
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standard of deferred payment
means of settling a debt
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liquidity (define)
ease at which an asset can be converted into currency
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networth
assets minues liabilities
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fractional reserves
hold of reserves of less value than sum of outstanding claims on the reserves
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transaction demand for money
held to pay for goods & services that anticipate buying
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precautionary demand for money
money held for contingencies or emergencies
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speculative demand for money
held in response to concern that bond prices & other financial asset prices may change
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crowding out (define)
govt investments reducing private investments by borrowing money thru sell of bonds reducing available money for private investments
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budget surplus (define)
govt revenues exceed expenditures
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budget deficit (define)
govt expenditures exceed revenues
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balanced budget
budget surplus equals zero
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equation for money demanded
M = (1/v)PY
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equation of exchange
- MV - nominal GDP = PY
- M money supply
- V velocity
- P implicity price deflator (nominal GDP/real GDP)
- Y real GDP
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level change of equation of exchange
- when sum of % rates of change are approximately equal
- %changeM + %changeV = %changeP + %changeY
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spending multiplier
- change in equilibrium level of real GDP / change in autonomous AE
- 1/MPS
- change autonomous AE/1-MPC
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