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Week Ten Notes

by: Samantha Pruser

Week Ten Notes ECON 222 001

Samantha Pruser
GPA 3.8

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Tuesday, November 17- Lecture 19 Thursday, November 19- Lecture 20
Principles of Macroeconomics
Chandini Sankaran
Class Notes
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This 4 page Class Notes was uploaded by Samantha Pruser on Friday December 4, 2015. The Class Notes belongs to ECON 222 001 at University of South Carolina taught by Chandini Sankaran in Summer 2015. Since its upload, it has received 18 views. For similar materials see Principles of Macroeconomics in Economcs at University of South Carolina.


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Date Created: 12/04/15
Tuesday November 17, 2015 Macroeconomics Notes- Lecture Nineteen Arbitrary Redistribution of Wealth- unexpected inflation redistributes wealth among the population in a way that has nothing to do with merit or need - Unanticipated or incorrectly anticipated inflation redistributes wealth from debtors to creditors - Unanticipated or incorrectly anticipated deflation redistributes wealth from creditors to debtors EXAMPLE: Jack loans out 1,000 to Jill. Jack- creditor Jill- debtor - Term to maturity 1 year (Nov 2015- Nov 2016) - Real return (r) = 10% - N = 10% + 0% = 10% $1,100 - Unexpected Inflation 15% r= -5% From 1880 to 1896 Western farmers (debtors) took loans from eastern bankers (creditors) - Lead to unexpected deflation - Arbitrary redistribution of wealth from debtors to creditors - Deflation is more dangerous in an economy than inflation - Below 0% is deflation - Above 0% is inflation - BLS does not estimate causes of unemployment - Inflation causes the CPI and nominal wages to rise together over the long run - Moderate levels of inflation is the norm for a growing economy (Start of Chapter 14) - Economists consider money to be an asset that people are willing to accept in exchange for goods and services, or for payment of debt Asset: anything of value owned by a person or firm, is a reflection of one’s wealth (house, land and money) Liquidity: The ease of which an asset can be exchanged into an economy’s main medium of exchange Barter: goods and services exchanged directly for other goods and services Commodity Money: has a value independent of its use as money (has intrinsic value/alternative uses) EXAMPLE: gold parts, cowrie shells (Asia), beaver pelts (precolonial America) Fiat Money: money that doesn’t have alternative uses/no intrinsic value EXAMPLE: US dollars - Any money that is authorized by a central bank or governmental body that does not have to be exchanged by the central bank for gold or some other commodity - Fiat Money- Advantages o Government does not have to exchange - Fiat Money- Disadvantages o If people stop believing in its value then it ceases to have value The Functions of Money 1. Medium of Exchange: money is acceptable in a wide variety of places as a form of payment in exchange for goods and services 2. Unit of Value: money allows a way of measuring value in a standard manner. Each good has a price in terms of dollars which enables us to compare different value of goods 3. Store of Value: Money allows people to defer consumption until a later date by storing value. Enables us to transfer our wealth from today to sometime in the future. Other assets can do this too but money does it particularly well because it is liquid 4. Standard of Deferred Payment: In borrowing and lending exchanges between people over time (creditors and debtors) What can serve as money? 1. Acceptable 2. Standardized Quality 3. Durable 4. Valuable 5. Divisible Tuesday November 19, 2015 Macroeconomics Notes- Lecture Twenty US Money Supply (M1) 1. Traveler’s Checks- in place of cash, meant for traveling 2. Currency- dollars and coins 3. Checking Account deposits M2- Broader definition of money supply (Less liquid than M1) 1. Savings Accounts Deposits 2. Money market Mutual Fund Shares 3. Small denomination time-deposits- like a savings account, cannot access online We know---- 1. Treat both currency and checking account balances as “money” but nothing else 2. Realize than banks are much more trustworthy nowadays than previously - Debit cards can directly access into checking accounts, but the card is not money - Credit cards are also not money, not a reflection of wealth or assets Reserves: deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve - 100% Reserve Banking- when banks keep reserves consisting of every single dollar deposited (not realistic b/c banks would make no money) - Fractional Reserve Banking System- commonly used, banks only keep a portion of what is originally deposited into them Total Reserves = Required Reserves + Excess Reserves - Banks in the US are required to hold required reserves: the minimum amount of deposits that the bank must keep in their vaults or with the Federal Reserve o These deposits cannot be loaned out o Approximately 10%, called the Required Reserved Ratio (rrr) Required Reserves Ratio (rrr)- The minimum fraction of deposits that a back is required by law to keep - Some banks choose to hold onto excess reserves - But not legally required to do so EXAMPLE: One person in the economy deposits $1,000 100% Reserve Banking: The bank would be required to hold onto all 1,000 dollars Fractional Reserve Banking: The bank would only need hold onto 100 of the dollars deposited - That money continues to be loaned out and deposited over time, in other banks EXAMPLE: Person 1- Deposits $1,000 (of currency = M1) Deposits Loans Reserves Branch 1 $1,000 $900 $100 Branch 2 $900 $810 $90 Branch 3 $810 $729 $81 - Beginning M1 was 1,00- (what was originally deposited) - End M1 = $1,000 + $900 + $810 = $2,710 - This exhibits Money Creation by Banks Simple Deposit Multiplier SDM = 1_ RRR - This equation tells us the amount of money that is going to be created by banks under the fractional reserve banking system EXAMPLE: 10% RRR and $1,000 in currency deposited $1,000 x _ 1_ = $10,000 0.1 - So, $10,000 is the amount of money created by banks


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