ECO 3223 SP2012 EVANS STUDY GUIDE FOR FINAL EXAM Note This is intended to direct you to the relevant topics that will be covered on the exam Questions will be worded differently so don t MEMORIZE this content use it to help you understand the concepts KNOW ALL OF THE KEY TERMS FROM EACH CHAPTER CHAPTER 3 WHAT IS MONEY Key terms Commodity money money made up of precious metals or another valuable commodity Currency Paper money such as dollar bills and coins e cash electronic money that is used on he Internet to purchase goods or services Electronic money e money money that exists only in electronic form and substitutes for cash as well Fiat money paper currency decreed by a government as legal tender but not convertible into coins or precious metal Hyperinflation An extreme inflation in which the inflation rate exceeds 50 per month Income The flow of earnings Liquidity the relative ease and speed with which an asset can be converted into cash M1 a measure of money that includes currency travelers checks and checkable deposits M2 A measure of money that adds to M1 money market deposit accounts money market mutual fund shares small denomination time deposits savings deposits overnight repurchase agreements and overnight Eurodollar Medium of exchange Anything that is used to pay for goods and services Monetary aggregates the measures of the money supply used by the Federal Reserve System M1 and M2 Payments system the method of conducting transactions in the economy Smart card A stored value card that contains a computer chip that lets it be loaded with digital cash from the owners bank account whenever needed Store of value A repository of purchasing power over time Unit of account Anything used to measure value in an economy Wealth All resources owned by an individual including all assets 1 We discussed at length the evolution of money over time from commodity money to currency backed by gold to fiat money What is fiat money Fiat money is paper currency decreed by a government as legal tender but not convertible into coins or precious metal pg 57 What are the components of M1 and M2 What two factors make it so difficult for the central bank to know the true money supply from month to month 2 M1 is composed of currency in circulation travelers checks demand deposits and other checkable deposits M2 is composed of M1 plus small denomination time deposits savings deposits and money market deposit accounts and money market mutual fund shares Two factors are that small depository institutions need to report the amounts of their deposits only infrequently the Fed has to estimate these amounts until future figures arrive at a future date Second the adjustment of the data for seasonal variation is revised substantially as more data become available Pg 60 63 CHAPTER 22 AGGREGATE DEMAND and SUPPLY ANALYSIS Aggregate demand The total quantity of output demanded in the economy at different price levels Aggregate demand curve A relationship between the price level and the quantity of aggregate demand that shows the quantity of aggregate output demanded for each level of aggregate output Aggregate supply The quantity of aggregate output supplied by the economy at different price levels Aggregate supply curve The relationship between the quantity of output supplied and the price level Animal spirits Waves of optimism and pessimism that affect consumers and businesses willingness to spend Consumer expenditure The total demand for spending on consumer goods and services 1 Demand shocks Shocks that can shift the aggregate demand curve including changes in the money supply changes in government expenditure and taxes changes in net exports and changes in consumer and business spending Government spending Spending by all levels of government on goods and services Hysteresis A departure from full employment levels as a result of past high unemployment Keynesians A follower of John Maynard Keynes who believes that movements in the price level and aggregate output are driven by changes not only in the money supply but also in government spending and fiscal policy and who does not regard the economy as inherently stable Monetarists A follower of Milton Friedman who sees changes in the money supply as the primary source of movements in the price level and aggregate output and who views the economy as inherently stable Natural rate of output The level of aggregate output produced at the natural rate of unemployment at which the demand for labor equals the supply of labor Natural rate of unemployment The rate of unemployment consistent with full employment at which the demand for labor equals the supply of labor Net exports Net foreign spending on domestic goods and services equals the supply of labor Planned investment spending Total planned spending by businesses on new physical capital e g machines computers apartment buildings plus planned spending on new homes Real business cycle theory A theory that vies real shocks to tastes and technology as the major driving force behind short run business cycle fluctuations Self correcting mechanism A characteristic of the economy that causes output to return eventually to the natural rate level regardless of where it is initially Supply shocks Any change in technology or the supply of raw materials that can shift the aggregate supply curve 1 The AD AS SRAS Model You need to know the following a AD Curve What relationship does it express What are its components What shifts the AD curve A relationship between the price level and the quantity of aggregate demand that shows the quantity of aggregate output b demanded for each level of aggregate output It is shifted by Money supply government spending taxes net exports consumer optimism and business optimism pg 566 569 SRAS Curve What relationship does it express What shifts the SRAS curve Generally upward sloping it is The relationship between the quantity of output supplied and the price level Tightness of the labor market expectations of inflation wage push and changes in the production costs that are unrelated to wages such as energy costs Pg 571 The amount of aggregate output supplied at any given price level goes to the natural rate level of output in the long run so that that the long run aggregate supply curve is a vertical line Anything that can improve GDP in the economy can ultimately shift the LRAS these could be changes in technology or increase in education which would allow for more efficient production