Videos

Video 1:

The video introduces the types of money. We have 3 types of moneys, commodity, representative and fiat money. Commodity money is the first type of money being used, it can be think of as a fair trade, depend on how both parties set the value, say a cow for a bag of rice, etc. Representative money is the type of currency where we use a metal as a value to trade other goods, for example: gold, silver, bronze. This type of money is not used anymore because of the flexibility in prices of metal, and as the price of metal changes, it will affect the currency of that country. Fiat money is what most countries use today, it is money and has value because the government say so, it is stable since the govt has control over it.

Video 2:

The video explains the supply and demand of money on the Money Market graph. The concept is the same as supply and demand concept, the demand for money will always downward sloping and is affected by the interest rate. Supply for money in the other hand is vertical because it doesn't vary based on the interest rates because it's set and fixed by the Fed. During a recession, the Fed increase the supply of money to remain the interest rate and increase the demand for money.

Video 3:

The video explains the tools of monetary policies include tight and easy money. Expansionary has easy money, the Reserve Requirement and Discount Rate decreases, while actually they both increase. To expand the money supply the FED buys bonds. When trying to contract the money supply the FED will sell bonds

Video 4:

The video  explains the loanable fund market on graph, it is the money available in banking system for people to borrow. The demand for loanable fund is downward sloping as all the supply demand concepts. The supply for loanable funds depend on the savings, the more money saved, the more money bank have to make loans. It's a leakage in income but it is positive for supply of loanable funds when people tend to save more.

Video 5:

The video discussed about the money creating process. Banks make money by loaning money out. When a person deposit a check in to a bank, the bank will keep a certain amount as the reserve the will loan the excess reserves out. The total amount of loan created is through a multiplying expansion. Reserve Ratio is the percentage of banks total requirements. The process of the multiple deposits is to add up all the potential loans.

Video 6:

The video shows the connection between the loanable fund market, money market and the AD-AS graph together. In the money market graph, when the demand for money increase (shift to right), the interest rate increase. When that happens, in the loanable fund, the available money is reduced. That makes the AD increases in AD-AS increase, hence increase the nation's GDP. The fisher effect say the increase in interest rate will increase the inflation. it is a direct relationship.

Unit 4 - Changes in the Supply of Loanble Funds

The supply of borrowing of loan-able funds = savings (low demand for bonds)
->More savings= more supply of loan-able funds (->)
->Less savings = less supply of loan-able funds (->)
EX
-Government budget surplus = more savings= more supply Loan-able funds .: Slf -> .: v
-Decrease in consumers MPS = less saving = less supply of loan-able funds .: Slf <- .:r ^

Final Thoughts on Loan-able Funds

 

-Loanable funds market determines the real interest rate

-When government does fiscal policy it will affect the loan-able funds market

-Changes in the real interest rate (r%) will affect Gross Private investment.

Federal Fund Rate- the interest rate that commercial bank, change other commercial banks for over night

-Discount rate- loans form FED 

-Sister banks- federal fund rate

Prime Rate- the interest rate that is given to a banks most credit worthy consumers

o-4%

Unit 4 - Loanable Fund Market

Loan-able Funds Market

-The Market where savers and borrowers exchange funds (Qlf) at the real rate of interest (r%)
-The demand for loadable funds, or borrowing comes from households, firms, gov't and foreign sector. 

-The demand for loan-able funds is in a fact the supply of bands.
-The supply of loan-able funds of saving comes from households, firms government and the foreign sector. 

-The supply of loan-able funds is also the demand for bonds.
 

Changes in the Demand for Loan-able Funds

-Demand for loan-able funds = borrowing (i.e supplying bonds)
->More borrowing = demand for loan-able funds (->)
->Less borrowing  = less demand for loan-able funds (<-) 

Examples
- Government deficit spending = more borrowing = more demand for loan-able finds .: Dlf -> .: r % ^
- Less investment demand =less borrowing = less demand for loan-able funds.

Unit 4 - Key Principles

A single bank can create money (through loans) by the amount of excess reserves

The banking system as a whole can create money by a multiple (deposit on a money multiplier) of the initial excess reserves


Banks loan out all of the excess reserves
Loans are redeposited in checking accounts rather that taken in cash 

 

Money that was created by the banking system. 

