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AP Macroeconomics: MPS/MPC/Policies

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marginal propensity to consume
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with a given amount of money, what proportion will you consume? MPC=1-MPS
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marginal propensity to save
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with a given amount of money, what proportion will you save? MPS= 1-MPC MPS= 1/Spending multiplier
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Spending Multiplier
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1/MPS Change in Real GDP/ Change in spending
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Calculate change in Real GDP
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change in spending x spending multiplier change in taxes x tax multiplier
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Tax multiplier
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1- spending multiplier
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Change in Taxes
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Change in real GDP/ tax multiplier
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What is a balanced budget?
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When change in government spending and change in taxes are the same.
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Loanable funds market graph
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shows the amount of money available at different interest rates; real interest rates (y axis) and money (x axis), supply up and demand down borrowers want low interest rates and vice versa
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crowding out
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when government increases its borrowing in order to raise interest rates and push out private investors
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functions of money
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-medium of exchange -let’s us be able to speak relatively -as a store of value
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liquidity
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ability to transfer assets into cash
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M_1 money supply
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most liquid money we have– cash, checkable deposits
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M_2 money supply
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includes M_1; savings accounts, money market account, small time deposits
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functions of federal reserve bank
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print and destroy currency, investigate counterfeiters, process checks, create monetary policy, manipulate money supply
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money supply market
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interest rates on y axis money on x axis vertical money supply curve downward sloping demand or investment
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tools of federal government to manipulate money supply
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1. change discount rate 2. change required reserve ratio 3. buy and sell bonds
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prime rate
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rate at which consumers borrow from banks
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federal funds rate
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overnight rate that banks charge each other
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discount rate
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rate at which banks can borrow from federal reserve bank
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required reserve ratio
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how much of the money we can spend or use; ex: i put $1000 in the bank and R.R.R. is 20% – that means there’s $200 in my required reserves and $800 in my excess reserves (loanable funds) RRR x money multiplier= 1
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money creation
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excess reserves x money multiplier
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what are some reasons why the actual money created may be less than expected?
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1. borrowers hold on to some of the money as cash and don’t put it back into the bank 2. banks do not lend out all excess reserves
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money multiplier
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1/ required reserve ratio
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expansionary fiscal policy
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taxes decreases, government spending increases, better for recession
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contractionary fiscal policy
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taxes increase, government spending decrease, better for combatting inflation
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expansionary monetary policy
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government buys bonds, decrease discount rate, and decrease required reserve ratio; better for combatting recession
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contractionary monetary policy
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government sells bonds, increase discount rate, increase required reserve ratio; better for combatting inflation
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automatic stabilizer
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an action that does not require a new law and produces and instant economic effect; ex: progressive income tax