Chapter 24
Economics 310 with Hogan at University of Michigan - Ann Arbor
About this deck
By: Jaime Miettinen
Textbook:
The Economics of Money, Banking and Financial Markets, 8th Edition / MyEconLab / eBook 1-Semester Student Access Kit
Created: 2009-04-20
Size: 18 flashcards
Views: 28
Textbook:
The Economics of Money, Banking and Financial Markets, 8th Edition / MyEconLab / eBook 1-Semester Student Access KitCreated: 2009-04-20
Size: 18 flashcards
Views: 28
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Hyperinflation
Extremely rapid inflations with inflation rates exceeding 50%/month.
German Hyperinflation episode
1921-1923
- Needed to make reparations and reconstruct economy post-WWI.
- Printed more currency to pay for expenditures - created rapid increase in MS and price level.
- Government expenditures inc. to pay striking workers.
- Inflation rate over 1mi.%.
- Supports Friendman.
"Inflation is always and everywhere a monetary phenomenon."
- Milton Friedman quote
- Whenever a country's inflation rate is extremely high for a sustained period of time, its rate of MS growth is also extremely high.
- Inflation isa monetary phenomenon.
- Upward movements in price level a monetary phen. ONLY if it's a sustained process.
A steady increase in MS affects on graph
- AD curve shifts right
- SRAS curve shifts left
- Continuous rise in price level - increase in inflation
- High money growth produces high inflation
Cost-Push Inflation
Occurs due to:
- Negative supply shocks.
- A push by workers for higher wages.
Demand-Pull Inflation
Occurs when:
- Policymakers pursue policies that shift AD curve to the right.
Relationship between high employment target rate and cost-push inflation
- Leftward shifts of SRAS cause government w/ high employment target to shift AD right - keeps unemployment and output at natural levels.
- Continuing rise in price level.
Accommodationg Policy
An activist polycy w/ a high employment target. Government has given in to demands of the workers for higher wages.
T/F:
Demand-pull inflation can eventually trigger cost-push inflation.
T: When a demand-pull inflation produces higher inflation rates, expected inflation eventually rises. This causes workers to demand higher wages so their real wages do not fall.
Government Budget Constraint equation
DEF = G - T = (change in)MB + (change in)B
- DEF: government budget deficit
- G: government spending
- T: tax revenue
- MB: monetary base
- B: government bonds held by public
Government Budget Constraint facts
If the DEF is financed by an increase in B, there is no effect on the MB. Hence no effect on the MS.
But, if the DEF is not financed by an increase in B, the MB and MS increase.
Ricardian Equivalence
Named by Barro of Harvard Univ. after the 19th c. British economist, Ricardo.
- When the government runs deficits and issues bonds, the public recognizes that it will be subject to higher taxes in the future to pay off bonds.
- Public saves more in anticipation of future taxes.
- Net result: D for bonds increases to match increased S.
- Bond price and interest rate unchanged - no need for Fed to buy bonds to keep interest rate from rising.
Data Lag
The time it takes for policymakers to obtain data that tell them what's happening in the economy (i.e. GDP data).
Recognition Lag
Time it takes for policymakers to be sure of what the data are signaling about the future course of the economy (i.e. Recession declared 6mo. after it's determined it started).
Legislative Lag
The time it takes to pass legislation to implement a particular policy. Does not exist for most monetary policy actions (i.e. OMOs) but is important for implimation of fiscal policy.
Implementation Lag
Time it takes for policymakers to change policy instruments once they have decided on the new policy. Unimportant for OMOs (immediate) but is important for fiscal policy.
Nonactivist View
- Discretionary policy is counterproductive.
- Wage and price adjustment more rapidly responds to expectations.
- Credibility of a nonaccommodationg (nonactivist) anti-inflation policy as crucial to its success.
Activist View
- Use of discretionary policy to eliminate excessive unemployment.
- Wage and price adjustment sluggish and unresponsive to expectations of policy.
About this deck
By: Jaime Miettinen
Textbook: The Economics of Money, Banking and Financial Markets, 8th Edition / MyEconLab / eBook 1-Semester Student Access Kit
Created: 2009-04-20
Size: 18 flashcards
Views: 28
Textbook:
The Economics of Money, Banking and Financial Markets, 8th Edition / MyEconLab / eBook 1-Semester Student Access KitCreated: 2009-04-20
Size: 18 flashcards
Views: 28
About StudyBlue
STUDYBLUE makes things that make you better at school.
Things like online flashcards with photos and audio.
Things like personalized quizzes and friendly reminders about when (and what) to study next.
Think of it as a digital backpack™: access to all of your study materials online and on your phone.
STUDYBLUE exists to make studying efficient and effective for every student, for free. Join us.
“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
Dennis
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