Factors That Weaken the Effectiveness Of the Multiplier

1. If the Banks fail to loan out all of their excess reserves, FED weak has to change money multiplier
2. If Bank customers take loans in cash rather new checking deposits creates cash or currency drain.  

Unit 4 - Investment

Investment- We are redirecting resources, that you would consume now for the future.

Financial Asset- claims on property and income of the borrower

Financial Intermediaries- institution that channels funds from savers to borrowers.

Interest in relationship savers, saver is me, and institution is a bank, the bank invests.

3 Purposes for Financial Intermediaries
1. Share risk
-Diversification- spreading out investment to reduce risk

2. Providing Information
-Stock-broker to advise you what to do to see

3. Liquidity
-Easily to convert to cash
-Returns- the money and inverses above and beyond the sum of money that was intentionally invested.

*The higher the risk, the higher the investment bond.

Bonds
3 Components of a Bond
-Coupon rate
-MaturityPar
-Value

-Bonds are Loans or IOUs that represent debt that the Gov't or a cooperation must repay to an invester

-Bonds are generally low risk investments

Coupon Rate

-The interest rate that a bond issuer will pay to a bond holder

Maturity

-The time at which payment to a bond holder is due

 

Par Value

-The amount that an investor pays to purchase a bond and that will be re payed to an investor at maturity

Yield 

-Annual rate of return on a bond of the bond were held to maturity 

Bond you LOAN

Stocks you OWN

Unit 4 - Money

Money- is any asset that can be easily used to purchase goods and services.

Uses of Money:
 As a medium of exchange

- Used to determine value

- You need something to compare cost to

- When you hide money (shoe box, under mattress)

- In a bank it earns interest, at home its the same value

 

Types of Money

Commodity Money - value within its self (Salt, olive oil, gold)

Representative Money- represents something of value
-IOU - pay back worthless paper

 

Fiat Money

- Money because government says so (Paper currency, coins)

 

*Currency is not the same as money

All money is not currency

6 Characteristics of Money

1. Durability (last long)
2. Portability ( take it everywhere)
3. Divisibility (Broken down) ex(1 dollar is 10 dimes)
4. Uniformity (looks the same, updates)
5. Limited supply
6. Acceptability 

Money Supply

- All the available money in the economy 

M1 money- Consists of LIQUID ASSETS

-Easily can convert to cash
-Currency (paper)

-Coin

-Check-able deposits  (checks)

-Travelers Checks

M2 money- Consists of M1 Money + Savings Accounts + money market accounts.

 

3 Purposes for financial Institutions

1. Store Money
2. Save Money
3. Loan Money- Credit card/Mortgage 

4 Ways to Save Money

1. Savings Account
2. Checking Account
3. Money Market Account
4. CD certificate of Deposit

3+4 Higher interest rate. 

Loans
Banks operate on fractional reserve bank system

Interest Rate
Principal- amount of money borrowed
Interest- price paid for the use of borrowed money
- simple interest- paid on the principal
- compound interest- paid on the principal + the accumulated Interest

Types of financial Institutions

1. Commercial banks
2. loans and saving institutions
3. mutual savings banks
4. credit unions
5. financial companies   

Unit 3 - Fiscal Policy

What is Fiscal Policy
Changes in the expenditures or tax revenues of federal government

Tools of fiscal policy

• Taxes - government can increase or decrease taxes
• Spending- government can increases or decreases spending

 Goal: To promote our nation's economic good: full employment, price stability, economic growth

Deficits, Surplus and Debt

Balance budget: Revenues = Expenditures

Budget deficit: Revenues < Expenditures

Budget surplus: Rvenues > Expenditures

Government debt: sums of all deficits

*Government must borrow money when it runs a budget deficit

Government borrows from
-Individuals
-Corporations
-Financial institutions
-Foreign entities or foreign government

Fiscal Policy Options

• Discretionary Fiscal Policy-think deficit
• Contractionary Fiscal Policy-think surplus
• Non-Discretionary Fiscal Policy (no action)

Discretionary vs. 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

Contractionary
-Strategy to control inflation
-Decrease AD
-Decrease government spending
-Increase taxes

Expansionary
-Strategy to control recession
-Increase AD
-Increase GDP
-Reduce unemployment
-Increase government spending
-Decrease taxes


Automatic or Built- In stabilizers
Anything that increases the government increases its budget deficit during a recession and increases its budget surplus without requirement explicit action by policy makers.


