Ch. 8: Money and inflation Money – Definition – Types – Functions Greshams law & bimetallic standard History of banking Fractional reserve banking and the creation of money History and structure of the Fed Fed tools for controlling the money supply – Discount rate – Reserve ratio – Open market operations Components of the money supply – Monetary base, reserves, M1, M2

Ch. 8: Money and inflation Balance sheet entries for – Open market operation – Change in reserve ratio – Change in public cash holdings Equation of exchange – Quantity theory of money Link between inflation and money supply growth Money market and determination of interest rates – Factors affecting money supply /demand – Bond market when interest rates are above or below equililbrium.

Financial markets Present and future value Bond prices and interest rates – One year bond – Zero coupon bond Determinants of bond yields – Risk – Term – Liquidity Stock market – Fundamental value of stock – Stock metrics PE ratio Beta – Factors influencing stock prices – Efficient markets hypothesis Futures markets and price expectations.

Ch. 9: Exchange rates and the balance of payments Supply/demand model and determinants of exchange rates – Interest rates, imports/exports, expected asset returns, inflation, expected future exchange rates, etc. Interest rate parity – Conditions required for parity – Arbitrage opportunities when parity doesnt hold – Implications for exchange rate movements when interest rates arent equal Purchasing power parity – Conditions required for parity – Arbitrage opportunities when parity doesnt hold – Implications for movements in exchange rates based on inflation differentials

Ch. 9: Exchange rates and the balance of payments (X-M=(S-I) + (T n -G ) X-M as indicator of a countrys status as internatl borrower or lender. Factors affecting a countrys status as borrower or lender Debtor/creditor versus borrower/lender Balance of payments accounts – Capital, current, official settlements – Debits vs credits in accounts – Implications of surplus or deficit in each account Exchange rate regimes – Flexible – Fixed – Crawling peg – How central banks can manipulate exchange rates and implications for official settlements account and trade flows

Ch. 9: AD and AS Determinants of long run AS – Labor market – Production function Determinants of short run AS – Nominal wages sticky in short run – Effect of a movement along SRAS on prices, real wages and employment – LRAS Determinants of AD – C+I+G+(X-M) – Why AD is downward sloping. – Fiscal policy (taxes or spending) – Expectations about inflation, future income – Exchange rates

Ch 9: AD and AS Implications of inflation/recessionary gap for – Real wages relative to equilibrium – Employment relative to equlibrium – Unemployment relative to natural rate – Real GDP relative to potential Short run and long run effects of a change in AD. Keynesians versus others on merits of policy interventions to stabilize economy.