Unit 7: Balance of Payments

5/8/17
Balance of payments 

• measure of money inflows and outflows between the US and the rest of the world (ROW)
• inflows are referred as credit
• outflows are referred as debits 

The balance of payments is divided into 3 accounts

•  Official reserves accounts 
  
•  Current account 
•  Capital/finance account 

 Balance of trade or net exports

•  Exports of goods and services -  imports of goods and services
•  Exports create a credits a balance of payments 
•  Imports create a debit to the balance of payments 

 Net foreign income

•  Income earned by US own foreign assets  -   Income paid to foreign health US assets 
• Ex:  interest payments on US only Brazilian bonds  -   Interest payments on German own treasury bonds 

 Net transfers
 Foreign aid --->   A debit to current account

• Ex:  Mexican migrant workers send money to family in Mexico 

 Capital/finance account

•  The balance of R ownership 
•  Includes the purchase of both real and financial assets 
•  Direct investments in the US is credits of capital account 
• Direct investments by US firm/individuals and a foreign country our debit so the capital account
•  Purchase a foreign financial assets represented a debit to capital account 
•  Purchase of domestic financial assets by foreigners represents a credit to the capital account 
• The united Arab emirates sovereign wealth fund purchase a large steak in the and a NASDAQ

 Relationship between current and capital account

•  The current account and the capital account should zero each other out 
•  If the current account has a negative balance then the capital account should have a positive balance of official reserves 
•  The foreign Currency holdings of the US Fed reserves SGS 
•  When there is a balance of payments surplus the Fed accumulates flooring Currency and debits 

 The balance of payments

•  When there is a balance with humans deficit the Fed the pleats it's reserves of foreign Currency and credits the balance of payments 
• The official reserves zero out the balance of payments

5/9/17

•  Balance of trade=  Good exports + goods imports 
• Balance of goods and services = good exports + service exports - goods imports + services imports
•  Currency account = balance of goods + services + not investments + net transfers 
•  Balance on capital account = investments or stocks and bonds 
•  Official reserves = current account ( whatever falls into the category of investments or stocks and bonds) +  Capital account = 0 

5/10/17
 Foreign exchange

•  The buying and selling of Currency 
•  Any transactions that occurs in the balance of payment necessitates foreign exchange 
•  The exchange rate is determined in the foreign Currency market 

Exchange rate  determinants

•  Consumer taste 
  
•  Relative income 
•  Relative  price level
•  Speculation 

-appreciation of the money causes American goods to to be expensive and foreign goods to be cheaper than us reducing exports and increasing   Imports
- depreciation of the money causes American goods to be cheaper and foreign goods to be more expensive does increasing exports in reducing imports
5/11/17
- specialization-individuals and countries can be made by better off if they will produce in what they have a comparative advantage and then trade with other  countries for whatever else they want/need
- absolute advantage - The producer that can produce output or requires the least amount of input
- comparative advantage - The producer with the Lowe's opportunity cost
- Country should trade if they have relatively lower opportunity cost
- they should specialize in the good that is cheaper for them to produce
Input versus output
- an output problem presents the data as products produced given a set of resources
Ex: Number of pens produce
- an input problem presents the data as amount of resources needed to produce a fixed amount of output
Ex: Number of labor hours to produce 1 bushel
- when identifying  an absolute advantage and input problems change the scenario friend who can produce a given product with least amount of resources

Unit 5: Supply Side Economics Reaganomics

4/24/17
Reaganomics

• Trying to stimulate production or supply output.
• To achieve this they cut taxes and government regulations to increase incentives for business and individuals.
• businesses invest and expand creating jobs and people work, save, ad spend more  
• Laffer curve depicts a theoretical relationship between tax rates and tax revenues.

Laffer Curve

• Empirical evidence suggest that the impact of tax rates on incentives to work, save, and invest are small.
• tax cuts also increase demand which can fuel inflation and demand impacts may exceed supply impacts.
• where the economy is actually located on the laffer curve is difficult to determine.

Unit 4: Tools of Monetary Policy

4/3/17

1.  Open market operation -  when the Fed buys or sells government bonds, this is the most important and widely use monetary policy
-  if the Fed buys bonds out of the economy and replaces it with money MS increases
-  if the Fed sells bonds it takes money and give security to the investors therefore MS decreases

2.  Reserve requirement -  Dollar amount that must be kept back

• The Fed sets of the amount in the bank must hold
•  The loan eventually become still posits for another bank that will loan out their excess reserves
• - if there is a recession, what should the fat Jew to the reserve requirement ?

•  decrease the reserve ratio ,  Banks hold less money and have more excess reserves, banks create money by loaning out excess reserves, money supply increases, interest rates fall, AD goes up
•   and if there is an inflation ?
•  increase the reserve ratio -  Bank equals more money less excess reserves, creates less money, MS decreases, Ir increases, AD decreases

3.  The discount rate 
-  there are many different interest rates, but they tend to all  rise and fall together
-  The discount rate is the interest rate that the Fed places
-  The federal funds rate is the interest rate that banks charge one another for overnight loans
-  The prime rate is the interest rate that banks charge their most credit worthy customers

4/04/17
Loanable  funds market 
- The private sector supply and demand loans
-  this market bring some gather those who want to lend money and those who want to borrow
-  this market shows the effect on the real interest rate
-  demand -  inverse relationships between real interest rate and quantity loans demanded

I

-  supply -  Direct locations to between real interest rate and quantity loan supplied

Here's a video discussing monetary policy and more!