Example: welfare check, food stamping, unemployment checks, corporate dividends, social security, veteran benefits, etc.

Economic Importance
- Taxes reduces spending and AD
- Reductions in spending are desirable when the economy is moving toward inflation
- Increases in spending are desirable toward recession

Tax System
Progressive: Average tax rate rises with GDP

Proportionary: Average tax rate remains constant as GDP changes

Regressive: Average tax rate falls as GDP changes

*Average tax rate = tax revenues / GDP

Unit 3 - Consumption and Saving

Disposable Income

• Income after taxes or net income
• DI = Gross Income - Taxes

2 choices

With disposable income, household can either

- Consume (spend money on goods, and 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

-Dis-saving

• APC = C/ DI =  % DI that's spent 

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 = 0 ?

- 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 (MPC)

• MPC = change in C/ change in DI

-% of every extra dollar earned that is spent

 

-Marginal Propensity to save (MPS)

• MPS = change in S/ change in DI

-% of every extra dollar earned that is saved

 

- MPC + MPS = 1

-1-MPC=MPS

-1-MPS=MPC

___________________________________________________________________

Spending Multiplier Effect

An inital change in spending (C,Ig,G,Xn) causes a larger change in Aggregate Spending or Aggregate demand

• Multiplier =change in AD/ hange in spending (C,Ig,G,Xn)

Why does this happen? 

Expenditures and income flow continuously which sets off a spending increase in the economy 

 

Calculating the Spending Multiplier

Can be calculated from MPC or MPS

• Multiplier = 1/1 -MPC or 1/MPS

*Multipliers are (+) when there is an increase in spending and (-) when there is a decrease in spending

Calculating Tax Multiplier

When the government taxes the multiplier it works inverse because how money is leaving the circular flow
Tax Multiplier (Always going to be negative*)

• Multiplier = MPC/1-MPS or -MPC/MPS

*If there is a tax-cut, then the multiplier is +, because there is now more money in the circular flow

Unit 3 - Three Schools of Economics

I. Classical

John B. Say
Adam Smith
David Ricardo
Alfred Marshall

What Classical Economics believe in

• Competition is good
• Invisible-Hand Market will take care of it's self
• Say's law supplies creates its own demand 
• AS- Determines output
• economy is always close to or always at full employment
• in the long run the economy will balance at full employment
• Trickle down effect will help the rich first then help everyone else later
• savings(leakage)= investment considered an (injection) because we invest
• prices and wages are flexible downward 
• no involuntary unemployment
• no reason you shouldn't be employed 
• what ever output is produced will be demanded no government intervention 

__________________________________________________________________

II. Keynesian

John Mainer Keynes

What Keynesian Economics believe in

• Competition
• AD is key and not AS
• leaks cause constant recession 
• savings cause recessions 
• believed in ratchet effects and sticky wages Block Say's laws
• In the long run we are all dead
• demand creates its own supply there fore
• savers =/ Investment and save for different reasons
• the economy is not always close to or at full employment
• prices and wages are inflexible downward
• mono-plastic competition 
• there is government intervention
• fiscal or monetary policy 

_____________________________________________________

III. Monetary 

Allen Green's Span
Ben Bernanke

What Monetary believed in

• Congress can time policy options
• government best control the health of the economy, by regulating banks and interest rates
• easy money- recession
• tight money- inflation
• change required reserves if needed
• Use bands through open market operation
• use interest rate to change the discount rate, the discount rate, federal fund rate. 

Unit 3 - 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 make investment decision?
-Cost/benefit analysis


How does business determine the benefits?
-Expected rate of Return

How does business count the cost?
- Interest Cost

How does business determine the amount of investment may undertake?
-Compare expected rate of return to interest cost

*If expected return> interest cost , invest
*If expected return< interest cost then do not invest

Real (r%) v. Nominal (I%) Interest Rate

Nominal is the observable rate of interest. real subtract out inflation (pie%) and is only known ex post factor

Real interest rate (r%)

• r%= I%- pie% 

 *Cost of an investment decision = the real interest rate (r%)

Unit 3 - Full Employment

Full employment equilibrium exists where AD intersects SRAS & LRAS at the same point

Recessionary Gap

• A recessionary gap exists when equilibrium occurs below full employment out put

