ECON 330 Study Guide - Midterm Guide: Federal Reserve System, Deflation, Money Supply
Document Summary
Midterm 2 review: central banks and the federal reserve system. Most important goal (low inflation) --- minimizes uncertainty. Role of a nominal anchor: apply constraint to avoid time-inconsistency problem. * nominal variable (inflation rate, money supply) to tie down price level to achieve price stability. * time-inconsistency problem: short term monetary policy leading to poor long term outcomes. Shortrun expansionary policy not good in longrun --- inflation. High employment: keeps ppl out of misery and low idle workers/resources --- lowers gdp. * natural rate of unemployment: demand for labor = supply for labor. * supply-side economics = spur economic growth by providing tax incentives for businesses to invest in facilities and equipment and for taxpayers to save more. Stability of financial markets --- creation of fed reserve. Stability in foreign exchange markets: goal is stability. * dollar worth more = less ability to export. No long run trade off b/w inflation and employment.
