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

Unit 3

2/11/15

   Ø  Aggregate Demand (AD)

·         Shows the amount of Real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level

·         The relationship between the price level and the level of Real GDP is inverse.

·         Looking at output. Once price level goes up the quantity goes down and once price goes down quantity goes up. Inverse relationships.

Ø  Aggregated Demand Graph

    Ø  Three reasons AD is downward sloping

-          Real-balances Effect

-          When the price level is high households and businesses cannot afford to purchase as much output.

-          When the price level is low households and businesses can afford to purchase more output.

-          Interest- Rate Effect

-          A higher price- level increases the interest rate which tends to discourage investment

A lower price- level decreases the interest rate which tends to encourage investment

-          Foreign Purchases Effect

A higher price- level increases the demand for relatively cheaper imports

-          A lower price-level increases the foreign demand for relatively cheaper U.S. exports.

Ø  Shift AD

·         There are two parts to a shift in AD:

-          A change in C, Ig, G, and /or Xn

-          A multiplier effect that produces a greater change than the original change in the 4 components.

-         Increase in AD=AD right

-          Decrease in AD=AD left

   Ø  Consumption

·         Household spending is affected by:

-          Consumer wealth

o   More wealth=more spending (AD shifts right)

o   Less wealth=less spending (AD shifts left)

-          Consumer expectations

o   Positive expectations = more spending (AD shifts right)

o   Negative expectations = less spending (AD shifts left)

-          House hold indebtedness

o   Less debt = more spending (AD shifts right)

o   More debt = less spending (AD shifts left)

-          Taxes

o   Less taxes = more spending (AD shifts right)

o   More taxes = less spending (AD shifts left)

   Ø  Gross Private Investment

·         Investment Spending is sensitive to:

-          The real Interest Rate

o   Lower Real interest Rate = more investment (AD right)

o   Higher Real interest Rate = less investment (AD left)

-          Expected Returns

o   Higher Expected Returns =More Investment (AD right)

o   Lower Expected Returns = Less investment (AD left)

o   Expected Returns are influenced by

-          Expectations of future profitability         

-          Technology

-          Degree of Excess Capacity (Existing Stock of Capital)

-          Business Taxes

   Ø  Government Spending

·         More Government Spending (AD right)

·         Less Government Spending (AD left)

   Ø  Net Exports

·         Net Exports are sensitive to:

-          Exchange Rates (International value of $)

o   Strong $ = More imports and fewer Exports = (AD left)

o   Weak $ = Fewer Imports  and More Exports = (AD right)

-          Relative Income

o   Strong Foreign Economies = More exports = (AD right)

o   Weak Foreign Economies = Less Exports = (AD left)

2/12/15

   Ø  Aggregate Supply

·         The level of Real GDP (GDP R) that firms will produce at each Price Level (PL)

   Ø  Long-Run v. Short-Run

·         Long- Run

-          Period of time where input prices are completely flexible and adjust to changes in the price-level

-          In the long-run the level of RGDP supplied is independent of the price-level

·         Short-Run

-          Period of time where input prices are sticky and do not adjust to changes in the price level

-          In the short-run, the level of RGDP supplied is directly related to the price-level

   Ø  Long-Run AS (LRAS)

·         The Long-Run Aggregate Supply or LRAS marks the level of full employment in the economy (analogous to PPC)

·         Price are completely flexible in the long-run, changes in price-level do not change firms’ real profits and therefore do not change firms’ level of output. This means that the LRAS is vertical at the economy level of full employment.

-          *Long-run is vertical at full employment

   Ø  Long Run AS graph

   Ø  Short-Run Aggregate Supply (SRAS) Upward sloping

Input prices are sticky in the short run, the SRAS is upward sloping. This reflects the fact that in the short-run, increases in the price-level increase firm’s profits and create incentives to increase output.

