Unit 7

           

April 15, 2015

Currency Exchange

Ø  Foreign Exchange (FOREX

·         The buying the selling of currency

·         The exchange rate € is determined in the foreign currency markets

·         Simply put. The exchange rate is the price of a currency.

·         Do not try to calculate the exact exchange rate

Ø  Tips

·         Always change the D line on one currency graph, the S line on the other currency’s graph

·         Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer.

·         If D on one graph increases, S on the other will also increase

·         If D moves to the left, S will move to the left on the other graph

Ø  Changes in Exchange Rates

·         Exchange rates (e) are a function of the supply and demand for currency

·         An increase in the supply of a currency will make it cheaper to buy one unit of that currency

·         A decrease in supply of a currency will make it more expensive to buy one unit of that currency

Ø  Changes in Exchange Rates

·         An increase in demand for a currency will make it more expensive to buy one unit of that currency

·         A decrease in demand for a currency will make it cheaper to buy one unit of that currency

Ø  Appreciation

·         Appreciation of a currency occurs when the exchange rate of that currency increases (e­)

Ø  Depreciation

·         Depreciation of a currency occurs when the exchange rate that currency decreases (e¯)

Ø  Exchange Rate Determinants

·         Consumer tastes

o   Ex. Japanese goods create increase in D of Yen and an increase in S of dollars in the currency exchange market.

o   The increase in demand of the Yen leads to the appreciation of the Yen

o   The increase in supply of dollars leads to the depreciation of the Dollar

·         Relative Income

o   Imports tend to be normal goods

o   Ex. If Mexico’s economy is becoming stronger and the U.S. economy is in recession, then Mexicans will buy more of everything, including American goods

·         Relative price level

·         Speculation

o   IF U.S. investors expect that Swiss interest rates will climb in the future, then Americans will demand Swiss francs in order to earn the higher rates of return in Switzerland

o   This will cause the Swiss Franc to appreciate as demand for it will increase

o   Supply of the Dollar will increase causing it to depreciate 

Unit 5

April 1, 2015

Short-run Aggregated Supply (SRAS

Time is too short for wages to adjust to the price level.

Workers may not be aware of changes in their real wages due to inflation and has adjusted their labor supply decisions and wage demands accordingly.           

Long-run AS

·         Flexible wage in price level

·         Offset each other.

·         The possible production graph curve the shift the

·         Time long enough for wages to adjust to the price level. (Growth in format, technological change)

Demand-Pull Inflation (Demand changes not AS)

Cost-Push Inflation “prices go up production goes up.” (Never use AD) unless I change the supply.

Recession: AD decreases because we’re not using fiscal or monetary policy, (AD) no one will spend, pressure in production PL no one will buy.

Economic Growth:                                                                                                                                            

	Price Level	Wage level	Employment Level	Implications
1. Horizontal/Keynesian	Fixed	Fixed	Flexible	Output depends upon changes in employment.
2.	Flexible	Fixed	Flexible	Output depends upon changes in price level and employment
3	Flexible	Fixed	Fixed	Output depends upon changes in price level.

4/6/15

Ø  The Long-Run Phillips Curve (LRPC)

·         Because the Long-Run Phillips curve exists at the natural rate of unemployment (Un), structural changes in the economy that affect Uvn will also cause the LRPC to shift

·         Increases in Un will shift LRPC ->

·         Decreases in Un will shift LRPC <-

Ø  Stagflation

·         Is when inflation and unemployment increases occurring at the same time

o   During baby boomer

o   Womans movement

o   Civil Rights movement

o   Vietnam War Ends

o   All embargo 1973-1979

Ø  Disinflation

·         It is reduction in the inflation rate year to year this occurs when aggregate demand decreases

Ø  Deflation

·         General drop in the price level

April 9, 2015

The Balance of Payments

Measure of money inflows and outflows between the US and the Rest of the World (ROW)

o   Inflows are CREDIT

o   Out flows are DEBITS

The Balance of Payments is divided into 3 accounts

Current Account

Capital/Financial Account

Official Reserves Account

Double Entry Bookkeeping

Every transaction in the balance of payments is recorded twice in accordance with standar accounting practice.

