Formulas
Spending Multiplier
1/(1-MPC) = 1/MPS
Wealth Effect
As Aggregate price goes up purchasing power goes down
3 Goals of the Fiscal Policy
full employment, price stability, economic growth
Nominal vs Real
Nominal Intrest Rates are the rate on paper, Real Intrest Rates are adjusted for inflation
Liquidity
how easy it is to convert a financial asset into cash without causing a big loss in value
Tax Multiplier
-(MPC/1-MPC)= -(MPC/MPS)
Interest Rate Effect
As interest rates go up, investment and consumer spending go down
Debt vs Deficit
Debt is the original amount owed Deficit is the new amount being added
Monetary Policy
a set of actions to control a nation's money supply and achieve equilibrium
Loans vs Bonds
Both investments have a return, but bonds are with the government and loans are with the banks
MPC
Change in consumption/Change in disposable income
Exchange Rate Effect
as the price in the country goes up the quantity demand for common goods goes down
Federal Budget/ Taxes
Taxes are the government's revenue and the federal budget is created by congress and approved by the president
Intrest Rates
The real "price" of money, consumers are "paid" to save money or "pay" to borrow money
Loanable Funds Market
Equilibrium rate of interest is that which brings equality between the demand for and supply of loanable funds
MPS
Change in savings/Change in disposable income
Multiplier Effect
An increase in national income resulting from an increase in aggregate demand when there are changes in spending/ saving money multiplier on national income creates money out of thin air
Fiat Currency
Money that is not backed by Gold or metals but rather back by our government but if our government falls we also lose the money.
The FED Tools
Open Market Operations, Reserve Requirement, Discount Rate
Money Supply & Intrest Rates
Money supply acts independently of Interest rates
Bank Balance Sheets
Assets + Liabilities =
Fisher Effect
Real interest rates = Nominal - Inflation
4 Functions of Money
Medium of Exchange, Measure of Value, Standard, Store of Value
OMO, Reserve Requirement, Discount Rate
The discount rate is the minimum interest rate set by the FED, Reserve Requirement is the % of money banks need to keep on them, OMO is the buying and selling of government securities in the open market
Double Jeopardy
YOU WIN