UNIT 4 PART 9

The deficit in the money market the government borrow it from the American people.  When there is an increase in government spending, there is an increase in the demand of money because the government is borrowing it.This causes more demand in loanable funds in the loanable funds market.  Due to this it causes aggregate demand to increase. In the loanable funds we can increase it or reduces the national funds since all of them when there is a budget deficit in government. The Fisher effect states that the increase in interest rate has to equal the increase in price level  one to one ratio.

UNIT 4 PART 8

MONEY CREATION PROCESS  is the banks that create money by making loans. In the money creation process you have the money multiplier and the multiplier deposit expansion.
RR the percentage of the bank total deposits that they have to keep in reserve either in both cash or deposits.  The money multiplier is then multiplied by the amount of money loaned to get the potential total amount of money created in the banking system. 

UNIT 4 PART 7

LOAN ABLE FUNDS
- LF are money that is available in the banking system in order for people to borrow.

• DEMAND LOANBLE FUNDS: It is downward sloping because when the interest rate is low than people tend to borrow more. When the interest rate is high then people tend to borrow less.
•  SUPPLY LOANBLE FUNDS IS UPWARD SLOPING.

              -SIF comes from the amount of money that people have in banks and are dependent on savings. 

UNIT 4 PART 4

THE FED : TOOLS OF THE MONEY POLICY 

You have two options: EXPANSIONARY(EASY MONEY) and CONTRACTIONARY(TIGHT MONEY).

EXPANSIONARY MONEY  reserve requirement (RR) decreases, the discount rate decreases, and the FED buys bonds to expand the money supply. RR are decreased, increasing the excess reserves, which can become loans and increases the money supply. On the other hand the contractionary policy, required reserves are increased, the discount rate is raised, and bonds will be sold to reduce the money supply.

UNIT 4 PART 3 FROM THE VIDEO

MONEY MARKET 

• GRAPH #1 

*DM*

- Why does the demand for money slope downward ?

ANSWER:

-When price is high the quantity demand is low, and when the price is low the quantity demand is high.

- When the interest rate is low then people tend to borrow more for transaction or to hold assess, and when the interest rate is high people tend to borrow less.

 *SM*

-The supply of money is vertical because it doesn't vary base on interest rate. Demand for money is tie into the interest rate and the supply of money not because it is fixed and is set by the FED. It doesn't move unless the FED does something to move it.

UNIT 4 PART 1 FROM THE VIDEO

Types of Money
1. Commodity Money

-have some commodity money of goods that has other purposes that also functions as money

       *EXAMPLE: Back in the old times people use cows or any other animal as money

2. Represented Money

-that whatever you are using as currency represents a specific quantity of approach money

       *EXAMPLE: Gold or Silver

3. Fiat Monet: money that is not backed by precious metal, it is legal tender, it is money that must be accepted for transaction, and is backed by the government

       *EXAMPLE: because the government says it has value it has value. Like the government decides to make all socks worth one dollar, the sock is worth one dollar can use it to pay.    

 Functions of Money(things that actually money does)
1. Money is a Medium of Exchange

-When you buy something you give money

UNIT 4

UNIT 4

Money

     I.        Uses of Money

a.       Medium of exchange: it is basically borrow or trade

b.       Unit Of Account: It establish economic value

-EX: Piano lesson and you pay $10 for ever lesson. Instead of paying instead the teacher wanted a cake. So from now on they pay with cake

c.       Store Of Value: money holds its value over a period of time where as products may not ( no matter where you store your money it doesn’t lose its value) Except the purchasing power

   II.        Types of Money

A.)   Commodity Money: It gets its value form the type of material from which it is made

-          EX: GOLD AND SILVER COINS

B.)    Representative money: It is paper money back from something tangible that gives it value

-          EX: IOU MONEY

C.)   Fiat Money: Money basic the government said so

 III.        Characteristics of Money

A.      Divisible: break the dollar bill into many ways.

B.      Portable: Put your money in socks, bra

C.      Uniform: A dollar it’s a dollar, doesn’t matter if you change the president but a dollar is a dollar

D.     Acceptable:

E.       Scare: Money will always be around but it wont

F.       Durable:

 IV.        Money Supplied

A.      M1 Money: 75 percent of money that comes from circulation comes from here (It is liquid- easy to convert)

1.      Cash and coins >Currency

2.      Checkable deposits >Demand deposits  

3.      Traveler’s checks

B.      M2 Money

-          Consist of M1 Money, Savings accounts, and deposits held by banks outside of the USA

-          Saving Account is not a transaction where you can’t pull out ( Only transfer from the saving to checking account)

C.      M3 Money

-          Consists of M2 Money and certificated of deposit money know as CD’s

-          What CD’s are if you keep money in it will grow

UNIT 3

Classical vs. Keynesian

Ø  Classical Vs. Keynesian

v  Modern followers

-          Adam Smith, J.B Say, David Ricardo, Alfred Marshall

-          J.M. Keynes

v  Say’s Law

-          Supply creates its own demand.

-          Production = income = spending

-          Under spending is unlikely

-          Whatever output is produced, it will be demanded.

-          Demand creates its own supply.

-          Depressions refute Say’s law.

-          Underspending persists.

v  Savings and Investments

-          Savings = Investment income

-          Savings (leakage) = Investment (injection)

-          Spending > Business > Households > Spending

-          Savings does not equal Investment

-          Savings: Future needs, precaution, habit, income level, interest rate.