Recessionary gap <- AD decreased

Inflationary Gap

•  An inflationary gap exists when equilibrium occurs beyond full employment output

Inflationary gap  -> AD increased

Unit 3 - Aggregate Supply

What is Aggregate Supply
The level of real GDP (GDPr) that firms will produce at each price level (PL)
Real GDP= Out put

Long run v Short run AS

Long Run

• period of time where input prices are completely flexible and adjustments to change 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 when 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 in the economy (analogous to ppc)
• Because input prices are completly flexible in the long-run changes in the price level do not change firm's real profits and therefore. do NOT Change firms level of full employment

 

 

Short Run Aggregate Supply (SRAS) 

• Because input prices are sticky in the short run, in the SRAS is upward sloping
• an increase in  GDPr, a decrease goes to the right and left
• The key to understand shifts in SRAS is per unit cost of production.

Per unit cost of production
total input/ total output = per unit cost of production

Changes in SRAS (decreases)
Determinants of SRAS (all following affect production cost)

• input prices
• productivity
• legal-institution environment

Input Prices

Domestic Resource Prices

• Wages (75% of all business cost)
• Cost of capital
• Raw material (commodity prices)

Foreign Resource Prices

• Strong $ = lower foreign resources prices
• Weak $ = higher foreign resources pries

Market Power

• -Monopoly and cartels that control resources
• Increases in resource prices in= SRAS shifts <-
• Decreases in resource prices= SRAS shifts ->

Productivity
productivity = total out put/ total input

• more productivity= lower unit production cost = SRAS shifts ->
• lower productivity = higher unit production cost= SRAS shifts <-

Legal- Institutional Enviornment

• Taxes ($ to gov't) on business increase per unit production cost = SRAS shifts <-
• Subsides ($ form gov't) to business reduce per unit productivity cost = SRAS shifts ->

Government Regulation

• Government regulation creates a cost of compliance = SRAS shifts <-
• Deregulation reduces compliance cost = SRAS shifts ->

Unit 3 - Consumption

What affects household spending

Consumer wealth

• more wealth = more spending (AD shifts ->)
• less wealth = less spending (AD shifts <-)

Consumer expectations

• Positive expectations = more spending (AD shifts ->)
• Negative expectations = less spending (AD shifts <-)

Household Indebtedness

• Less debt= more spending (AD shifts ->)
• more debt= less spending (AD shifts <-)

Taxes

• less taxed = more spending (AD shifts ->)
• more taxes= less spending (AD shifts <-)

Gross Private Investment spending is sensitive to

The Real Interest Rate

• Lower Real Interest Rate =more investment (AD shifts ->)
• Higher Real Interest Rate = less investment (AD shifts <-)

Expected Returns

• High Expected returns =more investment (AD shifts ->)
• Lower expected returns = less investment (AD shifts <-)
• 
  

  Expected returns are influenced by

• Expectations of future profitability
•  Technology
• Degree of excess capacity (existing stock of capital)

Government Spending

• More spending (AD shifts ->)
• Less spending (AD shifts <-)

Net Exports

• Net exports are sensitive to:
• - exchange rates (international value of a $)
• strong $ = more imports and fewer exports (AD shifts <-)
• Weak $= fewer imports and more exports=(AD shifts ->)

Relative income

• Strong foreign economies= more exports =(AD shifts ->)
• Weak foreign economies = less exports= (AD shifts <-)

Unit 3 - Aggregate Demand

What is Aggregate Demand (AD)?
-Shows the amount of real GDP that the private public and foreign sector collectively desire to purchase at each possible price level

-The relationship between the price level and the level of real GDP is inverse

Three Reasons AD is downward sloping

Real-Balance Effect
-When the Price-level is high household and businesses cannot afford to purchase as much out put.

-When the price-level is low households and businesses can afford to purchase more output
Interest Rate Effect

-A higher price level increases that interest rate which tends to discourage investment

-A lower price level decreases the interest rate which tends to encourage investment

Foreign-Purchase Effect
-A higher price level increases the demand for relatively cheaper imports

-A lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts in Aggregate Demand (AD)
It happens when:
- Change in C, Ig, G, and/or Xn
- Multiplier effect that produces a greater change than the 4 components

*increases in AD= AD ->
*decreases in AD= AD <-

 

Aggregate Demand Curve

AD increased

AD decreased