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Cards In This Set
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The problem that the people or firm who are most eager to make a transaction are the least desirable to parties on the other side of the transaction.
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Adverse selection
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The risk that one party to a transaction takes actions that harm another party.
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Moral hazard
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The problem that one side of an economic transaction knows more than the other.
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Assymmetric information
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What happens when the reserve ratio decreases?
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Money supply increases
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How is money created?
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The Fed prints money and then buys bonds from the treasury, thus putting
money into banks. Once they are in banks, the money increases as a result of
the money multiplier.
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What are the 4 ways to make money?
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Buy bonds, decrease reserve requirement, change the discount rate, and auction facility.
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Why do AE curves shift to the left?
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Negative expenditure shocks
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Why do AE curves shift to the right?
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Positive expenditure shocks
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Why do AE curves slope downward?
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The AE curve captures the negative effect of the real interest rate on aggregate expenditure, which determines the output in the short run.
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What can the Fed do to keep the economy from overheating?
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Keep rates low
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If the AE curve shifts to the left and the Fed wants to keep output at
potential, what happens to interest rates?
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They decrease
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Why is the Output Philips Curve upward sloping?
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Relationship between inflation and output; inflation equals expected inflation if
output is at potential, and higher output raises inflation.
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Why is the Unemployment Philips Curve downward sloping?
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Relationship between inflation and unemployment; inflation equals expected inflation
if unemployment is at the natural rate, and higher unemployment reduces
inflation.
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