Video over unit 4 - Monetery policy

Video 1

Type of money

• Commodity money - involves the use of an actual good in place of money.

• Representative money - is money that can be exchanged for a commodity at a fixed rate.

• Fiat money - is money that has no value except as the medium of exchange; there is no inherent or intrinsic value to the currency. 

Three function of money

• Medium of Exchange - is what people trade for goods and service.

• Store of value - is a means for holding wealth.

• Unit of Account - is the measure in which prices are quoted. 

Video 2

Money Market Graph

 

• Shift the supply curve (always vertical ) when the FED changes the money supply to change nominal
• As the interest rate increase, the quantity of money demand decrease.
• As the interest rate decrease, the quantity of money demand increase.

 

• The money supply curve only move to the left and right.

• The money demand line only move up and down.

Video 3  

Tools of Monetary policy

•  Expansionary monetary policy - occur when a central bank acts to increase the money supply in an effort to stimulate the economy. When the FED buys bonds, it injects new funds directly into the loan-able funds market. this action increases the supply of loan-able funds and decreases the interest rate.

• Contractionary monetary policy - occurs when a central bank acts to decrease the money supply. When the FED sells bonds, which pulls funds out of the loan-able funds market. This action decrease the supply of loan-able funds and increase the interest rate.

Video 4

The loanable funds market

 

• Supply loanable funds depend on savings.
• An increase in the supply loanable funds means the quantity will increase and the interest rate will decrease.
• A decrease in the supply loanable funds means the quantity will decrease and the interest rate will increase.
• The supply loanable funds only move to the right or left.
• An increase in the demand loanable funds means the interest rate will decrease.
•  A decrease in the demand loanable funds means the interest rate will decrease.

 

Video 5

Money Creation process

*Banks create money buy making loans.

• Reserve Requirement (RR) -  is the amount of money that is required by the FED that banks should keep on any deposit. 

RR = 20%                                                                                            Loan amount = $500

Question: Total $ created

$ multiplier =1/RR               1/0.2  = 5                         5*500=   2500

Video 6

Relating the money market graph, Loanable graph, AD - AS Graph

• An increase in the demand, will increase the interest rate and the price level.

* The supply line on left graph can only move left and right.

* The supply line on the middle and right graph move up and down.

29 February 2016 [Fiscal Policy (Unit 3)]

Fiscal Policy

• Changes in the expenditures or tax revenues of fiscal gov't
• - 2 Tools of fiscal policy

• Taxes - government can increase or decrease taxes
• Spending- government can increases or decreases spending
• Fiscal- is enacted to promote our nation's economic good: full employment, price stability, economic growth

Deficits, Surplus and Debt

• Balance budget
• - revenues =Expenditures

• Budget deficit
• - Revenue < expenditures

• Budget Surplus
• - revenues > expenditures

Government debt
- sums of all deficits - sums of all surpluses

Government must borrow money when it runs a budget deficit

Government borrows from
- individuals
- corporations
-financial institutions
-foreign entities or foreign government

Fiscal Policy Two options

• Discretionary Fiscal Policy-think deficit
• Contractionary Fiscal Policy-think surplus

- Non-Discretionary Fiscal Policy (action)
Discretionary v automatic fiscal policies

• discretionary

-increasing or decreasing government spending and/or taxes in order to return the economy to full employment
-discretionary policy involves policy makers doing fiscal policy in response to an economic problem

• Automatic

-unemployment + compensation & marginal tax rates are examples of automatic policies that help mitigate the effect of recession and inflation. Automatic fiscal policy takes places with out policy makers having to respond to current economic problems 

Contractionary VS Expansionary

Fiscal Policy
Contractionary fiscal policy- policy designed to decreased aggregate demand

• - strategy for controlling inflation

Expansionary fiscal policy - policy designed to increase aggregate demand

• strategy for increasing GDP, combatting a recessionary &reducing unemployment

Expansionary Fiscal policy
-increase government spending (G ^)
- decrease  taxes (Tv)