-          Investment: Interest rate, rate of profit, expectations

v  Loanable Funds Market: Ig = gross investment , r = interest rate, Sm = supply of money, S_LF=Savings (Supply of money), D_LF=Investment (Demand of money)

-         

-          Investment from savings, cash, checking accounts.

-          Lending creates money.

-          Sm increases.

-          Inflation/unemployment are unstable.

v  Wage/price flexibility

-          Prices/Wages are flexible downwards.

-          Prices/Wages are inflexible downwards (Ratchet Effect).

v  Supply Curve

-          Vertical

-          Horizontal

v  Output and Employment

-          AS determines output and employment.

-          AD determines output and employment.

v  Unemployment: S = Savings, I = Investments

-          Rarely exists due to wage/prices inflexibility.

-          The cause is external and war.

-          Usually exists.

-          External: War

-          Internal: S does not equal I

v  Aggregate Demand (AD)

-           AD determines price level.

-          Reasonably stable if money supply is stable.

-          AD changes due to its determinants.

-          AD is unstable even if money level is stable due to fluctuations in investment standing.

v  Basic Equation

-          MV = PQ

-          C + Ig + G + Xn = GDP

v  Role of Government

-          Monetary Rule

-          Maintain a steady money supply.

-          Laissez faire is best and economy is self-regulating.

-          Believe in fiscal policy.

-          Tax and spend

-          Active government

-          Economy is “not self-regulating”.

v  Inflation (% change Price level Increases)

-          Caused by too much money.

-Caused by too much demand.

v  How long the short run

-          Short time

-          Long time

v  is Emphasis Today

-          Microeconomics

-          Macroeconomics

v  More Information

-          -Believe competition is good

-          Invisible hand (government will regulate itself).

-          In long run, economy will balance at full employment.

-          Trickle down effect- help rich first then others.

-          AD is key, not AS.

-          Leaks and savings cause recessions.

-          In the long run, we are all dead.

UNIT 3

Fiscal Policy- changes in the expenditures or tax revenues of the federal government.
             

• 2 tools of fiscal policy

          1.)Taxes: government can increase or decrease spending.
          2.)Spending: government can increase or decrease spending.


Deficits, Surplus, and Deficit

• Balanced budget

          *revenues= expenditures
            (it has been 16 years since we have had one)

•  Budget deficit

           *revenues < expenditure

• Budget surplus

           *revenues > expenditures

•  Government debt

            *sum of all deficits - sum of all surpluses

• Deficits

             *government must borrow money when it runs a budget deficit
             *government borrows from:
                     1. individuals
                     2. corporations
                     3. financial institutions
                     4. foreign entities of foreign government


Fiscal Policy Two Options

•    discretionary fiscal policy (action)

           *expansionary fiscal policy (think deficit)
            *contraction fiscal policy (think surplus)
           *Non- Discretionary fiscal policy (no actions)


Discretionary VS. Automatic Fiscal Policies

Discretionary
       *Increasing or decreasing governments 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.


!!!!!CAN NOT HAPPEN AT THE SAME TIME!!!!!


Automatic
     *unemployment compensation and marginal tax rates are examples of automatic polices that help militate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

Expansionary Fiscal Policy (easy) VS. Contraction Fiscal Policy (tight)

• Expansionary                                                 

* combat a recession                                      

*increase government spending & decreases taxes                                                   

• Contraction

*combat inflation

 * decrease government spending & increase taxes

Automatic or Built in Stabilizers

• anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring expect action by policy makers.

     EX. Transfer Payments, Social Security, Medicare, Medicate, Unemployment, VA benefits

Tax Structures

•  progressive tax system 

               *average tax rate rises with GDP

***EQUATION:   tax revenue/GDP

• proportional tax system 

               *average tax rate remains constant as GDP changes

• regressive tax system

               *average tax rate falls with GDP

UNIT 3

Consumption & Saving

Disposable Income (DI)

•         Income after taxes or net income

•         DI = Gross Income - Taxes

2 Choices

•         With disposable income, households can either

–        Consume (spend money on goods & services)

–        Save (not spend money on goods & 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 = 0?

–        Autonomous consumption

–        Dissaving

•         APC = C/DI = % DI that is spent

Saving

•         Household NOT spending

•         The ability to save is constrained by

–         The amount of disposable income

–        The propensity to consume

•         Do households save if DI = 0?

–        NO

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

APC & APS

•         APC + APS = 1

•         1 – APC = APS

•         1 – APS = APC

•         APC > 1 .: Dissaving

•         -APS .: Dissaving

MPC & MPS

•         Marginal Propensity to Consume

–        ΔC/ΔDI

–        % of every extra dollar earned that is spent

•         Marginal Propensity to Save

–        ΔS/ΔDI

–        % of every extra dollar earned that is saved

•         MPC + MPS = 1

•         1 – MPC = MPS

•         1 – MPS = MPC

Determinants of C & S

•         Wealth

–        Increased wealth .: Inc. C & Dec. S

–        Decreased wealth .: Dec. C & Inc. S

•         Expectations

–        Positive .: Inc C & Dec S

–        Negative .: Dec C & Inc S

•         Household Debt

–        High Debt .: Dec C & Inc S

–        Low Debt .: Inc C & Dec S

•         Taxes

–        Taxes Inc .: Dec C & Dec S

–        Taxes Dec .: Inc C & Inc S