Extending the Analysis of Aggregate supply (Unit 5)

Extending the Analysis of Aggregate supply

• SRAS: in macroeconomics this is the period in which wages (and other input price) remain fixed as price level increase or decreases.
• LRAS: period of time in which wages have become fully responsive to changes in price level.

Effect over Short - Run

• In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profit are increasing while wage remain constant
• In the level long run wages will adjust to the price level and previous output levels will adjust accordingly.

 

Equilibrium in the extended model

• The extended model means the inclusion of both the short run and LRAS come.
• The long aggregate supply curve is represented with a vertical line @ full employment.

 

Demand pull inflation

• Demand pull - price increase based on increase in aggregate demand.
• In the short run, demand pull will drive up prices, and increase production.
•  In the long run, increase in aggregate demand  will eventually return to previous levels.

 

Cash push & the extended model

• Cost - push arises from factor that will increase per unit costs such as increase in the price of a key resource.

 

Dilemma for the Gov't

 

• In an effort to fight cost - push, the gov't can react in two different ways.
• Action such as spending by the gov't could begin an inflationary spiral.
• No action however  could lead to recession by keeping product and employment levels declining.

 

 

• LR Phillips curve

 

 

 

• Natural rate of unemployment is held constant.

• Because the LRPC exists at the natural rate of unemployment, structural change in the economy that affect unemployment will also cause the LRPC to shift.
• Increase in unemployment shift LRPC to the right
• Decrease in unemployment shift LRPC to the left

 

 

21 March 2016 (Unit 4)

3 Tool of Monetary Policy

The Required Reserve

1. The RR : Only a small percent of your bank deposit is in the safe.
1. The fed set the amount that bank must hold.
1. When the FED increase the money supply it increase the amount of money held in the bank deposit.
2. If there is in a recession, what should the FED do to the resserve requirement?
1. Decrease in the RR
2. MS increase, interest rate decrease, AD increase

1. If there is inflation, what should the FED do to the reserve requirement?
1. Increase in the RR
2. MS decrease, interest rate Increase, AD decrease

The Discount Rate

• The discount rate is the interest rate that the FED charge commercial banks.
• EX : If bank of America need $10 million, the borrow it from the U.S. Treasury (which the FED controls) but they must pay it back with interest.
• To increase the money supply, the FED should Decrease the discount rate (Easy money)

The open market Operations

• The FED buys & sells government bonds (securities)
• To increase the money supply, the FED should buy bond.
• To decrease the money supply, the FED should sell bond.

•  Federal Fund Rate : The rate at which member of bank loan each order over night loan.
• prime Rate : Interest that bank gives to there most credit wordy customer.

• When a customer deposit cash or withdraws cash from there deposit account, it has no immediate effect on money supply.
• Single Bank - loan money from Excess reserve
• Banking System - ER * MM = Total money supply
• It only changes- The Composition of the money, Excess Reserve, and Required Reserve.
• When the FED buys or sells bonds, ER is credited.

11 March 2016 (Unit 4)

• When the FED buys bond, it increases the money supply.

• When the FED sells bond, it decreases the money supply.

10 March 2016 (Unit 4)

Function of the FED

1. Issue paper currency 
2. Set reverse requirement
3. Lend money bank & charge them interest 
4. Check clearing service for bank
5. Act as personal bank to government 
6. supervise member banks 
7. Control money supply in the economy

• The Required reserve ratio in the % of demand deposit ( Checking account balances) that must not be loaned out.
• Required Reserve Ratio = 10% (when is set by the government).

Multiple Deposit

• Type 1 : Calculate the intial change in excess reserve.
• Type 2 : calculate the change in loans in the banking system.
• Type 3 : Calculate the change in the money supply 

9 March 2016 (Unit 4)

Time Value of Money 

• Is a dollar today worth more than a dollar tomorrow?
  • Yes
   
• Why? 
• Because of inflation & opportunity cost 

• Let V = future value of money 
• P = Present value of money 
• r = real inflation rate (nominal rate - inflation rate)
• N = years
• K = number of times interest is credited per year.

• The simple interest formula 
• V = (1 + r)^n * P

• The compound interest formula
• V = (1 + r/k)^nk * P  

• Demand have an inverse relationship between nominal interest rates and the quantity of money demanded.
• When the interest rate increase, the money demand decrease.
• When the interest rate decrease, the money demand increase.

The Demand for money

 

• Money demand shifter 
• Change in price level
• Change in income
• Change Taxation that affect investment 

the money supply

•  How does this affect AD
  • Money supply Increase - Interest rate decrease - Investment increase - AD increase 
  • Money supply decrease - Interest rate increase - Investment decrease - AD decrease  
  Financial Asset
  Stocks & Bond 
  Future benefit
  What you own
  
  
  • Stock - financial asset that convey ownership in company.
  • Bond - promise to pay a certain amount of money + interest in the future

  What Bank Do 

  • A bank is a financial intermediary
  • Uses liquid assets (i.e. bank deposit) to financial the investment of borrowers.

  • Process is known as Factional Reserve Banking.
  • A system in which depository institution hold liquid assets less than the amount of deposits
  •  Can take the form of (currency in bank vaults & Bank reserve)
   
   
  Basic Accounting Review
  • T - Account (Balance sheet)
  • Assets (Amounts owned)
  • Liabilities (Amount hole)

4 March 2016 (Unit 4)

• Uses of money
• Medium of exchange: is what people trade for goods and services.
• Unit of account: It establish economic worth in the exchange process.
• Store of value: Money hold is value over a period of time, where as product may not

• Type of Money
• Commodity Money: Involves the use of an actual good in place of money.
• EX: Gold coin, Silver coins

• Representative Money: its a paper money back by something tangible that give it value.
• EX: I    O   U

• Fiat Money: there money because the government sad so.

• Characteristic of Money 
• Durable 
• Portable
• Divisible
• Uniform
• Acceptable

• M1 money supply: currency (coin & cash), check-able deposit (demand deposit), traveler check.
• 75% money will come from M1
• It the most liquid able (easy to break down)

• M2 money supply: M1 money + saving account + deposit held by banks out side of the U.S.
• Not really liquid able (easy to break down)

• M3 money supply: M2 + certificate of deposit they held by private institution.
• If you put your money out to early, you be penalize.

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