•  Notice that the PL increase

Contractionary Fiscal Policy
-Decrease government spending
-Increase in taxes

• Notice that the PL Increase

For more on this topic, you can go to the link below

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=video&cd=1&cad=rja&uact=8&ved=0ahUKEwiN3J3s067LAhVGaD4KHUmvCwAQtwIIHDAA&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DotmgFQHbaDo&usg=AFQjCNF7ONXEGSpxiSC3UxIlsvXsLvF8hw&sig2=8EkWaGarOvPyRe-DSGRoeg&bvm=bv.116274245,d.cWw

25 February 2016 [Consumption and Saving (Unit 3)]

Consumption and Savings

Disposable Income: Income after taxes or net income

DI = Gross Income - Taxes

2 choices

•  With disposable income, household
• Consume (Spending money on goods and service
• Save (not spend money on goods and services

Consumption: Household spending the ability to consume is constrained by the amount of disposable income the propensity to save.

• Do households consume if DI = O
• Autonomous consumption
• Dissaving

APC = C/ DI = DI that is Spent saving

Saving: House hold NOT spending the ability to save is constrained by the amount of disposable income the propensity to consume.

Do house holds save if DI = O

NO

APS = S/DI=%DI that is not spent

APC and APS

APC+APS=1

1-APC = APS

1-APS =APC

APC > 1.: dis-saving

-APS.: Dis-saving

MPS and MPC

• Marginal Propensity to consume 

- change in C/ change in DI

-% of every extra dollar earned that is spend

• Marginal Propensity to save

- change in S/ change in DI

-% of every extra dollar earned that is save 

- MPC + MPS = 1

-1-MPC=MPS

-1-MPS=MPC

22 February 2016 [SRAS (Unit 3)]

Note on SRAS

• Nominal Wage: The amount of money receive be worked per unit of home.
• by the hour 
• by the day 
• Real Wage: It is the amount of goods and service a worker an purchase with their nominal wage.
• It is the purchase of your nominal wage
• Sticky Wage: Nominal wage level that is set according to an initial price level and does not very dew to labor contract and other restriction.

                                 

                                       

• Classical Range (inflation)
• Price: Flexible 
• Wages: Flexible 
• Employment level: Fixed
• Implication: Output is independent of changes in the price level.
• Intermediate Range (Upward sloping)
•  Price: Flexible 
• Wages: Fixed
• Employment level: Flexible
• Implication: output depend upper changes in price and employment level.
• Keynesian Range (Recession)
• Price: Fixed 
• Wages: Fixed 
• Employment level: flexible
• Implication: output depend upon change in the unemployment level.

Investment Demand

what is investment money spent of expenditures on:

• new plant (factories)
•  capital equipment (machinery)
• technology (hardware software)
• new homes

 Inventories (goods sold by produces Expected Rate of Return)

How does business determine the benefits?

- how does business count the cost- Interest Cost

How does business determine the amount of investment my undertake

- compare expected rate of return to interest cost

if expected return> interest costif expected return< interest cost then do not interest.Real (r%) v. Nominal (I%)

what's the difference?

-Nominal is the observable rate of interest. real subtract out inflation (pie%) and is only known ex post factorhow do you complete the real interest rate (r%)r%= I%- pie%what then determine the cost of an investment decision?- the real interest rate (r%)

19 February 2016 [Full Employment (Unit 3)]

Full Employment

• Full employment equilibrium exist where AD intersects SRAS & LRAS at the same point.

                                                 

Recessionary Gap

• A recessionary gap exists when equilibrium occurs below full employment output.

                                              

Inflationary Gap

• An inflationary gap exists when equilibrium occur beyond full employment.

                                            

18 Febraury 2016 [Aggregate Supply (Unit 3)]

Aggregate Supply

Aggregate supply: The level of Real GDP (GDPR) that firms will produce at each price level (PL).

