ECON

velocity formula

nominal gpd over money supply
Money three functions

medium of exchange, unit of account, store of value
fiat money

the legal tender that is not backed by gold
velocity is

the circulation rate of money
The quantity theory of money

velocity is constant in the long run
inflation rate equation

the growth rate of money supply - growth rate of real gdp
the equation for the real interest rate (fisher equation)

”real interest rate = nominal interest rate - rate of inflation”
winners of unexpected inflation

”homeowner paying a mortgage with fixed nominal interest, firms paying wages that are not indexed for inflation”
losers of unexpected inflation

”banks getting payments on fixed interest rate mortgages, a worker receiving a wage that is not indexed for inflation, retirees that pensions are not indexed for inflation”
Ways inflation can stimulate an economy

”fall in real wages allows companies to hire more workers, increase in price outputs causes labor demand to shift right”
Inflation social cost

inflation tax, raising logistical costs, distorting relative prices
inflation tax

Decline in value of cash holdings due to inflation
Raising logistical cost

frequent price changes
what activities do the federal reserve engage in

”regulation, interbank transfers, manipulating the number of bank reserves”
What does the central bank do

”monitors financial institutions, controls certain interest rates, indirectly controls the money supply”
What is the dual mandate of the federal reserve

low inflation and max employment
Why does the fed manipulate the quantity of bank reserves

”influence short-term interest rates, influence money supply and inflation, influence long-term interest rates”
bank reserves are

”combination of deposits that private banks hold at the central bank and cash in their vaults”
the federal fund market

The market where banks borrow and lend reserves to one another
How can the feds shift the demand of reserves

”changing reserve requirements and changing interest paid on reserves”
How does the fed shift the supply of reserves

buy or sell reserves on the markets
An increase in the supply of bank reserves does what to the federal fund rate

lowers FFD
The lower federal fund rate does what for the demand for loans

increase demand for loans
The increase in bank loans does what to the money supply and inflation

”increases the growth of money supply and inflation”
Increase supply of bank reserves does what to inflation

increases inflation
the fed decrease the supply of bank reserves to the federal fund rate

increases FFR
an increase in FFR does what to long-term interest rates

increase interest rates
lower demand for loans do what for the money supply and inflation

”reduce the growth of money supply and lower inflation”
A decrease in in the supply of federal reserves do what to inflation

lower inflation
What is co-movement

many variables affect growth and contraction in the government
Real business cycle theory

emphasizes changes in productivity and technology
Keynesian theory

focuses on business and consumer expectations of the future
Financial and monetary theory

looks at changes in prices and interest rates
Countercyclical policies

reduce the intensity of economic fluctuations
Expansionary policy

reduce impact of a recession
Contractionary policy

try to slow down the economy
IORB rates

interest on reserve balance
ON RRP rate

Overnight Reverse Repurchase Agreement Facility
what does expansionary policy do to short-term interest rates

lower short term interest rates
the equation for the Taylor rule

”FFR = long run FFR target + 1.5(inflation rate - inflation rate target) + 0.5( output gap in % points)”
output gap equation

gdp - trend gdp over trend gdp times 100
Expansionary fiscal policy uses

”government expenditure and lower taxes to increase the growth rate of the GDP”
contractionary fiscal policy uses

”expenditure and higher taxes to reduce the growth rate of the GDP”
Government expenditure multiplier equation

”government expenditure multiplier = changes in GDP / changes in government expenditure”
What is an absolute advantage

”a producer can produce more units per hour than other producers”
What is a competitive advantage

when a producer has a lower opportunity cost
Net exports is

exports minus imports
current account equation

”(Net exports) + (Net factor payments from foreigners) + (Net transfers from foreigners)”
net capital out flows is

savings minus investment
nominal currency exchange rate equation

”units of foreign currency over 1 unit of domestic currency”
when the nominal exchange rate rises the currency is

appreciating
When the nominal exchange rate is falling the currency is

depreciating
flexible (floating) exchange rate

not government intervention in foreign markets
fixed exchange rate

the government intervenes to keep a target rate
managed exchange rate

a system between fixed and flexible