   Ø  Short run Aggregate Supply Graph

   Ø  Changes in SRAS

·         An increase in SRAS is seen as a shift to the right. SRAS right

·         A decrease in SRAS is seen as a shift to the left. SRAS left

·         The key to understanding shifts in SRAS is per unit cost of production

·         Per-unit production cost = total input cost/ total output cost

   Ø  Change in SRAS( increase)

   Ø  Change in SRAS (Decrease

   Ø  Determinants of SRAS (all of the following affect unit production cost)

·         Input prices

-          Domestic Resource Prices

o   In wages, Raw materials,

o   Pay cost of capital

-          Foreign Resource Prices

o   Value of the dollar is it weak or strong?

o   Strong $ = Lower foreign resource prices

o   Weak $ = higher foreign resource prices

-          Market Power       

o   Monopolies and cartels that control resources control the price of those resources. (OPEC)

-          Increases in Resource Prices = SRAS left

-          Decreases in Resource prices = SRAS right

·         Productivity

o   Total output/total inputs

o   More productivity = lower unit production cost = SRAS right

o   Lower productivity = higher unit production cost = SRAS left

·         Legal- institutional Environment

o   Taxes and Subsidies

-          Taxes ($ to gov’t) on business increase per unit production cost =SRAS left

-          Subsidies ($ from gov’t) to business reduce per unit production cost = SRAS right

o   Government Regulation

-          Government regulation creates a cost of compliance = SRAS left (side regulations in businesses)

-          Deregulation reduces compliance costs = SRAS right (Deregulated airline, paid the same cost. Different destination, but later on cheap ticket, price of fair changed)

2/17/15

   Ø  Full Employment

·         Full Employment equilibrium exists where AD intersects SRAS & LRAS at the Same point.

   Ø  Recessionary Gap

·         A recessionary gap exists when equilibrium occurs below full employment output

o   AD Shifts to the left which decreases

   Ø  Inflationary gap

·         An inflationary gap exists when equilibrium occurs beyond full employment output.

o   When there is an inflationary gap AD to the right increasing

   Ø  Investment Demand

·         What is investment?

o   Money Spent or expenditures on:

-          New plants (factories)

-          Capital equipment (machinery)

-          Technology (hardware & software)

-          New Homes

-          Inventories (goods sold by producers)

   Ø  Expected Rates of Return

·         How does business make investment decisions?

o   Cost/Benefit Analysis (red, if business 3 years you good)

·         How does business determine the benefits?

o   Expected Rate of Return

·         How does business count the cost?

o   Interest costs

·         How does business determine the amount of investment they undertake?

o   Compare expected rate of return to interest cost

-          If expected return > interest cost, then invest

-          If expected return < interest cost, then do not invest

   Ø  Real (r %) v. Nominal (i %)

·         What’s the difference?

o   Nominal is the observable rate of interest. Real subtracts out inflation (π%)  and is only known ex post factor

·         How do you compute the real interest rate (r %)?

o   r % = i % - π% (inflation rate) π is inflation

·         What then, determines the cost of an investment decision?

o   The real interest rate (r %)

   Ø  Investment Demand Curve (ID)

·         What is the shape of the investment demand curve?

o   Downward sloping

·         Why?

o   When interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable. (High, fewer buyers, low, more buyers)

-          Changes in r% cause changes in Ig. Factors other than r% may shift the entire ID curve

2/18/15

   Ø  Shifts in Investment Demand (ID)

·         Cost of production

·         Lower costs shift ID right

·         Higher Costs shift ID left

   Ø  Business Taxes

·         Lower business taxes ID right

·         Higher business taxes ID left

   Ø  Technological Change

·         New technology shifts ID right

·         Lack of technological change shifts ID left

   Ø  Stock of Capital

·         If an economy is low on capital, then ID right

·         If an economy has more capital, then ID left

   Ø  Expectations

·         Positive expectations shift right

·         Negative goes left

   Ø  Long-run AS

•   Always vertical at full employment, it represents a point on an economy production possibilities curve
• Long-run AS Does not change as the price level change.
•   Change long-run AS same as the PPC curve outward
•  Only shifts: Change of resources, change in technology, and economic growth

