ECO 320L Final: Definitions Exam 2025
Questions and Answers
Fisher Equation - ANSWER-nominal IR = real IR + expected inflation
Quantity Equation - ANSWER-Mv = PY
Money supply times the velocity of money equals the nominal GDP. In the long
run, g(m) = pi, which says that the growth rate of money equals inflation
Stagflation - ANSWER-Stagflation is the term to describe that the economic
situation in which the inflation is high while the economic growth is low (or total
output is produced under the natural level).
monetarism - ANSWER-Information and impact lags are too severe for monetary
policy to be a useful stabilization method. The optimal form of monetary policy is
to have a constant growth rate of the money supply
inverted yield curve - ANSWER-Demonstrates market expectations of future
short-term interest rates going down. Indicator of an economic downturn
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
, INTEREST RATE ON BONDS
liquidity trap - ANSWER-Situation where interest rate is zero and chance in money
supply has no real effect
Time Inconsistency - ANSWER-Central banks have an incentive to make promises
about future inflation which are no longer optimal when "the future" arrives,
giving them strong incentives to deviate from past promises.
Laffer Curve - ANSWER-Shows that tax revenues are increasing with tax rates for
low tax levels but decreasing with tax rates at high enough tax levels.
quantitative easing - ANSWER-Purchase of long-term bonds or mortgage
securities by the central bank designed to directly affect the long-term interest rate
automatic stabilizers - ANSWER-Fiscal policy tools which automatically respond
to economic conditions
information lag - ANSWER-Time it takes for policy-makers to acquire information
about the current state of the economy
monetary neutrality - ANSWER-Notion that changes in the money supply have no
effect on real variables, but only affect nominal variables (ex: prices and wages).
Model says this should hold in the long run but not in the short run
taylor rule - ANSWER-Description of how monetary policy-makers change
interest rates in response to inflation and output changes
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
Questions and Answers
Fisher Equation - ANSWER-nominal IR = real IR + expected inflation
Quantity Equation - ANSWER-Mv = PY
Money supply times the velocity of money equals the nominal GDP. In the long
run, g(m) = pi, which says that the growth rate of money equals inflation
Stagflation - ANSWER-Stagflation is the term to describe that the economic
situation in which the inflation is high while the economic growth is low (or total
output is produced under the natural level).
monetarism - ANSWER-Information and impact lags are too severe for monetary
policy to be a useful stabilization method. The optimal form of monetary policy is
to have a constant growth rate of the money supply
inverted yield curve - ANSWER-Demonstrates market expectations of future
short-term interest rates going down. Indicator of an economic downturn
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
, INTEREST RATE ON BONDS
liquidity trap - ANSWER-Situation where interest rate is zero and chance in money
supply has no real effect
Time Inconsistency - ANSWER-Central banks have an incentive to make promises
about future inflation which are no longer optimal when "the future" arrives,
giving them strong incentives to deviate from past promises.
Laffer Curve - ANSWER-Shows that tax revenues are increasing with tax rates for
low tax levels but decreasing with tax rates at high enough tax levels.
quantitative easing - ANSWER-Purchase of long-term bonds or mortgage
securities by the central bank designed to directly affect the long-term interest rate
automatic stabilizers - ANSWER-Fiscal policy tools which automatically respond
to economic conditions
information lag - ANSWER-Time it takes for policy-makers to acquire information
about the current state of the economy
monetary neutrality - ANSWER-Notion that changes in the money supply have no
effect on real variables, but only affect nominal variables (ex: prices and wages).
Model says this should hold in the long run but not in the short run
taylor rule - ANSWER-Description of how monetary policy-makers change
interest rates in response to inflation and output changes
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