Credited must be debited

-Ex. US manufacturer, John Deere, exports $50 million worth of farm equipment to Ireland.

~        A credit of $50 million to the current account

(-$50 million worth of farm equipment or physical assets)

~        A debit of 50 million to the capital/financial account

(+$50 million worth of Euros or financial assets)

Balance must=0

Current Accounts

~        Balance of Trade or Net Exports

o   Exports of Goods/Services – Import of Goods/ Services

o   Exports create a credit to the balance of payments

o   Imports create a debit to the balance of payments

Net Foreign Income 

~        Income earned by U.S. owned foreign assets – Income paid to foreign held U.S. assets

o   Ex. Interest payments on U.S. owned Brazilian bonds – Interest payments on German owned U.S. Treasury bonds.

Net Transfers (tend to be unilateral (one sided))

~        Foreign aid -> a debit to the current account

o   Ex. Mexican migrant workers send money to family in Mexico.

Capital/Financial Account

~        The balance of capital ownership

~        Includes the purchase of both real and financial assets

~        Direct investment in the United States Is a credit to the capital account

o   Ex. The Toyota Factory in San Antonio

~        Direct Investment by U.S. firms/individuals in a foreign country are debits to the capital account

o   Ex. The Intel Factory in San Jose. Costo Rico.

~        Purchase of foreign financial assets represents a debit to the capital account

o   Ex. Warren Buffet buys stock in Petrochina

~        Purchase of domestic financial assets by foreigners represents a credit to the capital account

o   The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ

Relationship between Current and Capital Account

The current Account and the Capital Account should zero each other out

That is… if the Current Account has a Negative balance (deficit), then the Capital Account should then have a positive balance (surplus).

Ø  Official Reserves

~        The foreign currency holdings of the US Federal Reserve System

~        When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments

~        When there is a balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments

4/13/15

Ø  Active v. Passive Official Reserves

·         The US is passive in its use of official reserves. Because our exchange does not change. It does not seek to manipulate the dollar exchange rate.

·         The People’s Republic of China is active in its use of official reserves. It actively buys sells dollars in order maintain a steady exchange rate with the US.

4/14/15

Ø  Goods and services exports - goods and serves imports

·         You can have a trade deficit or trade surplus

·         If you have a trade deficit imports are greater than imports

·         If you have a trade surplus Exports greater than imports

Ø  7Informal way to balance of trade

·         Goods exports + Goods imports

·         Balance on goods and services

·         Goods imports + Service Imports

Current account

Balance on trade + Net Investment + Net transfers

Capital account

Foreign purchases of US assets + US purchases of assets abroad

Official reserve

Current account balance + Capital account balance 

Unit 4 Review/Question

Unit 4 Video Summarization /Notes

Video Response/Summary to Unit 4 

Types and Functions of Money – Part 1

She explains the 3 basic money markets that are used the most today and functions of money. One is commodity is anything that can be used to function just like money. Second type is representative money is any money that is being used is represented as a specific of a precious metal. Moving away from the gold currency because of the great the depression because wasn’t stable enough back then. Lastly, Fiat money it is not backed up by legal money that is accepted, backed by the government that it has value. Money is medium of exchange is buying things, store of value, and is when you store it you hope there is still some value in it. Money is a unit of account is look at the price that implies to worth.

Money Market Graph – Part 3

Practice drawing the money market. Vertical axis, price (interest rate, i), horizontal, quantity of money (QM). Demand slopes downward because when the price is high the QM is price is low. People borrow more. Supply is set by the fed put the quantity equilibrium and interest rate.  Unless changed by the Fed then it changes. When you increase demand it fluctuates puts pressure on interest rate. If the Fed wants to go back to the interest rate.

