Video number 1

There are three types of money. The first one is commodity is the purpose that function as money. A representative is represent metals. Fiant is the money that must accept by transaction. There are three types of function of money. The first one is medium of exchange it means you exchange something. Store of value is when you put money away and you expected to still have value when you use it. The last one is the unit account with this we can said price indicate worth.

Video number 2
Money Market
Demand is down because price is high, so demand is low but the  price is high, basically they have an inverse relationship.SM is vertical does not vary on interest rate. Interest rate on the  y-axis. on the money graph x-axis is QM increase money supply is the right decrease is to the left.

Video number 3

Expansionary and contradictary is have a inverse relationship. Discount rate is the bank can borrow from the FED. In expand the money supply the Fed buy bonds. in contradictary the Feb sell bonds.

Video number 4

Interest rate on the y-axis. quantity of loanable fund on the axis. Dlf downward and Slf is upward. The slf is the amount of money people have in bank. The more people put money in the bank, the more loans bank will be available.

Video 5
Money creation create money by making loans. RR is the amount the bank need to keep. Multiplier is 1/RR. Multiplier deposit to add all the potential loans. Money creation have multiplier and multiple deposit expansion.

Video 6

Money market lonable fund and AD-AB graph. It's better to put them side by side. Money supply and loanable fund have a interest rate as their y-axis. Both DM and Dlf are going down

Loanable funds market:

 

• The market where savers and borrowers exchange funds at the real rate of interest.
• Demand for loanable funds or borrowing comes from households,firms,gov and the foreign sector. The demand for loan able funds is in fact the supply of bonds. 
• The supply of loan able funds or savings comes from households,firms,gov and the foreign sector. The supple of loan able funds is also the demand for bonds.

Changes in the demand for Loanable funds 

• Remember that demand for Loanable funds=borrowing 
•  More borrowing=more demand for Loanable funds (->)
• Less borrowing=less demand for Loanable funds (<-)

Changes in the supply of Loanable funds 

• Remember that supply of Loanable funds=saving 
• More saving=more supply of Loanable funds(->)
• Less savings=less supply of Loanable funds (<-)

Final thoughts on Loanable funds 

• Changes in saving and borrowing create change in loanable funds and therefore the r% changes
• change in the real interest rate will affect GDP

 

key principle

• A single bank can create money (through loans) by the amount of excess reserves
• Banking system as a while can create money by a multiple (deposition) money multiplier of the initial excess reserves.

Factors that weaken the effectiveness of deposit multiplier:

1. If banks fail to loan out all of its excess reserves.
2. If bank customers take their loans in cash rather than in their checking account deposits it creates a cash or currency drain.

MONEY MARKET

Inverse relationship between money, demand, and interest rates.

DM ; MD up    :  ir down

money demand shifter:

1. Change in price level
2. Change in income

Function of the FED

-It issues paper currency 

-sets reserve requirements and holds reserves of banks

-lends money to banks and charges them interest

-they are a check clearing service for banks

-It acts as personal bank for the Government

-supervises member banks

-Controls the money supply in the economy

How banks work

Asset

• Reserves
• Required reserves(rr) - % required by FED to keep on hand to meed demand.
• Excess reserves(er) - % reserves over and above the amount needed to satisfy minimum Reserve ratio by FED
• Loans to firms, consumers, & other banks (earn interest)
• Loans to government (if the bank fail could sell the building/property) 

liabilities + Equity

• Demand deposits ($ put into bank)
• Timed deposits(CD)
• Loans from: FED reserves & other banks
• Shareholders equity

Creating a bank:

• Transaction
• Depositing reserves in a FED. reserve banks
• Required reserves
• Reserve ratio commercial banks required reserve/commercial banks checkable deposit liability 
• Excess Reserve

 

Time Value of Money

Time value of money 

Time Value of Money

Is a dollar today worth more than a dollar tomorrow?
- yes

• Inflation
• opportunity cost and inflation
• this is the reason for  changing and paying interest

Let V= future VALUE of prices
P= PRESENT VALUE of prices
R= REAL INTEREST RATE (Nominal rate- inflation rate) express as a decimal
n= YEARS
K= Number of times interest is credited per year

Simple Interest Formula

V=( 1+ R)^n x P

Compound Interest Formula
V=(1+R/K)^nk x P

R% = 1 % - pie%

Monetary Equation of Exchange
MV=PQ
-M= Money supply (M1 or M2)
-V Money's Velocity (M1 or M2)
-PL= Price Level (PL on the AS/AD diagram)
-Q= Real GDP ( sometimes labeled Y on the AS/AD diagram)

 

Investment

Investment: directing resources,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.

  Purposes for Financial Intermediaries

• Share risk Diversification 
• Reduce risk
• Provides
• Liquidity returns account investment received above and beyond in a sum of money that investment
  

Bond

• Coupon rate
• Maturity
• Par Value

• Loans or IOUs that represent debt that the Government  or a cooperation must repay to an investor
• Low risk investments
• Coupon Rate
• Interest rate that a bond issuer will pay to a bond holder
•  It's time at which payment to a bond holder is due
• Hard value it's a account that invested pay to purchase a bond that will be repay at maturity
• 
  

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


Bond you LOAN
Stocks you OWN

~MONEY~

Money- that is use to purchase goods and services.

Three uses of money

• Meaner of exchange to determine value.