• Long-run: Period of time where input prices are completely flexible and adjust to changes in the price level
• In the long-run, the level of Real GDP supplied is independent of the price level.

• Short-run: Period of time where input prices are sticky and do not adjust to changes in the price level.
  
  • In the short-run, the level of Real GDP supplied is directly related to the price level. 
   
• Long-run Aggregate Supply (LRAS)
• The Long-Run Aggregate Supply or (LRAS) marks the level of full employment in the economy (analogous to PPC)
• Because input price are completely flexible in the long-run, change in price level do not change firms real profit and therefore do not change firms level of output. This means that the LRSA is vertical at economy level of full employment.

• Short-run Aggregate Supply (SRAS)
• An increase in SRAS is seen as a shift to the right SRAS
• A decrease in SRAS is seen as a shift to the right
• The key to understanding shift in SRAS is per unit cost of production.

Determinate of SRAS

•  Input prices
• Productivity 
• Legal-Institutional Environment

1. Input prices: Wages (75% of all business cost) 
1. Cost of capital
2. Raw material (commodity price)
3. Foreign resource price
• Strong $ = lower foreign 
• Weak $ = strong foreign 
• Increase in resource price = Less SRAS 
2. Productivity 
1. Productivity = Total output / Total input
2. More productivity = lower unit production cost = SRAS -->
3. Lower productivity = higher unit productivity cost = SRAS <-- 
3. Legal - Institute environment 
1. Taxes and Subsides
• Taxes on business increase per unit production cost = SRAS <--
• Subsides to business reduce per unit production cost = SRAS -->
2. Government Regulation
• Government regulation creates a cost of compliance = SRAS <--
• Deregulation reduces compliance cost = SRAS -->

12 Febraury 2016 [Aggregate Demand (Unit 3)]

Aggregate Demand

• Aggregate demand is the demand by consumer, business, government, and foreign countries.
• What definitely doesn't shift the curve?
• Change in price level cause a move along the curve
• Aggregate Demand (AD) = C +I + G + Xn

Three reason why AD is downward sloping

1. Real balance effect
• High price levels reduce the purchasing power of money.
• This decreases the quantity of expenditures.
• Lower price levels increase purchasing power and increase expenditures        .
2. Interest-Rate effect 
• When the price level increases, lenders need to change higher interest rates to get a REAL return on their loans.
• Higher interest rates disscourage consumer spending and business investment.
3. Foreign trade Effect
• When U. S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods.
• Export fall and imports rise causing real GDP demanded to fall. (Xn Decreases).

Shifter of Aggregate Demand

GDP = C + I + G + Xn

Shifter of Aggregate Demand

GDP = C + I + G +Xn

Two parts to a shift in AD

• A change in C, Ig, G, and Xn 
• A multiplier effect that produces a greater change than the original change in the 4 components.
• Increase in AD = AD -->
• Decrease in AD = AD <--

 Increase in AD

 

 

 

 

 

Decrease in AD

 

  

 

Determinate of AD

Consumption

1. Consumer wealth AD
• More wealth = AD -->
• Less wealth = AD <-- 
2. Consumer expectations
• Positve EX = AD -->
• Negative EX = AD <--
3. Household indebtedness  
• Less debt = AD -->
• More debt = AD <--
4. Taxes
• Less taxes = AD -->
• More taxes = AD <--

 

Gross Private Investment

• Investment spending is sensitve to the Real interest rate
• Lower Real interest rate = more investment
• Higher Real interest rate = less investment 

• Expected returns are influence by technology and expectation of future profitability.
• High expected return = More investment
• Low expected return = Less investment

• Government spending 
• More government spending = More investment
• Less government spending = Less investment

• Net Export are sensitive to exchange rules (international value of $)
•  Strong $ = More import and less export
• Weak $ = Less import and more export 
• Relative income
• Strong foreign Economy = More Exports
• Weak foreign Economy = Less Export