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Econ 201 week 9 notes (Money, Inflation)

by: Ekene Tharpe

Econ 201 week 9 notes (Money, Inflation) ECON 201

Marketplace > University of Tennessee - Knoxville > Economcs > ECON 201 > Econ 201 week 9 notes Money Inflation
Ekene Tharpe

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About this Document

Covers money functions/types, bank system/reserves, t-account and more.
Intro Economics: Survey Course
Donna Bueckman
Class Notes
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This 4 page Class Notes was uploaded by Ekene Tharpe on Tuesday March 15, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Donna Bueckman in Fall 2015. Since its upload, it has received 51 views. For similar materials see Intro Economics: Survey Course in Economcs at University of Tennessee - Knoxville.


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Date Created: 03/15/16
Econ  201  Notes:  Week  9     Macro  vs.  Micro   • Macroeconomics:  study  on  economy  as  a  whole   • Microeconomics:  single  household     Money:  “intermediate  good”  that  people  use  to  buy  G&S     • Technically  no  need  for  need  for  barter  system  (double  coincidence   of  wants;  difficult  and  can  be  inconvenient)   • Reduces  search  time/waste  of  recourses     Functions  of  Money:   1. Medium  of  Exchange:  buyers  give  to  sellers  for  G&S   2. Unit  of  Account:  measuring  tool  people  use  to  record  debt  and  make  prices   3. Store  of  Value:  item  that’s  purchase  power  lasts  from  present  to  future   4. Standard  of  Deferred  Payment:  not  only  exchangeable  today;  can  buy   today  and  pay  in  the  future     Types  of  Money:   1. Commodity  money:  material  with  intrinsic  value  (ex.  Gold)   2. Representative  Commodity  money:  represents  commodity     3. Fiat  money:  “money”  w/o  intrinsic  value;  used  because  of  gov’t  decree     The  Money  Supply:  quantity  of  money  available  in  the  economy       • Also  known  as  money  stock   • Parts  of  money  supply   o Currency:  paper  bills  and  coins  in  the  hands  of  the  public  (non-­‐bank)   o Demand  deposits:  Bank  account  balances  that  depositors  can  access   w/  a  check  (checkable  deposits)   Measure  of  U.S.  Money  Supply   • M1:     o Currency,  Checkable  deposit,  Traveler’s  check   • M2:         o M1  plus  savings  deposits,  small  time  deposits,  money  market  mutual   funds,  (cant  be  accessed  immediately)   The  Bank  System   • Banks  create  money  and  act  as  intermediaries       Banks     Withdraws,   Payment  of  loans,       Interest  payments   Interest  payment         Deposits   Loans     Savers   Borrowers   How  Banks  Make  Money   • Fractional  Reserve  Banking  System   o Banks  keep  reserves  (fraction  of  deposits)  and  the  rest  is  given  out  as   loans   ⋅ Based  on  Goldsmith’s  principle       Deposit   • $1000   Deposit   • $900       Bank   • Reserve:  $100  (1/10  of  deposit)   Bank   • Reserve:  $90  (1/10)   Loan   • deposit  $9)    e  rest  of  the   Loan   • Loan:  $810(the  rest)       Spend   • $900   Spend   • $810   *  $1900  is  in  the  system  and  the  bank  has  $100.   *$2710  now  in  the  system  and  the  bank  has  $190   Spender  deposits  loan  into  bank  and  system   (do  the  math!)   begins  again.   