• Unit of Account 
• compare prices

• Store Value
• how money can be store                                                                                                  

1.  Commodity Money: value within its self

• Salt
• olive oil
• gold

2.  Representative Money: Represents something of value

• IOU

3.  Fiat Money: Money because government says so 

• coins

Currency is money BUT not all currency is money

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

• Total value of finical available in use economy
• Liquid assets (easily to convert to cash)
• Crash
• Paper Currency
• coin
• check-able deposits or demand deposits  (checks or checking account)
• Travelers Checks

M2

• Consists of M1 Money
• Savings Accounts 
• money market accounts. 

Financial Institutions

1. Store Money
2. Save Money
3. Loan Money(Credit card)

Save Money

• Savings Account
• Checking Account
• Money Market Account
• CD certificate of Deposit

Loan

• Banks operate on reserve system which where they keep their fraction of the fund and loan out the rest.

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 and Interest

Formulas
P- Principal
R- rate of interest
T- time
Simple Interest
I= P x R x T/ 100
Time
T= I x 100/ P x R
Principal
P = I x 100/ R x T
Interest Rate
R = I x 100/ P x T
Types of financial Institutions

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

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 borrows from

• individuals
• corporations
• financial institutions
• foreign entities or foreign government

Fiscal Policy Two options

•  Discretionary fiscal policy (action)
• Expensionary fiscal policy (think deficit)
• 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, combating a recessionary &reducing unemployment

Expansionary Fiscal policy

• increase government spending 
•  decrease  taxes
• notice that the PL increase

Contractionary Fiscal Policy

• decrease government spending
• Increase taxes

Automatic or Built- In stabilizers.

• Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring action by policy makers
• Taxes reduce spending Aggregate demand
• Reduction spending  

Transfer payment

•  welfare check
•  food stamping
•  unemployment checks
•  corporate dividends
•  social security
• veteran benefits

Progressive Tax system
Average tax rate ( tax revenue/ GDP)

  Proportional Tax System
Average Tax rate remains constant as GDP changes

Regressive Tax System
Average tax rate falls

Disposable Income

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

2 choices

  which 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 = O

• Autonomous consumption
• Disadvantage
• 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.Dissaving
• -APS.: Dissaving

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

Three School of Economic
Classical

• John B. Say
• Adam Smith
• David Ricardo
• Alfred Marshall
• 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 

Keynesian

 

• John Mainer Keynes
• 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 

Monetary 

• Allen Green's Span
• Ben Bernanke
• 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. 

Investment Demand Curve 

*what is the shape of the investment down curve?
Downward sloping

why?

• when interest rates are high, fewer investments are profitable;when interest rates are low more investments are profitable

Shifts in Investment Demand (ID)

 

cost of production 

• lower cost shift ID->
• high cost shift ID <-

  Business taxes

• lower business taxes shift ID ->
• higher business taxes shift ID<-

  Technological change

• new technology shift ID->
• lack of technology change shift ID<-

Stock of Capital 

• If an economy is low on capital, then ID ->
• If an economy has much capital then ID <-

Expectations

• positive expectations shift ID ->
• Negative expectations shift ID <-

(Long run is always vertical)
 

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 
• Anytime have recessionary gap graph move to the left.

inflationary GA

•  An inflationary GAP exists when equilibrium occurs beyond full employment output
• Ad will move to the right

Investment Demand
Interest Rate

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 cost
• If 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 factor
• how 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%)

Aggregate Supply
The level of real GDP (GDPr) that firms will produce at each price level (PL)

 

Long run v Short run

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 completely 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

• 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

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 <-
• Decreases in resource prices= SRAS ->

Productivity
productivity = total out put/ total input

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

Legal- Institutional Environment

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

• - government regulation creates a cost of compliance = SRAS <-
• - deregulation reduces compliance cost= SRAS->

 

Aggregate Demand (AD) 

• shows the amount of the real GDP that the private, public & foreign.l sector collectively desire to purchase at each possible price level. 

• relationship between price level & level of real GDP is inverse.
• Three reason AD is download sloping
•  Real balance effect
• When the price level is high households and business can not afford to purchase as much output 
• When the price level is low households and business can afford to purchase more output.

Interest Rate Effect: 

• A higher price level increases the interest rate which tends to discourage investment. 

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

Foreign Purchases Effect: 

-Higher price level increases the demand for relatively cheaper imports.

-Lower price level increases the foreign demand doe relatively cheaper U.S. Exports. 

Shifts in Aggregate Demand

There are two parts to a shift in AD

 A change in C,Ig,G & Xn

 A multiple effect that produces a greater change than the original change in the 4 component.

 increases in AD= AD--->

decreases in AD= AD <----

Consumption

 household is spending is affected by

1.  consumer wealth
2.  more wealth=more spending 
3.  Less wealth=less spending 

consumer expectations

• Positive expectation=more spending

• Negative expectation=less spending

Household indebtedness:

Less debt=more spending 

More debt=less spending 

Taxes: 

Less taxes= more spending

More taxes= less spending 

 

Gross Private investment  

-Investment spending is sensitives

The Real Interest rate

Lower real interest rate(more investment)

Higher real interest rate( less investment)

• Expected returns

Higher expected returns(more investment) (AD->)

Lower expected returns(less investments) (AD<-)

Expected returns are influenced by

• Expectations 
• Technology 
• Degrees of excess capacity  
• Business taxes 

Government Spending

More gov spending (AD->) 

Less gov spending (AD<-)

Net exports 

Exchange rates(international value of $)

Strong $=more imports and fewer exports (AD<-)

Weak $= fewer imports & more exports (AD->)

Relative income 

Strong Foreign Economies= more exports (AD->)

Weak foreign Economies=less exports (AD<-)