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fiat money
- commodity money
- shells, cocoa, beads, rocks
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why do people hold money
precautionary, transactionary, speculative
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adam smith
- father of economics
- wrote wealth of nations
- free market
- invisible hand
- invented ad and how long run affected ad
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average propensity to consume APC
consumption/disposable income
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how does frictional reserve sysem create money
banks lend money from a single deposit
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money expansion multiplier
- calculates the maximum amount of money that an initial deposit can be expanded to within a given reserve ratio
- m=1/r
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3 functions of money
- medium of exchange
- store of value
- unit of account
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why is nominal interest rate (i) viewed as the "price of money"
opportunity cost of keeping mondy in your pocket
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quantity theory of money
- increasing the amount of money will lead to an equall percentage change in prices of products and services
- %^ms+%^v=%^p+%^Y
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what are the total reserves and how are they changed
- the sum of all deposits that a bank can take in
- changed by
- changing required reserve ratio
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liquidity
ease in which you can convert an asset into cash
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velocity
rate at which money is spent and respent in the market
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four characteristics of money
- durability
- portability
- divisibility
- indentifiable
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marginal propensity to comsume
- shows the likely hood of a ^ in c due to a ^ in Yd
- MPC=^C/^Yd
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say's law
supply creates its own demand
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john keyns
- The General theory
- fiscal policy
- SRAS
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Reasons for SRAS
- sticky prices
- sticky wages
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Shifts in SRAS
- changes in wages
- changes in prices of non labor inputs
- productivity (training, education)
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Y*
non inflationary full employment level of real GDP
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shifts in LRAS
- change in technology, T up lras right
- change in resources
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real balance effect
as prices fall, buyers "real" purchasing power goes up so they buy more stuff
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intterest rate effect
as prices fall, savings increase, money for loans increase, demand for loans increase, ppl buy more stuff
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international trade effect
as prices fall, U.S. exports more, ppl buy more U.S. stuff
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shifts in AD
- change in consumer spending: c up, ad up
- change in investing
- change in gov spending
- change in net exports
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required reserve ratio
the portion of deposits that banks must hold in reserve
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aggregate demand
the total demand for goods and services in the economy at a givin time and price level
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LRAS
total planned output when prices and wage rates can change
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SRAS
total planned output when prices can change but inputs stay the same
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fundamental psychological rule
0<MPC<1 some money will be spent, some will be saved
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