Unit 4 – Money & Banking / Monetary Policy (3-27-16)

Ap Macroeconomics Unit 4 - Relating the Money Mkt., Loanable Funds Mkt., and AD-AS

Part 9

https://www.youtube.com/watch?v=k37Y6BKcpsY&index=8&list=PL2CB281D126F65E26

Overview-

In the comparison of the MMG,LFG, and AD-AS graphs they are very similar to each other. The reason for this is that if one graph's changes or shifts to the left or right then every graph will move to the left or right, this is because MMG shifts due to the gov't increasing money demand, LFG like the MMG shifts right due to an increase of the quantity of the loanable funds, and in the AD-AS graph the AD increases which is also shifting to the right. The changes in the supply of money is also a change in the price of money in each graph which can either shift it left or right. The main thing is the Fisher effect which states that if price increases then the other supply's of money increases or vice versa.

Unit 4 – Money & Banking / Monetary Policy (3-27-16)

Ap Macroeconomics Unit 4 - Money Creation and Multiple Deposit Expansion

Part 8

https://www.youtube.com/watch?v=1tUC59pz95I&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

Overview-

Money has a certain process that it goes into there are two parts they are a multiplier and multiple deposit expansion. Money creation is the governments process to create money through loans. This for example is the RR is 20% and the loan is $500, the total money created is $2500 this is calculated by 1/RR x loans. This is increase is from the Multiple deposit expansion which affects the entire banking system but it is only a potential increase.

Unit 4 – Money & Banking / Monetary Policy (3-26-16)

Ap Macroeconomics Unit 4- The Loanable Funds Market

Part 7

https://www.youtube.com/watch?v=rdM44CC0ELY&list=PL2CB281D126F65E26&index=6

Overview-

The Loanable Funds graph is labeled by y-axis being price and Quantity of funds of the x-axis. The demand for loanable funds is downward slopping as for supply it is upward slopping. The reason that supply is that supply is dependent on the savings and will only increase when the people have a reason to spend money and vise versa when supply decreases (people want to save money). The government if on the other hand wants to go through with a deficit then they will have a demand for that money and increase the loanable funds that the people can "use".

Unit 4 – Money & Banking / Monetary Policy (3-26-16)

Ap Macroeconomics Unit 4 - The Fed's Tools of Monetary Policy

Part 4

https://www.youtube.com/watch?v=XJFrPI8lLzQ&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

Overview-

There are 3 types of tools that the fed uses for Monetary Policy. They are split into two parts Expansionary and Contractionary (Ez. money and Tight Money) which is further split into 4 parts which is RR (Reserve Ratio).Discount rate, Securities/Bonds (Fed buys/sells to change money supply) and is changing the Fed Funds Rate. Expansionary has a decreasing value of RR, Discount rate, Securities/Bonds where the Fed buys bonds to increase the money supply. Contractionary has a increasing value of RR and Discount rate then in Securities/Bonds Fed sells bonds which decreases the money supply.

Unit 4 – Money & Banking / Monetary Policy (3-26-16)

Ap Macroeconomics Unit 4- Money Market Graphs

Part 3

https://www.youtube.com/watch?v=gzFdeM6lUno&feature=bf_prev&list=PL2CB281D126F65E26&lf=results_video

Overview-

Money market graphs are labeled by y-axis: Interest rate x-axis: commodity (Qm) with a downward slopping demand for money due to Price is high then demand is low and vise versa, supply of money is vertical due to it not varying and is fixed by the Fed. The Money market graph also can only move right or left shifting demand for money not money supply unless changed by the Fed. The only way to change supply of money the Fed can increase or decrease the money supply during a rescission or during inflation. The government also only changes the money supply based upon interest rates and the government attempt to stabilizing interest rates. 

Unit 4 – Money & Banking / Monetary Policy (3-26-16)

Ap Macroeconomics Unit 4 - Types and Functions of Money

Part 1

https://www.youtube.com/watch?v=YLsrkvHo_HA&feature=results_video&playnext=1&list=PL2CB281D126F65E26

Overview- 

Money has three types of how it is used for example through trading goods for another good, using notes that hold value (gold standard), or a currency that is backed by the government. They have also been based on how often it is used going from primitive to modern. Money also contains a separate functions which is determined by what it is used for the they are; money is a Medium of Exchange, a Store of Value, and a Unit of Account". These three functions are based upon the actions a user is doing for example if they buy an item they are using the "Medium of Exchange", if they save the money they are using "Storing of Value", and lastly if they decide to buy a brand name then they are using "Unit of Account".


