And a customers checking account to be a liability

This preview shows page 6 - 9 out of 9 pages.

and a customer’s checking account to be a liability Monetary policy refers to the actions the FED takes to manage the money supply and interest rates If the probability of losing your job remains low, a recession would be a good time to purchase a home because the FED usually lowers interest rates Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be lower and real GDP to be lower In response to the bank panics of the Great Depression, future bank panics are designed to be prevented by the FDIC The quantity theory of money predicts that in the long run, inflation results from money supply growing faster than real GDP When the economy enters recession, your employer is unlikely to reduce wages because it would reduce morale and productivity Monetary policy refers to the action the FED takes to manage the money supply and interest rates The major shortcomings of a barter economy are the requirement of a double coincidence of wants 6
Rising prices erode the value of money as a medium of exchange and as a store of value The level of aggregate supply in the long run is not affected by changes in price level The FED’s four monetary policy goals are: price stability, high employment, economic growth, stability of financial markets and institutions The major assets on a bank’s balance sheet are its reserves, loans, and holdings of securities When the price level in the US falls relative to other countries, imports will fall, exports and net exports rise If the velocity of money grows at 5%, the money supply grows at 10%, and real GDP grows at 4%, then the inflation rate will be 11% 29 Table. = the Fed should lower the target for the federal funds rate Money is defined as any asset people generally accept in exchange for goods and services An increase in interest rates decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports A decrease in investment causes the price level to decrease in the short run and decrease further in the long run. An open market purchase of Treasury securities by the FED would cause the equilibrium interest rate to decrease When housing prices fell, most banks and lenders tightened the requirement for borrowers making it harder for buyers to obtain mortgages The sale of Treasury securities by the Fed will decrease the quantity of reserves held by the banks Which describes the wealth effect? When the price level falls, the real value of household wealth rises Banks keep less than 100% of checking deposits as reserves because on a typical day withdrawals are about the same as deposits Suppose there has been an increase in investment. As a result, real GDP will increase in the short run, and decrease to its initial value in the long run 7
The most liquid measure of the money supply is M1 Slope =  -7/10    GDP deflator=  108.5   Nominal GDP=  $8,750   Opportunity cost of buying a cappuccino=  2.5 tea cakes   % change in sales=  42.9%    Haley's opportunity cost of making a bracelet =  1 1/3 necklaces  Serena's opportunity cost of making a necklace=  1/2 bracelet    Gross Domestic Product =  $1,200   25 silk leaves   Real avg. hourly earnings=  $8.28    Annual growth rate of real GDP per capita=  4.7%   Public saving=  -$1 trillion  Private saving=  $3 trillion     Unemployment rate=  5%   Years to double= 23.3 years to 21 years    Unplanned increase in inventories =  $2 million   Change in GDP=  $100 million    Labor force participation rate=  80%   CPI=  121   Growth rate in potential GDP=  10%   Actual growth rate in GDP=  7.3%   Inflation rate =  1.8%    Max. loan=  $8,000  Increase to=  $50,000   Inflation=  11%   8
9

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture