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ECU ECON 2133 - Final Exam Study Guide

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Econ 2133 1st EditionExam # 4 Study GuideReview IV Not a lot is in the book – more economic history; 10 TF and 25 MC What Presidents appointed the different Fed Chairs since 1979?Jimmy Cater – VolkerRegan- Allan Greenspan (87-2006) Bush- BernankeObama- Janet Yellin (first female)The Equation of Exchange: A tautology that is always true. Money supply x velocity = prices x output All money spent = total spendingThe Quantity Theory of Money: Inflation buster that was pursued to disinflate the economy in the 1980s.Ordered in 1979, high inflation and a shifting Philips curve for wage price spiral Output goes up on average between 2.5-3 %/ year (we know it from historical data)Foundation for pursuit of money stock targetingIf we have a handle on what V is going to do we have direct linkage between inflation rate and money supplyInterest Rate Targeting in the 1970s – What did it do and why did it fail?Went on for 3 years (10/1979 to 10/1982)Control money growth because that was the number one objective to get us off wage price spiral and commence in 1980s disinflation of the economy 1979= 14% interest rate and 21% prime rate. People expecting 15% interest rate so they lock this into wage pay, hence why the spiral ensued Don’t let inflation rate get out of hand then have to pay the price of getting it back in control Haven’t been able to disinflate without economy smacking into a wall then rebuilding Money Stock targeting in the 1980s – When was it, what did it do, why was it pursued and why did it fail? Cannot be done if the velocity of money is unstable. 10/79- 10/82Targeted growth rate of M1 and M2 money supplies (objective of monetary policy to put clamps on money growth) Why? Inflation buster and Fed had to try something new. Velocity had become unstable so couldn’t keep on and went back to targeting interest rates to promote financial market stability - Why Fed Funds rate? Because they’re good at it. Chose to target it at a specific interest rate. - Fed Funds Market: Interbank reserve lending market (bank borrow from other bank for short term loans and depends on excess reserves in banking system meanwhile the Fed has complete control over excess reserves in system.- 3% interest rate with +/- Basis Points to promote banking and financial market system.. Cannot do it with an inflationary economy. Should have gotten rid of this alreadyMonetary policy from 11/1982 until 8/8/2007.First about achievement of price stability then once we achieved it we didn’t want to give it up so we didn’t - All central banks in world learned lesson that best way to promote higher employment and lower inflation was to provide price stability - Some countries even put this in writing, our Fed Reserve is worried currently about economic growth, financial market stability, distribution of income, women in workforce, aka everything - Certain purity to sticking to what you’re best at and doing it your best- Message banks got was to stick to promoting long term price stability. 60s & 70s showed that it’s the one thing they can deliver- Can’t please everybody and has given us economic stability The oil shocks of the 1970s - when and what were the key historical events surrounding them?Devastating and substantial Two oil shocks:1. 1973 Yom Kipper War; OPEC embargoed oil to the states and quadrupled overnight 2. 1979 World price of oil doubled; Irani Revolution ad began Iraq War with them. Iran become Islamic republic and major disruption- 1980 & 191-1982 recession related to that- Revolves around Middle Eastern conflict Interest rate targeting vs. money stock targeting – you can’t do both - you must choose one or the other.Some axioms of banking:1. Thou shall not loan required reserves 2. Cannot target both rates 1970s chose interest rate 1980s chose stock The Phillips curve and the wage-price spiral. What is the long-run Phillips curve?Relationship between inflation and unemployment and shows the tradeoff of them that the people in the 60s thought was there. Used 1960s to empirically confirm it - Unemployment rate = 6% (not bad now but back then it was high)- Thought there was a downward relationship called the Phillips curve, reduced unemployment rate to 3% but inflation rate at 6%; lower unemployment for higher inflationThis is NOT a stable relationship though. As soon as people build this inflation rate into their inflation rate expectations and start demanding it in interest rates and wages, the tradeoff switches and gets us right back to where we started Long Run Phillips Curve is vertical line or maybe upwardsCamel hump and the FOMC Camel Hump: Assets on balance sheet of the Fed, represents all the things they have purchased with counterpart on liabilities side called the red monster and both = the monetary base Fed Funds Market: What is the fed funds rate and how does the Fed raise and lower it?- Fed Funds Market: Interbank reserve lending market (bank borrow from other bank for short term loans and depends on excess reserves in banking system meanwhile the Fed has complete control over excess reserves in system.- 3% interest rate with +/- Basis Points to promote banking and financial market system.. Cannot do it with an inflationary economy. Should have gotten rid of this alreadyCurrent Fed policy from 8/9/2007.Rescue Financial Market and the Stabilize and rehabilitate it 2008: Fed and Treasury stopped markets from shatteringBanking system was bankrupt, very serious condition. Wasn’t every bank, BB&T and Wells Fargo were safe because they didn’t make foolish investments but as a whole the banking system was messed up. Far worse than illiquid, at least you still have money. Took Fed and Government to come in and bail it out to save it then stabilize it Day they decide to increase interest rates and we will have a new monetary policy regime FOMC Federal open Market Committee (policy making arm of fed reserve, they make the decision to increase or decrease interest rates, make it more contractionary or expansionary)- Meet every 6 weeks (meeting in June and September) - President of Fed Reserve in Indianapolis doesn’t think we should raise interest rates until Fall 2016 (same with Dr. Parker) - Complete control over bank reserves belongs to Fed and lowers and raises I via Open Market Operations1960s- Wage price spiral 1970s – Inflation 1980s – Disinflation 1990s – Price StabilityWhat is the difference between implicit and explicit inflation


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