Economics Exam 2 – Terms and Definitions

Economics Exam 2 – Terms and Definitions -...

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Economics Exam 2 – Terms and Definitions “The Fed” responsible for inflation controls money supply by buying and selling securities can shut off money supply and control inflation but cannot expand the money supply The Fed “buys” or holds certain percentage of the US debt. (around 25%) Because they hold all of this money they never have to go to Congress for money Expansion happens during good times Contraction occurs when Fed sells securities (expansions with a (-) sign) When contraction occurs, Fed sells securities at whatever price is necessary to get a bank to buy. Fed is not in the business of making money Expansion depends on banks wanting to make loans, Contraction occurs when Fed has decreased the price of securities so significantly that the banks cannot afford to not buy them. Quantity Theory of Money – PY (nominal output of money into economy) = VM (How many times money goes around in circular flow diagram) Cannot predict small change in money supply at any one point. Can predict small change in over a long period of time.
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