Unit VII

Supply of dollar

• Comes from U.S citizens, banks, and industries wanting to purchase foreign goods, investments, assets, and to make transfer payments to foreigners.

Demand of dollar

• Comes from foreigners, banks, and industries wanting to purchase our goods, investments, assets, and make transfer payments to us.
• Anytime you have a dollar appreciate= Demand increases and supply goes down
• Dollar depreciates= demand down and supply up
• 5 determinants of supply and demand of the foreign exchange market
• Change in buyers taste
• Change in relative income
• Change in relative prices
• Change in interest rates
• Change in expectations
• Fixed rate exchange Is determined by the government.
• Flexible or floating exchange rate are determined by market forces such as supply or demand, and there is little or no government intervention.

Formulas:
Official reserves= capital account + current account
Capital account = Assets + Debits
Current account = balance of trade + net investment + net  transfers
Balance of trade= good and service exports- goods and service imports

Unit V

Short run

• timed to short for wages to adjust to the price level.
• workers may not be aware of changes in their real wages into inflation, and having adjusted their labor supply decisions wage demands accordingly.

Nominal wages

• amount of money received per hour, per day, per year.

Long run AS

•  Time long enough for wages to adjust to the price level.

KEY ASSUMPTIONS

• Represented by a vertical line
• Wages in price are flexible
• Changes in wages and price offset each other.
• Technology and economic growth shift the graph.

Phillips Curve

•  Represents the relationship between inflation and unemployment
• There is a short run trade off between the rate of inflation and the rate of unemployment.
• Aggregate supply shocks can cause both higher rates of inflation and higher rate of unemployment.(srpc shifts to the right or outward)
• There is no significant trade off between inflation and unemployment in the long run.
• If inflation persist and the expected rate if inflation rises then the entire SRPC moves upward.( stagflation is possible or probable)
• If inflation expectations drop due to new technology then the SRPC moves downward.
• Increase in AD = up/left movement along SRPC.
• Decrease in AD = down/right along SRPC
• SRAS increase = SRPC decrease
•  Disinflation
•  when unemployment and inflation both go down.
•  Long Run
• Is represent is represented by a vertical line.
• Only shifts if LRAS shifts
• LRAS shifts with technology and economic growth
• When all the way up top it's called Natural rate of unemployment.
• If rate of unemployment changes then the LRPC can change
• Increases in Un will shift LRPC to right
• Decreases in Un will shift LRPC to the left
• Misery index
• Combination of inflation and unemployment in any given year.
• Single digit is good
• Supply shock
• Rapid and significant increases in resource cost which causes SRAS curve to shift and will produce a corresponding shift in the SRPC curve.
• Increase in wages
• Oil embargo
• Increase in input prices
• Stagflation
• Consistent increase in inflation and unemployment.
• Disinflation
• Decrease in inflation from year to year, and can be seen in the LRPC.
• Prices go down and profits go down.
• Supply side economics Or Reagonomics
• Believe that AS curve will determine levels of inflation, unemployment, and economic growth.
• Supports policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payments. ( Welfare, social security, and unemployment compensation)
• Provide disincentives to work, invest,  and undertake  enterpenour ventures.
• Marginal tax
• Amount of tax paid on a additional income.  ( Being taxed when you get a bonus check)
• Laffer curve relationship
• Higher taxes you have to pay, most likely not to spend)
• Relationship between Tax revenues and government revenue.
• As tax rates increase from 0, tax revenues increase from 0 to some maximum level and then decline.
•  Lower tax rates could lead to an expansion of output and income by increasing AS and enlarging the tax base.

Unit IV- Money

Uses

- medium of exchange (barter or trade)

-unit of account, hives money its economic worth

-store of value

Types of Money

-Representative Money- paper money backed by a tangible product

-Commodity Money- gold and silver coins, gets its value form materials made

-Fiat Money- money because the government said it was

Characteristics of Money 

-Durability - how long is money good for 

-Portability - can carry it anywhere

-Divisibility - can be broken into smaller units

-Scarcity

-Acceptability

M1 Money

- consists of currency in circulation (paper and coins) 

- Checkable deposits- checking accounts, demand deposits (DD)

- Account for 75% of $ in circulation

M2 Money 

- 25 % of money

- Includes savings accounts

- money market accounts

- accounts held by banks outside the U.S

- adding M1 money as well

Formulas

-Assets= Liabilities + Net worth
-Reserve Ratio = (commercial banks required reserves/ commercial banks checkable deposit liabilities)

-Monetary Multiplier = 1 / (required reserve ratio)

- Maximum checkable deposit creation = excess reserves x monetary multiplier

-Single Bank

amount of money single bank cant create (loan out) = ER

AR-RR=ER

-Banking System

Can create money by a multiple of its initial ER

Deposit Multiplier = 1/RR

-System New $

Deposit Multiplier x Initial ER

Total change in the money supply as a result of the deposit

3 Important Issues

- Excess Reserves = actual reserves - required reserves
 -control of lending ability

-asset or liability to which bank

 

Options of Monetary Policy

 - Reserve Requirement- the % that is set by the FED of the minimum reserves that a bank must keep; decrease - expansionary monetary policy; increase - contractionary monetary policy'
- Discount Rate- the rate of interest that the FED charges for overnight loans to banks; decrease    - expansionary monetary policy; increase - contractionary monetary policy

- Federal Fund Rate- the rate that FDIC members charge each other for overnight loans; decrease    -  expansionary monetary policy; increase - contractionary monetary policy
- OMO (Open Market Operation):

Buy or sell securities (bonds) – “FED”

FED buys bonds - expand money supply (expansionary)
FED sells bonds - decreases money supply (contractionary)

Prime Rate- the interest rate that banks charge their most credit worthy borrowers

Unit 4 video question

http://youtu.be/QA9xaPcEi2E

Video Notes

Video One

There are three types of money in the money market. These three types of money are the commodity, representative, and the fiat money. In commodity money (cosidered the most primitive type of money), people are able to their trade goods with other goods. With representative money, the currency represents a specific quantity of metal (gold and silver). Finally fiat money is money that is only backed by the government's word.

