PRINCIPLES OF ECO II
PRINCIPLES OF ECO II ECO 202
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Miss Annamarie Kovacek
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This 25 page Class Notes was uploaded by Miss Annamarie Kovacek on Friday October 23, 2015. The Class Notes belongs to ECO 202 at University of Kentucky taught by James Gillette in Fall. Since its upload, it has received 19 views. For similar materials see /class/228264/eco-202-university-of-kentucky in Economcs at University of Kentucky.
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Date Created: 10/23/15
Ch 14 Money Banks amp the Federal Reserve System Major Ideas quotBanks Don t Really Create Money Do They Professor Krislov Fractional reserve banking system and the lender of last resort quotThe Buck Starts Here Shadow Banking System Fractional Reserve Banking System Banks Runs amp Bank Panics Fractional reserve banking system banking system In wlych banks keep lt of depOSIts as Why Bank Run Many depositors simultaneousl decide to money from a bank One ban can handle by from other banks Bank Panic Many banks experience at the same time Banking system could be In Bank panics in the US in the late 18005 amp early 19005 lead to Households amp firms had trouble gaining access to their accounts less oans available amp decrease In money supp y Systemic Risk in the Banking System Federal Reserve established in 1914 to end During a bank run or bank panic why can t the banks in the to pay the depositors between deposits amp loans Why couldn t investment banks during the 20072009 financial crisis sell Syitpemic Risk do you see the system wide ris Federal Reserve System quotLender of Last Resort Lender of Last Resort central bank makes loans to quotbanksquot that have and cannot borrow funds Is the lender of last resort function a bail out for the banks How so To whom How not Who does it save Federal Reserve during the Great Depression allowed banks to fail FDIC gederal Deposit Insurance Corporation set up in 1934 ecause of in banking system So Why Did We Have a quotBank Panic in 2007 2009 The bank panic was in the with investment banks money market mutual funds amp hedge funds quotShadow banking system had no insurance much less regulation than commercial banks amp little Federal Reserve involvement Federal Reserve System Monetary Policy Actions the Fed takes to manage the amp to pursue policy objectives Three traditional monetary policy tools amp Federal Open Market Committee Fed committee responsible for open market operations amp managing the money supply Meets every 6 weeks Federal Reserve System Open Market Operations Buying amp selling of bg the Fed in order to control the Why the purchase by the Fed of a Treasury security from the public increases bank reserves amp therefore the money supply When the Fed buys Treasury securities from the public the sellers of the securities the funds In their banks increasing and therefore typically the money supply as banks loan outt e quotThe Buck Starts Here Federal Reserve System Open Market Sale Why the sell by the Fed of a Treasury security from the public decreases bank reserves amp therefore the money supply When the Fed sells Treasury securities to the public the buyers of the securities pay with checks written on their checking account deposits decreasing and therefore typically the money supply as banks make loans Federal Reserve System Discount Policy Discount loans loans the makes to Discount rate interest rate the charges on discount loans When a bank receives a loan from the Fed the banks increase by the amount of the loan Lender of Last Resort function when banks face problems Fed opened the discount window to during the financial crisis Federal Reserve System Reserve Requirements How does a decrease in the required reserve ratio affect the simple deposit multiplier and the real world money multiplier Why does a decrease increase in the required reserve ratio increase decrease the money supply The Shadow Banking System amp the Financial Crisis of 2007 2000 Handout To Win Read Chapter 14 to complete understanding Work MyEconLab Study Plan Questions Major Points Next Time Ch 8 GDP Measuring Total Production amp Income Gross Domestic Product GDP value of all goods amp services groduced in a country during a year Total Problem 110 p 263 Real GDP vs Nominal GDP Real GDP value of final good amp services evaluated at prices Real GDP2012 Prices x Quantity2012 Adjusted for Nominal GDP value of final goods amp services evaluated at prices Nominal GDPm2 Prices X Quantity2012 Adjusted for GDP At Home amp Around the World Avatar vs Gone with the Wind Real vs Nominal Box Office Receipts FRED Database US Real GDP What two things stand out 0 CIA World Factbook Largest Economies Top Five amp BRIC nations Total Production Total Everything a firm receives from the sale of its output is paid out as to the of the factors of production Apple iPod example GDP Total Tota Components of GDP Four Major Categories of Expenditures GDPCIGNX Consumption C on goods amp services not including spending on new houses GDP in 2010 China c only M Services eg medical care education amp haircuts than sum of spending on durable amp nondurables goods Nondurable goods eg food amp clothing Durable goods eg automobiles amp furniture life span gt 3 years FRED Which dropped the most during the recession Components of GDP Four Major Categories of Expenditures GDPCGNX Investment I on new factories office building machinery amp additions to inventories plus spending by households amp by firms on new houses GDP in 2010 Business fixed investment new factories office buildings amp machinery Residential investment single family amp multi family houses Changes in business inventories FRED Look at the housing crisis Components of GDP Four Major Categories of Expenditures GDPCGNX Government Purchases G on goods amp services of GDP in 2010 eg teachers salaries highways amp aircraft carriers Doesn t include transfer payments like Social Security payments amp unemployment insurance payments Components of GDP Four Major Categories of Expenditures GDPCGNX Net Exports NX GDP in 2010 exports are goods amp services produced in US amp purchased by foreign firms households amp governments imports are goods amp services produced in foreign countries amp purchased by US firms households amp governments Two Types of Production Not Included in GDP Goods amp services people produce for themselves Buying amp selling of goods amp services that is concealed from the government or because the goods amp services are illegal Largest cash crop in Kentucky GDP Not a Perfect Measure of WellBeing Value of leisure not included in GDP GDP not adjusted for pollution amp other negative effects of production Not adjusted for changes in crime amp other social problems Measures size of pie not how divided To Win Read Chapter 8 with these slides as a guide to complete understanding Work MyEconLab Ch 8 Study Plan Questions Major Points Next Time
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