Notes:(to self)
(3) Types of Money
-Commodity money: a trade of goods that hold value (trading)
-Representative money: paper money backed by valuable metals(notes that held a certain value)
-Fiat Money: money not backed by valuable metals (guaranteed to be worth something by the government)
(3) Functions of Money
-Money is a "Medium of Exchange": Purchasing something with money
-Money is a "Store of Value": Putting money into a savings account
-Money is a "Unit of Account": Price =Worth (Quality) -Ex:Brand name vs cheap

(3-1-16) Unit III Fiscal Policy

Fiscal Policy

Fiscal Policy-
The change in expenditures or tax revenue of the federal government
-can either increase or decrease taxes or spending

Types of Budget
Balanced Budget= Rev. = Expenditures
Deficit= Rev. < Expenditures
-when in deficit, gov't borrows from
1. Individuals 2.Corporations 3. Financial Institutions 4. Foreign Entities and Countries

Surplus= Rev. > Expenditures
Gov't Debt= Sum of deficits - sum of surplus
Discretionary (action)
-Expansionary when in deficit
-combats recession
-increases gov't spending; decreases taxes
-Contractionary when in surplus
-combats inflation
-decreases gov't spending; increases taxes
-increase/decrease gov't spending or taxes to get back to FE (fiscal policy responds to economic problems that [may] occur)

Non-Discretionary (wait)
Automatic or built-in stabilizers - include unemployment compensation and marginal taxes; they happen without the use/interference of policy makers

Tax Systems
Progressive- Avg. tax rate rises with GDP (Tax revenue/GDP)
Proportional- Avg. tax rate remains constant as GDP changes
Regressive-Avg. tax rate falls with GDP
More Progressive = More Stablility

(2-25-16) Unit III Consumption and Saving Multipliers

Consumption and Saving Multipliers

Disposable income

income after taxes [Gross-Taxes]

Consume or save [spend or not to spend]

Consumption - restricted by DI & Propensity to save

-If DI = 0, autonomous consumption and dissaving [occurs]

-Saving - Restricted by DI & Propensity to consume

-if DI = 0, no saving [occurs]

-APC/APS = Average Propensity to Consume/Save

APC + APC = 1

1 - APC = APS

1 - APS = APC

-APS or when APC > 1 -> Dissaving

Multipliers

MPC + MPS = 1

MPC = 1 - MPS

MPS = 1 - MPC

-MPC

marginal.. fraction of any change in DI consumed [change in Consumption/change in Di]

-MPS

Fraction of DI saved [change in Saving/change in DI]

-Spending Multiplier Effect

Initial change in spending; causes larger change in AS or AD

(1/[1-MPC]) or 1/MPS

Multiplier = (change in AD/change in C, Ig, G, or Xn)

Positive= increase; Negative= decrease

-Tax Multiplier

Reverse multiplier because it leaves circular  flow

Tax cut is positive because money enters circular flow

Always negative

-(MPC/[1-MPC]) or -(MPC/MPS)

Multiplier = (change in AD/change in C, Ig, G, or Xn)

(2-24-16) Unit III Classical vs. Keynesian

Classical vs Keynesian

Classical

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

-Say's Law:

supply creates own demand

production= income= spending

under-spending is unlikely

whatever output is produced will be [in] demand

-Savings and investment:

savings=investment income

savings (leakage)= investment (injection)

-Loanable funds market

-Wage/Price Flexibility:

Downward

-Supply Curve:

Verticle

-Output and Employment

Determined by AS

-Unemployment

Rarely exists because of wage/price flexibility

Cause: External [war]

-Aggregate Demand

Determines PL

Stable is money is supplied/supply is stable

-Equation (Basic)

MV=PQ

1965-1972

-Role of Government

Monetary policy maintains steady money supply

Laissez-faire is best

Self regulating economy

-Inflation

caused by too much money 

-How Long is the Short Run

short time

-Emphasis today

Microeconomics

-ETC[other]

Competition is good

Invisible hand

Long-run Balance at FE

Trickle Down Effect- rich first, everyone else later

Keynesian

-Followers: J.B. Keynes

-Say's Law

Depressions refute Say's law

Demand creates its own supply

Underspending persists

-Savings and investments

-savings is not equal to investment

different motivations

-savings: future needs, precaution, habit, income level, and interest rate

-investments: interest rate, rate of profit, expectations

-Loanable Funds Market

Investment from savings, cash, checking accounts

Lending creates money->supply of money increases

Inflation and unemployment are unstable

-Wage/Price Inflexibility

Prices and wages are inflexible downward: Ratchet effect

-Supply Curve

Horizontal

-Output and Employment

Determined by Ad

-Unemployment

Usually exists

Causes: external [war] internal [savings not equal to investment]

-Aggregate Demand

changes due to determinants

unstable even if money supply/supplied is stable due to fluctuations in investment spending

-Equations [Basic]

C+Ig+G+Xn

1973-Present

-Role of Government

Fiscal Policy- Tax and spend

Active government

Economy is not self regulating

-Inflation

caused by too much demand

-How long is the short run

Long time

-Emphasis today

Macroeconomics

-ETC[other]

Flawed competition

AD is key;not AS

Leaks+Savings=Recession

Ratchet effects and Sticky Wages block Say's law

We are doomed in the long run

(2-23-16) Unit III Investment Demand

Investment Demand

Investment- $ spent (expenditures) on new plants/factories, capital equipment, technology, new houses, and inventory.