2/25/15

   Ø  Fiscal Policy

·         Changes in the expenditures a tax revenue of the federal government

·         2 Tools of fiscal policy:

o   Taxes government can increase or decrease taxes

o   Spending- government can increase or decrease spending

   Ø  Deficits, Surpluses, and debt

·         Balanced budget

o   Revenues=Expenditures

·         Budget deficit

o   Revenues < Expenditures

·         Budget Surplus

o   Revenues > Expenditures

·         Government Debt

o   Sum of all deficits – Sum of all surpluses

o   Government must borrow money when it runs a budget deficit

·         Government borrows from:

o   Individuals

o   Corporations

o   Financial Institutions

o   Foreign entities or foreign governments

·         Fiscal Policy Two Options

o   Discretionary Fiscal Policy (action)

o   Expansionary fiscal policy – think deficit

o   Contractionary fiscal policy- think surplus

o   Non- discretionary fiscal policy (no action)

   Ø  Discretionary v. Automatic Fiscal Policies

·         Discretionary- Increasing or decreasing Government Spending and/ or Taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem

·         Automatic- Unemployment compensation & marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

   Ø  Contractionary vs. Expansionary Fiscal Policy

·         Contractionary fiscal policy- policy designed to decrease aggregate demand

-          Strategy for controlling inflation

·         Expansionary fiscal policy- policy designed to increase aggregate demand

-          Strategy for increasing GDP, combating a recession, & reducing unemployment.

-          Increase government spending (G up)

-          Decrease taxes (T down)

·         Contractionary fiscal policy

-          Decrease government spending

-          Increase Taxes

-          RECESSION TO INFLATION OR TO INFLATION TO RECESSION

   Ø  Automatic or Built-In Stabilizers

-          Anything that increases the government’s budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy.

·         Automatic Stabilizers (Food stamps etc.) Fiscal is run by congress.

o   Transfer Payments

-          Welfare checks

-          Food stamps

-          Unemployment checks

o   Nondiscretionary Fiscal Policy ( Automatic Stabilizers)

-          Corporate Dividends

-          Social Security

-          Veteran’s Benefits

   Ø  Tax System

·         Progressive Tax System

o   Average tax rate (tax revenue/GDP) rises with GDP

·         Proportional Tax System

o   Average tax rate remains constant as GDP changes

·         Regressive Tax System 
o   Average tax rate falls with GDP 

Three Economic Schools
Classical	Keynesian	Monetary
Ø  Adam Smith     Ø  John B. Say                           Ø  David Ricardo     Ø  Alfred Martial        -          Competition is good        -          Adam smith made the invisible hand “don’t need government help for business”        -          Says-Law     o   Supply creates its own demand     o   Determines output        -          In the LR the economy would balance at full    employment     o   The economy is always close or at full employment       -            AS=AD     o   At full employment equilibrium       -          Triple effect down effect     o   Halves and halves not       -          Savings (leakage) =investment (injection)       o   Savings increase with interest rate       -          Prices and wages are flexible downward -          Lassies fair	Ø  John Maynad Caynes        -          Competition is flawed        -          Ad is key not AS      o   Ad determines its own output and demand creates its own supply        -          Leaks cause constant recessions        -          Savings cause recessions        -          Savers and investors save and invest for different reasons savings are inverse to the interest rate.       -          Ratchet and sticky wages saves law       -          Prices and wages are flexible downward       -          So there is no mechanism is able for full employment in the LR we’re all dead       -          The economy is not always close to or at full employment       -          Government Intervention       -          Fiscal policy     o   Add stabilizers     o   Expansionary and Conpansionary	Ø  Alen Greenspan    Ø  Ben Bernanke       -       Fine tuning is needed       -          Voters won’t allow contractionary options       -          Congress can’t time policy options       -          Institute easy money and tightly money       -          Change required reserve if need       -          Buy and sell bonds through open market operations       -          Use interest rates to change the discount rate and the federal fund rate.