Unit 4: Money creation formula

3/27/17 

• A single can create money by the amount of excess reserves
• The banking system as a whole can create money by a multiplier of excess reserves
• MM x ER = expansion of money 
• Money multiplier= 1/RR
• New Existing Money

- if the initial deposit in a bank comes from the fed or a bank purchase of a bond or other money out of circulation (buried treasure) The deposit immediately increases the money supply
- The deposit then leads to further expansion  of the money supply through the money creation process
-Total change in MS if the initial deposit is new money= deposit+money created by banking system
-if a deposit in a bank is existing money (already counted in M1 ) depositing the amount does not change the MS immediately because it is already counted.
-Existing currency deposited into a checking account changes only the composition of the Money supply from coins/ paper money to checking accounts deposits
- Total change in the MS if deposit is existing money = banking system created money only.

3/29/17

Money Creation Process 

-$1000 in cash is deposited in a checking account ->  no immediate change in MS ->Assets
- $1000 fed  purchase of bonds from the public deposited into the checking account ->  immediate increase in MS in $1000 ->  liabilities
- Single bank - amount of money they can loan out of ER
- banking system - can create money by a multiplier of its initial excess reserve (ER x MM)
-  total change in the money supply as a result of the initial deposit.

https://www.youtube.com/watch?v=JG5c8nhR3LE ( A video elaborating on the money creation process)

Unit 4: Bonds vs Stocks

3/22/17

• Bonds are loans or IOU'S that the debt of the government or a corporation must repay to an investor. Te bond holder has no ownership
• How are the values of a bond determined? 
• If a corporation issues and then sell a bond is a liability or  an asset? Liability
• However it would be an asset for the buyer 

1. Dividends (interest)- portions of corporations profits, they are paid out by the stock holder
2. A capital gain is earned when a stockholder sells stock for more than he or she has paid for it 

- A stockholder that sells stocks at a lower price than the purchase suffers a capital loss
3/23/17

• Demand for money has an inverse relationship between nominal interest rates and the quantity of the money demanded

1. What happens to quantity demanded of money when interest rate increases? Quantity demanded falls because people want lower interest rates
2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increase

• Determinants for demand for money to shift (rarely shift)

- Change in price level
- Change in income
- Change in taxation that affects investments
increasing in money supply=decrease interest rate=increase in investments=increase AD

• How do banks make money?

-Fractional reserve system- Process in which banks hold a small portion of their deposits
-Demand deposits are created through the fractional reserve system
-Banks keep cash on hand (required reserve) to meet depositors needs
-Total reserve -(total fund held by a bank)= required reserves+ excess reserves
- Banks can only lend out their excess reserves

https://www.youtube.com/watch?v=-oSz4ckdxqQ

Unit 4: Why do we use money?

3/20/17

• The barter System- goods and services that are traded directly. There is no money exchanged
• Money - Anything that is generally excepted i payment for goods or services.
• Wealth- total collection of assets that store value.
• Income- Flow of earnings per unit of time.
• Money can be used as...

1. A medium of exchange
   
2. Unit of account
3. Store of value 

• 3 Types of Money

1. Representative Money- Represents something of value( "Iou's")
2. Commodity Money- Has value within itself Ex; Gold, Salt
3. Fiat Money- Money because the government says so.

• Characteristics of Money

1. Durability
2. Portability
3. Uniformity
4. Divisibility
5. Limited supply
6. Acceptability

• 3 Types of Money

- Liquidity- ease with which an asset can be accepted or converted into cash (liquidized)
- M1 (High Liquidity)- Coins, currency, and checkable deposits( personal and corporate checking accounts which are the largest component of M1). AKA demand deposits. In general is Money supply.
- M2 ( Medium Liquididty)- M1 plus savings deposits ( Money marked accounts) Time deposits (C'Ds= certificates of deposits) and mutual funds below $100K
- M3 (Low Liquidity)-M2 plus deposits above $100K

Unit 4: The Financial System

3/21/17 

• Purpose of Financial Instituters
  

A. Store $
B. Save $
-Savings account
-Checking account
-CD
Money market
C. Loan $
- Interest- Price paid for the use of borrowed money
- Principal- Amount of money you borrow

• Types of Financial intermediaries 

1. Commercial banks 
2. Savings and loans
3. Credit union
4. Mutual fund companies
5. Finance 

• The Financial System

- Assets- Anything monetary, owned by a person or business
- Financial Assets- a paper claim that entitles the buyer future to future income from the seller
- Physical Assets- a claim on a tangible object
- Liability- a requirement to pay money in the future

• 5 Major Financial Assets

1. Loans
2. Stocks
3. Bonds
4. Loan bake securities 
5. Bank deposit interest rate and inflation

• The Time Value of Money

- A dollar is worth more today than it is tomorrow. You are losing money every second you are not investing.

• Future Value v Present Value 

-FV= Future value, PV=Present value, i= Nominal interest rate, t= Time

- Future Value- If you invest ( Lend money to someone ) it will compound (grow) according to the following equation. FV= PV(1+i)^N

- Present Value- The amount of money i need to invest now in order to get some amount in the future PV= FV/(1+i)^N

- Simple interest- V=(1+r)^n *P

- Compound Interest- V=(1+r/k)^nk*P