01:220:103 Study Guide - Final Guide: Bank Reserves, Financial Intermediary, Deflation

• School: Rutgers University
• Department: Economic
• Course: 01:220:103
• Professor: Sheflin

Document Summary

In theory and under certain assumptions, competitive market system leads to efficient economic outcome. Government should allow market to function without interference, where possible. Measure of production of newly produced final goods and services, rather than expenditures on these. A price index an average" of prices in a group. Change in output resulting from change in government spending. Marginal propensity to consume shows the fraction of additional income that will be consumed. Md&ms = demand and supply of bank reserves determined by the fed. G ->d->y by multiplier and p; t ->(y- T)->c->d->y by multiplier, p; possibility of crowding out. Fed ms->i->i->d->y,p (equivalently: fed sets target for feds fund rate, buys or sells securities which changes bank reserves and moves the fed funds rate (and other short-term rates) to the target. Situation in which increases in money supply no longer lower interest rates, possibly because interest rates at the zero lower bound, hence can argue that monetary policy loses power.