Fiscal Policy
Who does fiscal policy?
Government
Who does monetary policy?
FED
What is the process of the government buying/selling bonds called?
Open Market Operations
Is money demand more correlated with M1 or M2?
M1 - Liquid assets like cash
If MPC = 0.8, MPS = ?
MPS = 0.2
MPC + MPS = ?
1
What is commodity money?
Items that have intrinsic value in addition to being money (Gold, silver, wheat)
When the discount rate increases, what is the effect on the money supply?
Decrease in MS
What causes a movement in money demand?
FED taking action to change Money Supply
Given: S = 1,500
What is I?
I = 1,500
S = I (Leakage/Injection Approach)
What affects economy more and why?: Taxes or Government Spending
Government Spending - Taxes hidden inside of consumption
What does legal tender mean?
Government accepts it for settling debts
What effect do decreasing interest rates have on the opportunity cost of holding money?
Opportunity Cost is low because you wouldn't make much more keeping money in the bank
What causes a shift in money demand?
- Y (Aggregate Output/Income)
- PL (Price Level)
Given: Y = 2,000, C = 500, I = 1,250
What is G?
What is the paradox of thrift?
Are savings accounts included in M1, M2, both, or neither?
M2
Explain the process of the ONRRP. Why is this beneficial for banks?
FED borrows money from banks overnight with treasury securities as collateral. The next day, banks get money back plus interest.
What are the 3 motives for holding money?
1. Transactions Motive – I want to hold money for everyday purchases of goods/services (groceries, gas, etc.)
2. Precautionary Motive – I want to hold money in case there is an emergency (medical bills, car repairs, laid off from job, etc.)
3. Speculative Motive – I want to hold money to take advantage of rate changes or asset prices
Given: 0.5(Yd) = 700, Y = 1,800
What is T?
T = 400
Yd = Y - T
0.5(1,800 - 400) = 700
If investment increases by 100 and government spending increases by 100, which one will have a larger impact on Y?
Same Impact
GM and IM are 1/mpsChange in Y = GM/IM x Change in G/I
If G/I is same and GM/IM same -> Change in Y is same
Which categories of money is the US Dollar (USD)?
Fiat Money, Legal Tender
Explain IORB and what impact increases/decreases have on money supply and interest rates.
Rate at which FED pays banks interest on reserves
-IORB increases -> money supply decreases -> rates increase
-IORB decreases -> money supply increases -> rates decrease
If the U.S. enters a recession, what will happen to money demand curve and what does this mean?
- Money demand curve shifting to left
- Money demand decreases -> Rates decrease -> Encourages spending
Given: Change in Output = 2,500, Change in Gov Spending = 100
What is MPS?
MPS = 0.04
Change in Output = Change in G x GM
2,500 = 100 x 25
GM = 1/mps
MPS = 0.04