Bank  Reserves   • Fed  (The  Federal  Reserve):  set  reserve  requirements;  monetary  policy  tool   o Regulate  minimum  reserve  amounts  (the  fraction)     o Vault  cash  and  deposits  w/  Fed     • Reserve  Ratio,  R:  fraction  of  deposits  held  as  reserves   o Total  reserves  are  a  percentage     • Actual  Reserve  =  Required  Reserve  +  Excess  Reserve       • Banks  Reserve  Holding:   o Require  Reserve:  bank  must  hold   o Actual  Reserve:  what  bank  really  holds   o Excess  Reserve:  amount  beyond  what  bank  must  hold         *Actual  Reserve  =  Required  Reserve  +  Excess  Reserve                   Bank  T-­‐account:  simplified  accounting   • Statement  showing  assets  and  liabilities   o Assets:  what  bank  owns   o Liabilities:  what  bank  owes  to  deposit   *Example:  Deposit  $1000  to  1  NB  (National  Bank)           2nd  NB     1st  NB   0     it s   0 Bank   Assets   Liabilities  nk   e p o s Assets   Liabilities   OWNS     OWES   w er          B o rr o r e n cy Reserves:   cu r Res$90     Deposit:  $900   $100   Deposit:  $100   it0       e p o s   e r        Loan:      oan:     o r ro w en c y3 $810   $900   B cu r r           Process  Continues!  and  banks   create  money  with  each  loan.  Total   money  supply  eventually  equals   $10,000  dd  all  loans  till  the  end   OR  mult    origina   $1000  deposit   by  money  multiplier )       The  Money  Multiplier:   • The  amount  of  money  the  bank  system  creates  from  each  $1  of  reserves   o $1/R   ⋅ Example:            R=10%  (.1)          Money  multiplier:  1/.1=  10     ⋅ So  above  example:    $1000  deposit  X  10  =  $10,000     More  Realistic  Balance  Sheet:   • Bank  Capital:  resources  bank  gets  by  issuing  equity  to  its  owners   o Also  bank  assets  minus  liabilities         • Leverage:  borrowed  funds  pay  for  existing  funds;  investment  purposes       More     Realistic  NB       Assets   Liabilities     Leverage  Ratio:  ratio  of  assets  to  banks  capital         =  $1000/$50  =  20   Reserves:   Deposit:   Interpretation:       $200   $800     For  every  $20  in  assets,  $1  is  from  bank  owners   Loan:     Debt:  $150     and  $19  is  financed  w/  borrowed  money   $700   Securities:   $100   Capital:  $50   Financial  Crisis:   • 2008-­‐09  financial  crisis,  banks  suffered  losses  in  mortgage  loans  and  in   backed  up  securities.  Caused  by  widespread  defaults.   • Credit  Crunch:  banks  reduce  lending  because  they  have  too  little  capital     o Fed  and  Treasury  can  inject  money   • Leverage:  Amplifies  Profits  and  Losses   • Capital  Requirement:   o Gov’t  regulation  specifying  minimum  amount  of  capital-­‐  ensure  banks   can  pay  off  depositors  and  debts;  a  buffer       Measuring  the  Cost  of  Living:   • Consumer  Price  Index  (CPI)   o Key  measurement  of  inflation  use  in  the  U.S   o Use  Bureau  of  Labor  Statistics  (BLS)  to  calculate     o Measures  ‘typical’  consumer  cost  of  living   ⋅ COLA  basis:  costs  of  living  allowances/adjustments     Calculating  CPIs:   1. Make  “Basket”  =  consumers  surveyed;  determine  typical  ‘shopping  basket’   2. Find  Prices   3. Calculate  basket  cost   4. Select  a  base  year  and  calc.  index   5. CPI  in  any  year  equals   =  100  X  (cost  of  basket  in  current  year)/(cost  of  basket  in  base  year)     6. Calc.  Inflation  Rate:   a. The  percentage  of  change  in  the  CPI  from  the  previous  period   b. Inflation  Rate  Equals     =  (CPI  this  year  –  CPI  last  year)/(CPI  last  year)  X  100     *Example:  Basket  {4  Pizzas,  10  Lattes}     Year   Cost  of  Pizza   Cost  of  Latte   Cost  of  Basket   2010   $10   $2   ($10  X  4)  +  ($2  X  10)=  $60   2011   $11   $2.50   ($11  X  4)  +  ($2.5  X  10)=  $69   2012   $12   $3   ($12  X  4)  +  ($3  X  10)=  $78       Calculate  CPI  in  each  year  by  using  2010  basket  cost  as  base   Inflation  Rate   • 2010:          100  X  (60/60)  =  10015%     • 2011:          100  X  (69/60)  =  115   (115-­‐100)/(100)  X  100   • 2012:          100  X  (78/60)  =  13013%       (130-­‐100)/(100)  X  100    


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