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

Unit 3: Fiscal Policy

3/06/17

Fiscal Policy 

• Fiscal Policy

- Actions by congress to stabilize the economy.

- 2 Tools to Fiscal Policy 

1. Taxes- Government can increase or decrease taxes
2. - Spending- Government can increase or decrease spending 

- Fiscal policy is used to promote our nations economic goals: full employment, price stability, and economic growth .

• Deficit, Surpluses, and Debt

*Balanced Budget

- Revenues ( bring in)= Expenditures (spend)

*Budget Deficit

- Revenues < expenditures

*Budget Surplus

- Revenues> expenditures 

*Government Debt

- Sum of all deficits- sum of all surpluses 

- The government can borrow money when it runs a budget deficit, They can borrow from...

- Individuals

-Corporations

-Financial institutions

-Foreign entities 

•  Options of fiscal Policy 

1. Discretionary fiscal policy (action by congress)
2. Expansionary fiscal policy (think deficit)
3. Contractionary fiscal policy ( think surplus)
4. Non-discretionary fiscal policy (no action)

• 3 Types of Taxes 

- Progressive Tax- Takes a larger % of income from high income groups

- Proportional Tax- Takes the % of income from all income groups 

- Regressive Taxes- Takes a larger % from low income groups ( takes more from poor people)

• Contractionary Fiscal Policy

- laws that reduce inflammation, decrease GDP and close the inflationary gap 

-  they can either decrease government spending or increase taxes or a combination of the two 

•  Expansionary fiscal policy 

- laws that reduce unemployment and increase GDP and close a recessionary gap 

- they can either increased government spending or decrease taxes are consumers or a combination of the two 

•  Automatic or built in stabilizers 

- anything that increases the government budget deficits during a recession and increase its budget surplus during installation without requiring explicit action by policymakers 

•  Transfer payments 

- welfare checks 

- food stamps 

- unemployment checks 

- corporate dividens

-  social Security 

- veterans benefits 

Unit 3: Consumption and Savings

2/23/27

Consumption and Savings 

• Disposable Income 
  

- Income after taxes or net income

-DI= Gross income-Taxes

-2 Choices with disposable income households 

1. Consume (spend money on goods and services)
2. Save ( not spend money goods and services)

• Consumption 

- Household spending

- the ability to consume is constrained 

- The mount of disposable income  

- The propensity to consume

-Do households save if DI=0? No

-APS= S/DI= % DI that is not spent

• Average Perpencitry to Consume/ Save (APS) (APC)

- APC+APS=1

-1-APC=APS                *https://www.youtube.com/watch?v=mjU1w9jwYwY ( diposible income)

-1-APS=APS

-APC>: Disaving

-APS: Disaving

• Marginal Perpencity to Consume/ Save (MPC)(MPS)

-MPC

- Change in consumption/ change in disposable income

-% of every extra dollar earned 

-MPS

- Change in savings/ change in disposable income

- % of every extra dollar earned is saved 

-MPC-MPS=1

-1-MPC=MPS

-1-MPS=MPC

• Determinants of C and S
  

- Wealth

- Household Debt

- Expectations

- Taxes

2/24/17

• Spending Multiplier Effect

- An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand.

-Multiplier= Change in AD/ Change in spending 

- Expenditures- Income and flow continuously which sets off a spending increase in the economy.

• Calculating the Spending Multiplier

- The spending multiplier can be calculated from the MPC or MPS

- Multiplier=1/ MPC OR 1/1-MPS

- Multipliers are positive where there is an increase in spending and negative when there is a decrease.

• Calculating Tax Multiplier 

- When the government taxes, the multiplier works in reverse  because now money is leaving the circular flow.

- -MPC/1-MPC or -MPC/MPS

- If there is a ta cut , then multiplier is positive because there is now more money in the circular flow.

2/27/17

Reasons why prices tend to be sticky or inflexible in a downward direction...

1. Fear of price wars 
2. wage contracts 
3. minimum wage 
4. Menu Costs
5. Moral effort and productivity 

• 3 Ranges of AD

- Range 1: Output is low, relative to the economy and full employment output; unemployment increases and GDPr decreases.
- Range 2: Output expands as spending increases.
- Range 3: The AS is vertical in the log-run, because the only effects would increase in AD we are already at full employment or an increase in demand by increasing output.

2/28/17

• Classical School 

- The trickle down theory: Help the rich first and then everyone else
- In the LR the economy will balance at full employment output
- The invisible hand

• Keynesian School 
  

- AD is key not AS
- In the LR we are dead
- Leaks cause recessions
- Saving causes recesssions