The Fed’s Tools of Monetary Policy– Part 4

Two options that are tools of monetary policy. Expansionary (Easy Money) and Contractionary (Tight Money) .RR or required reserve is where the amount of money that must be kept in the bank, vault cash or put into a close Fed Bank. If fed wants to increase or decrease they lower the reserve requirements. It becomes ER. If they want to retract in contractionary than it increase the RR. Secondly is the discount rate, the interest rate that are given to them by the Fed. If they want to let banks borrow money than it lowers in expansionary, but if discourage banks from borrowing money which raises it in contractionary. Lastly the video talks about buying/selling bonds/securities to expand the money supply the fed buys, you have to know which direction it goes. To contract bonds/securities you sell. FOMC choose these decisions. The federal funds rate is at the rate where banks burrow from each other.

The Loanable Funds Market – Part 7

Loanable funds money that is available for the public to use. The graph is the same as the money market. But at the bottom put quantity of loanable funds. Supply loanable funds goes upward, comes from the amount of money from savings. In this market saving is good in loanable funds. By increasing interest rate in the loanable fund graph should increase in demand.

Money Creation and Multiple Deposit Expansion – Part 8

The money creation process is by banks create money by making loans. Adjust and control the reserve requirement is the percentage of the banks total deposit in Fed or bank deposits. The money multiplier is 1/RR. All the banks in this process there is no excess reserves. If the bank holds excess reserves it will reduce your total.

Relating the Money Mkt., Loanable Funds Mkt., and AD-AS – Part 9

Money market supply money is straight up and down and does not move unless the Fed has made a change to do so. Loanable funds has the same but supply loanable funds goes upwards. AD-AS graph has the curve of vertical range and upward range. Horizontal is GDP and price level with inflation in mind. Loanable funds can either changed in demand or supply, be able to explain why you shifted in the direction. Fisher effect is interest rate must have a 1 % price level. Ties into interest to price level.

Unit 4

March 3, 2015

Ø Money is used in any asset

Ø  Use of money:

·         Medium of exchange- is used to determine value, when you trade you know how much the product is

·         Unit of account, how to compare prices

Ex. How much is the hamburger compare

Store of Value- How money can be stored. Saving accounts, shoe boxes, safe, ect. Does not draw interest

3 types of money

Commodity money- value in itself

3 ex. Salt, olive oil, gold

Representative money- represents something in value

Ex. IOU

Fiat money- it is money because the government says so. Paper currency and coins.

Not backed up by gold.

Ø  6 characteristics of Money

·         Durability

·         Portability

·         Divisibility

·         Uniformity

·         Limited supply

·         Acceptability

Ø  Money supply

·         M1 Money

o   Liquid assets (Liquidity) – easily convert to cash

-          Ex. Cash, paper currency, coins, checkable deposits or Demand Deposits (Checks or checking accounts), and traveler’s checks.

·         M2 Money

o   Consists of M1 Money

-          Savings Acct.

-          Money Market Acct.

-          Total asset available in the economy

Ø  3 reasons of Financial institution

·         To store money

·         Save money

-          4 ways to save money

o   Savings

o   Checking acct.

o   Money market accounts(Have a certain amount each year)

o   Certificate of Deposit (CD) (Locked for a certain time, earning interest, if the inflation rises the money will grow)

·         Loan money (Credit cards, because of mortgages)

Ø  Loans

·         Banks operates on a fractional reserve system is which is where they keep a fraction of the funds and loan out the rest. (Federal Reserve banks do the same)

Ø  Interest Rates:

·         Principal- The amount of money borrowed (Pay more on the principle, and pay for another month) P= Ix 100/ R x T

·         Interest- Price paid of the use of borrowed money R= I x 100/ P x T

-          Simple Interest- Paid on the principle I=P (principal) R (Interest rate) T (time)

-          Compound Interest- paid on the principle and the accumulated interest

Time (T) = I x 100 / P x R

Ø  5 Types of Financial Institution

·         Commercial banks

·         Savings and loans institutions

·         Mutual saving banks

·         Credit Unions

·         Finance Companies

Ø  Investment

·         Redirecting resources that you consume now for the future (EX.