Video Two

When you label a money market graph, you must have the acis correctly labeled. The y-axis is should always be labled "Interst rate", while the x-axis is labled "Price Quantity". Like always demand is downward sloping. The money supply should be vertical since it does not vary baed on the interest rate. Shifting the demand or supply will change the interest rate and price quantity accordingly. 

Video Three

THere are two main optionsfor the FED when it come to money supply, which is expansionary and contractionary. Expansionary is typically used during a recession while the later is enforced during an inflationary period. Th percent of cash that a bank need to store in "reserve" is known as the reserve requirement. In order for the FED to raise the money supply, they would need to lower the reserve requiremtent. Another tool the FED may use is the discount rate, which is the rate in which banks may borrow money from other banks. The final method used by the FED is the buying and selling of bonds. To increse the money supply the FED would buy bonds, but if they which to lower the money supply they would have to sell bonds.

Video Four

On the y-axis of the loanable funds markey graph is interest while the x-axis is quantity. Again the demanad is downward sloping, and the supply is upward sloping. The supply in a loanable funds market graph is dependent on savings. The more money saved by the banks, the more they can giveout as loans. 

Video Five

In order to determine the total cash created in a certain loan amount, you must determine the money multiplier (1/rrr). You then multiply the money multiplier with the loan amount which gives the total money created. This process is called the money creation process and states that banks create money by making loans. THis process assums that there is no excess reserve

Video Six 

The loanable funds, money market, and AD-AS mdel graphs all have a direct relationship with one another. This means a change in one will graph will affect the remaining two. An increase in interest rate will also increse the price leve This relationship is known as the Fisher effect. 

Fiscal Policy

• Changes in the expenditure or tax revenues of the federal government
• 2 tools of fiscal policy
•  taxes: gov't can increase or decrease
•  spending: gov't can increase or decrease
• Fiscal Policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Defecits, Surpluses, & Debt

• Balanced Budget: revenue = expenditures
• Budget Deficit: revenue < expenditures
• Budget surplus: revenue > expenditures
• Gov't Debt: sum if all deficit - sum of all surpluses
• Gov't must borrow money when in a budget deficit from:
• Individuals
• Corporations
• Financial institutions
• Foreign Entities

2 policies

• DISCRETIONARY FISCAL POLICY: (action)
• Expansionary: think deficit
• Contractionary: think surplus
• NONDISCRETIONARY: (Nonaction)
• Discretionary: Increase or decrease in gov't spending and/or taxes in order to return the economy to full employment
•  Automatic: unemployment compensation & marginal tax rates are examples that help miligate the effects of recession & inflation
• Contractionary: decrease AD (control inflation)
• Expansionary: increase AD
• Expansionary:
• Recession is countered with this policy
•   (Increase gov't spending, decrease taxes)
• Contractionary: inflation is countered (decrease gov't spending, increase taxes)
• Automatic or built in stabilizers
• anything that increases the gov't budget deficit during a recession & increase budget surplus
• doesnt requiring action from policymakers

Tax Systems:

• Progressive: avg tax rate (tax revenues/GDP) rises with GDP
• Proportional: avg tax rate remains constant as GDP changes
• Regressive: avg tax rate that falls with GDP

Consumption & Saving

•  Disposable Income
• Income after Taxes or net income
• DI = Gross income - taxes
• 1. Consume (spend money on goods & services)
• 2. Save

Consumption

• Household spending
• Ability to consume is constrained by
• the amount of disposable income
• the propensity to save
• Do households consume if DI = 0
• Autonomous consumption
• Dissaving
• APC = C/DI = percent DI that is spent
• (Avg propensity to consume)

Saving

• Household not spending
• The ability to save is constrained by
• the amount of disposable income
• the propensity to consume
• Do households save if DI = 0
• NO
• APS = S/DI = percent DI that is not spent
• (Avg propensity to save)
• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 .:Dissaving
• -APS = .: Dissaving

MPC & MPS

• Marginal Propensity to consume
• change in C/change in DI
• Percent of every extra dollar earned that is spent
• Marginal Propensity to Save
• change in S/change in DI
• percent of every extra dollar earned that is saved

Determinants of Consumption and Savings 

• WEALTH
• EXPECTATION
• HOUSEHOLD DEBTS
• TAXES

Spending Multiplier Effect

• An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or in aggregate demand
• Multiplier = change in AD / change in spending
• Why does this happen?
• Expenditures & income 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 = 1/1- MPC or 1/MPS
• Multipliers are (+) when there is an increase in spending and (-) when there is a decrease

Calculating the Tax multiplier

• money is now leaving the circular flow
• Tax Multiplier = -MPC/1-MPC or -MPC/MPS
• If there is a tax CUT, then the multiplier is + because there is now more money in the circular flow