Podcast
Questions and Answers
What does M2 define as money?
What does M2 define as money?
- Currency, checking accounts, and savings accounts (correct)
- Only government bonds and securities
- Real estate and foreign investments
- Only physical cash in circulation
What is the outcome of slowing the creation of real M2?
What is the outcome of slowing the creation of real M2?
- Economic growth and increased employment
- A recession occurs (correct)
- Inflation decreases significantly
- Stabilization of stock prices
Which event was described as the worst recession since the Great Depression?
Which event was described as the worst recession since the Great Depression?
- The recession of 1982 (correct)
- The recession of 1973
- The recession of 2008
- The recession of 1991
What significantly impacted the rise of the stock market from 1982 to 1987?
What significantly impacted the rise of the stock market from 1982 to 1987?
What happens when the supply of new money to the stock market dries up?
What happens when the supply of new money to the stock market dries up?
The stock market rose sharply due to the new money inflow, but what did this lead to?
The stock market rose sharply due to the new money inflow, but what did this lead to?
What was the stock market level in 1982 before the boom?
What was the stock market level in 1982 before the boom?
Flashcards
M2
M2
A measure of the money supply, including currency, checking accounts, savings accounts, and other liquid assets.
Real M2
Real M2
The amount of money in the economy adjusted for inflation. It reflects the actual purchasing power of money.
Recession
Recession
A period of economic decline characterized by reduced economic activity, high unemployment, and falling prices.
Money Supply Inflation
Money Supply Inflation
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Stock Market Boom
Stock Market Boom
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Stock Market Crash
Stock Market Crash
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Economic Boom
Economic Boom
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Study Notes
Money Supply and Recessions
- M2 money includes currency, checking accounts, travelers checks, savings accounts, money market mutual funds, and certain bank transactions.
- Real M2 is M2 adjusted for inflation.
- Recessions frequently follow periods where the government slows real M2 creation.
1982-1987 Stock Market Boom and Bust
- The 1982 recession was severe, comparable to the Great Depression.
- To address this, the money supply was significantly increased from 1983 to 1986, leading to stock market inflation.
- The inflated money supply fueled a stock market boom, with the market index rising from 777 in 1982 to 272212 in 1987.
- The increase in stock values was driven by increased investment and caused by easily accessible money.
- As the inflation rate in M2 fell in 1987, the money supply shrank and the stock market crashed.
- This resulted in a severe stock market crash and subsequent recession.
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