·         Financial Assets

-          Claims on property or income of borrower

·         Financial Intermediaries

Institutions that channels funds from savers to borrowers

Savers -> Financial Institutions -> Investors

Ø  Purposes of financial Intermediaries

·         Sharing Risks

·         Number 1 way diversification

·         Spread the investment in order to reduce risks

·         Providing information

·         Liquidity (Returns- amount an investor receives above and beyond the sum of money initially invested)

Bonds and Stocks

·         Bonds you loan

·         Bonds- loans or IOUs that represent debt that the government or a corporation must repay to an investor that the government, low risk investments

·         3 components of a bond

-          Coupon Rate: Interest rate issuer pays the bond holder

-          Maturity: The time at which payment to a bond holder is due

-          Par value: amount that the investor pays to purchase a bond and that will be repaid at maturity

-          Stocks you own

-          Yield it is the annual rate of return on a bond if the bond were held for maturity

March 4, 2015

Ø  Time Value of Money

·         Is a dollar today worth more than a dollar tomorrow?

-          Yes

·         Why?

-          Opportunity cost and Inflation

-          This is the reason for changing and paying interest.

·         Let v=future value of $

-          p= present value of $

-          r= real interest rate (nominal rate- inflation rate) expressed as a decimal

-          n= years

-          k= number of times interest is credited per year

Ø  The Simple Interest Formula

·         v= (1+r) ^n + p         

Ø  The Compound Interest Formula

·         v= (1+ r/x) ^nk =p

Ø  Multiple Deposit Expansion and the Federal Reserve (Chapter 14)

·         Functions of the FED

·         Issues paper currency

·         Sets reserve requirements and holds reserves of banks

·         It lends money to banks and charges them interest

·         They are a check clearing service for banks (Goes to the bank, then FED, it travels)

·         It acts as personal bank for the government

·         Supervises member banks

·         Controls the money supply in the economy

March 5, 2015

Ø  The Three Types of Multiple Deposit Expansion Question

·         Type 1: Calculate the initial change in excess reserves

-          a.k.a the amount a single bank can loan from the initial deposit

·         Type 2: Calculate the change in loans in the banking system

·         Type 3: Calculate the change in the money supply

-          Sometimes type and type 3 will have the same result (i.e. no Fed)

·         Type 4: Calculate the change in demand deposits

March 6, 2015

Ø  How Banks Work

·         Assets

-          Reserves:

o   Required reserves (rr)-% required by Fed. To keep on hand to meet demand

o   Excess reserves (er) - % reserves over and above the amount needed to satisfy the minimum reserve ratio set by Fed.

-          Loans to firms, consumers, and other banks (earns interest)

-          Loans to govt. = treasury securities

-          Bank property- (if bank fails, you could liquidate the building/property)

·         Liabilities + Equity

-          Demand Deposits ($ put into bank)

-          Timed Deposits (CD’s)

-          Loans from: Federal Reserve & other banks

-          Shareholders Equity- (to set up a bank, you must invest your own money in it to have a stake in the banks success or failure)

Ø  Creating a Bank

-          Reserve ratio= Commercial bank’s Required reserves/ Commercial banks checkable- deposits

Ø  Reserve Requirements

-          Excess reserves

o   Actual reserves- required reserves

-          Required reserves

o   Checkable deposits x reserve ratio

March 17, 2015

Ø  The Money Market

·         (Supply and Demand for Money)

·         Inverse relationship between money demand and the interest rates.

o   DM increases iR decrease

o   DM MD decrease iR increase

o   Demand for money is downward sloping