Week 13 Notes
Week 13 Notes ECN 222 - 005
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This 5 page Class Notes was uploaded by Abigail Johnson on Friday April 15, 2016. The Class Notes belongs to ECN 222 - 005 at University of North Carolina - Wilmington taught by Adam Talbot Jones in Spring 2016. Since its upload, it has received 6 views. For similar materials see Macroeconomics in Economcs at University of North Carolina - Wilmington.
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Date Created: 04/15/16
4/15/16 9:00 PM MONDAY April 11, 2016 Savings and Investment Chapter Aplia Assignment (due wed ) Make up assignment on BB (video + Q’s + Aplia) under the “unemployment” module • Unemployed: must be over 16, no job, but actively seeking job within last 4 weeks • Not in labor force: don’t suffice any one qualification for unemployed • Unemployment rate: (# unemployed/# in the labor force)*100 • Labor Force Participation Rate: (# in labor force/adult pop.)*100 Savings comes from National Savings Demand is the demand for investment (loans) Increase in budget deficit causes fall in investment • The govn’t borrows to finance its deficit, leaving less funds available for investment. • Crowding out private sector investment • Investment is important for long-run economic growth. o Budget deficits reduce the economy’s growth rate and future standard of living. • Lower interest rates à better economy Money -Without money, trade requires Barter • Barter: find someone who has what you want and wants what you have. • Requires a double coincidence of wants: two people each have a good the other wants • *Unnecessary with money, the set of assets that people regularly use to buy goods and services from other people. Three functions 1) A medium of exchange: an item buyers give to sellers when they want to purchase goods and services 2) Unit of account: the yardstick people use to post prices and record debts 3) Store of value: an item people can use to transfer purchasing power from the present to the future 2 Kinds of Money • Commodity Money: takes the form of a commodity with intrinsic value (e.g., gold coins) • Fiat Money: money without intrinsic value, used as money because of govn’t decree and faith in its acceptance (e.g., green pieces of paper) Money Supply: the quantity of money available in the economy • Currency: the paper bills and coins in the hands of the (non-bank) public • Demand deposits: balances in bank accounts that depositors can access on demand by writing a check (or swiping a card) • Money Supply = Currency + Demand Deposits Central Bank: an institution that oversees the banking system and regulates the money supply Monetary Policy: the setting of the money supply by policymakers in the central bank Federal Reserve (Fed): the central bank of the U.S. • Not federal govn’t • Independent of politics Structure of Fed: • Board of Governors (7 members) in DC o Appointed by president and confirmed by senate (14 year terms) • Presidents of regional Fed Banks (12 located around U.S.) o Regional banks are independent entities under the BoG and self-sustained with annual “dues” • FOMC (Federal Open Market Committee): includes the board of Gov.s and presidents of some of the regional Fed banks. The FOMC decides monetary policy (one chair of FOMC) Banks… Fractional Reserve Banking System: commercial banks keep a fraction of deposits as reserves and use the rest to make loans. • The Fed est. reserve requirements: regulations on the minimum amount of reserves that banks must hold against deposits. • Banks may hold more than this minimum amount if they choose. • Reserve Requirement = 10% The Reserve Ratio, R = fraction of deposits that banks hold as reserves WEDNESDAY APRIL 13 Bank T Account (pic) (objects of value or claim)Assets Liabilities (someone has a claim on the bank) Reserves($20) Deposits ($100) Loans ($80) R = 20/100 = .2 (Money Supply) MS = Currency + Demand Deposits Assets Liabilities Reserves($.08) Deposit($.16) $.04 $.08 $.02 $.04 $.01 $.02 $.01 $.01 $.16 $.31 (~$.32 because of li)it Money Multiplier: the amount of money the banking system generates with each dollar of reserves. • The money multiplier equals 1/R • Last example: R = .5 o 1/R = 1/.5 = 2 o .16 * 1/R = .32 • Demand Deposits = Reserves * 1/R Ex: Suppose the US is completely destroyed in a war and all currency is destroyed (starting over). Assume the Fed prints $500 which the banks keep as reserves, people hold no currency and only use checks/cards. • A) If the reserve ratio is initially 50%, how large is the money supply? o $1,000 • B) As stability returns, banks loan out a larger fraction of deposits keeping only a 10% reserve, how much does the money supply expand over this period? o $5,000 (reserve) - $1,000 = $4,000 reserve expanse How does the Fed control the money supply? (4 Tools) 1) Open-Market Operations (OMOs): the purchase and sale of U.S. govn’t bonds by the Fed. • To increase money supply, the Fed buys govn’t bonds, paying with new dollars. (HINT: Janet Yellen BUYS bonds) o …which are deposited in banks, increasing reserves o …which banks loan, causing MS to expand • To decrease money supply, the Fed sells govn’t bonds, reversing the process (and Janet Yellen SELLS bonds) • OMOs are easy to buy/sell o Fed’s monetary policy tool of choice 2) Fed Pays Interest on Excess Reserves: affects banks desire to make loans influencing money supply (pay off the banks to hold back from loaning) • To increase money supply, the Fed lowers interest paid on excess reserves. o Lower opportunity cost of making loans; more loans are made. • To decrease money supply, the Fed increases interest paid on excess reserves. Increases the opportunity cost of making loans; fewer loans are made.
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