Expected Rates of Return

-Invested upon cost/benefit

-Benefits from expected rate of return

-Cost of Interest costs

-Amount invested to comparison of expected rate of return to interest cost

Exp. Return> Interest Cost = Yes

Exp. Return<Interest Cost = No

-r% vs. i%

-Nominal = observable rate of interest; Real takes out inflation [known ex post facto]

-r% = i% - p% =>base investment decision

The Curve

-Downward sloping due to high rates = less investment and likewise vise versa

Shifts

-Cost of production: low = Right high= Left

-Business Taxes: low = Right high= Left

-Tech. changes: new = Right lacking(missing) = Left

-Stock of capital: low = Right high= Left

-Expenditures: positive = Right negative= Left

(2-18-16)Unit III Aggregate supply

Aggregate Supply

Aggregate Supply

-The Level of Real GDP (GDPr) that firms will produce at each Price Level (PL)

Long-Run AS(LRAS)-Period at which input $ is flexible & adjust to changes in PL- Real GDP is independent to PL

Short-Run AS(SRAS)-Input Price rigid; do not adjust- Real GDP related to PL

LRAS-shows full employment(analogous to PPC); verticale at full employment

(Note:This graph also shows changes in AD please ignore it)

Changes in SRAS

-Increase is represented as shift to the right

-Decrease is represented as shift to the left

-Changes are based upon the cost of production per unit (Total Input cost / Total Output)

Determinants

Input Prices- Domestic Resource $ [75% on Wages, Capital cost, and Raw Materials]

-Foreign Resource $

-Market Power- Increase=left Decrease=Right

Productivity-(Total Output / Total Input)

-More= lower unit prod. $ = SRAS shift rightward

-Less = Higher unit prod. $ = SRAS shifts lefward

Legal Institution Environment

-Taxes & Subsidies:

Taxes= shifts SRAS leftward 

Subsidies= shifts SRAS rightward

Government Regulation

Regulation = more compliance = SRAS shifting left

Deregulation = less compliance costs = SRAS shifting right

-FE equilibrium occurs when AD crosses SRAS & LRAS @ the same point

Recessionary Gap-

Occurs when equilibrium is below FE output

Inflationary Gap-

When equilibrium is above FE output

:SRAS

Nominal Wages- Amount of $ received by a worker per unit of time

Real Wages- Amount of goods & services a worker can buy with nominal wages

Sticky Wages- Set Nominal Wages from initial price levels: Doesn't vary because of labor contracts, etc.

(2-12-16) Unit III Aggregate Demand

Aggregate Demand (AD)

Aggregate Demand (AD) - is the demand by consumers,businesses, government, and foreign countries.

What definitely doesn't shift the curve?

-changes in price level causes a move along the curve

Why is AD downward slopping?
1. Real-Balance Effect-Higher Price level-> Less purchasing power of money ($)

2. Interest-Rate Effect- Higher Price level->Higher interest rates -> Less spending & investment

3.Foreign Trade Effect-US price level increase->Foreign buyers buy less US goods and Americans buy foreign goods.


Determinants of AD
-Shifts = Expenditure of GDP: Change in C,G, Ig, Xn.; Multipliers that produce greater change than the original 4
-AD [up] = Rightward shift -AD [down] = Leftward shift
-Consumption
Affected by: Consumer Wealth- Rich(higher)=rightward Poor(lower) = Leftward
Consumer Expectations-Positive=Right Negative=Left
Household Indebtedness-Less=Right More=Left
Taxes- Less=Right More=Left
-Gross Private Investment
Affected by: Real Interest rate-Lower=Right Higher=left
Expected Returns-Higher=Right Lower=left
-Influenced by:Profit Expectations, Technology, Degree of excess capacity, and Business taxes
-Government Spending
More= Rightward shift
less= Leftward shift
-Net Exports
Affected by: Relative income- Strong foreign econ.-More Exports=Right Weak foreign econ.-Less Exports=Left
Exchange rates-Strong $=More imports=Left Weak $=Less Imports=Right