unit-4 macro review money, money supply, bank accounting, & fiscal and monetary policy
TRANSCRIPT
Unit-4 Macro Review
Money, Money Supply, Bank Accounting, &
Fiscal and Monetary Policy
Fed vs. Government• The Federal Reserve creates money
– By buying bonds in open market operations
– Too much money can lead to inflation
• The Government creates debt– By borrowing money for deficit spending
– Too much debt can lead to crowding out
RealInterestRate
Qty Loanable Funds
D1
S1
---------------------------
R1
Q1
E1
Loanable Funds = Gov’tMoney Market = Fed
Illustrates Fed’s Monetary Policy
Supply of Money is fixed by Fed
Fed buys/sell bonds to shift MS which changesshort term interest rates (federal funds rate)
Use for Gov’t Debt questions
Model of National Savings & Private Investment => (I) in GDP
Supply = National Savings
Demand = Investment (borrow $)
Money Market
RealInterestRate
Qty Loanable Funds
D1
S1
---------------------------
R1
Q1
E1
Loanable Funds
Private + PublicSavings
MS1
MD
NominalInterestRate
Qty of $
MS2
---------------i1--------------P2
Affects AD
LRAS1PriceLevel
RealGDP
AD1
SRAS1
2 Types of Monetary Policy Expansionary Contractionary
AD2
Contractionary Policy
• The Fed has 3-tools to implement monetary policy:– reserve requirement (currently 10.0%)
– discount rate (currently 6.25%)
– open-market operations (currently 5.25% target)
Currently 0.75%Currently 0.0% target
=> Sell Bonds, ↑ discount rate & ↑ reserve requirement
MS ↓ => ↑ interest rate => C↓ & I ↓ => AD ↓
--------------------------------
P1
Y1Y*
E1-----------i2
3 Functions of Money
• Medium of exchange• Unit of account• Store of value
Measuring Money Supply
M1 - most liquid (cash, checking deposits, travelers checks, etc…)
M2 - slightly less liquid (M1 + savings acct., money markets,…)
M3 = least liquid (M2 + large time deposits (over $100,000) )
MONEY
Commodity money Fiat money
Types of Money
(Std. of value)
Example:
– $100 Deposit
– 10% Reserve Ratio
This loan causesmoney creation
Excess Reserves can be lent out by bank
Banks Create Money by lending
Fractional Reserve Banking System
Assets Liabilities
First National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
First National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
Second National Bank
Reserves$9.00
Loans$81.00
Deposits$90.00
Total Assets$90.00
Total Liabilities$90.00
.
Assets LiabilitiesAssets Liabilities
$10 $100
Total Assets Total Liabilities
$100 $100
DepositsRequired Reserves
Excess Reserves $90Loans
1st Bank Balance Sheet
Money Multiplier = 1/R
Assets Liabilities
First National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
First National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
Second National Bank
Reserves$9.00
Loans$81.00
Deposits$90.00
Total Assets$90.00
Total Liabilities$90.00
Reserve Requirement = 10%
Money Multiplier = 1/10% = 10
Money Supply Change = Money Multiplier X Initial Excess Reserves
$90 * 10 = $900 increase Money Supply
Quantity Theory of Money
Velocity of money is relatively constantReal GDP is fixed in short run↑ MS only will ↑Price Level
Monetarists economists believe that money is neutral!
That is changes in Money Supply (MS) have affect on real GDP in long run
MV = PQwhere:
V = velocityP = the price levelQ = real GDPM = the quantity of money
Qty Theory of Money Equation
RealInterestRate
Qty Loanable Funds
D1
S1
---------------------------
R1
Q1
E1
CROWDING OUT
S2
1) Government Borrowing reduces Supply of Loanable Funds
2) Real Interest Rates rise
3) Private Investor is “crowded out” of debt market
Loanable Funds
Review
• Practice Questions• Practice Free Response
1 D 14 A
2 B 15 D
3 D 16 D
4 E 17 A
5 D 18 D
6 B 19 B
7 C 20 E
8 B
9 D
10 D
11 A
12 C
13 E