Unit-4 Macro Review Money, Money Supply, Bank Accounting, & Fiscal and Monetary Policy.

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Presentation transcript:

Unit-4 Macro Review Money, Money Supply, Bank Accounting, & Fiscal and Monetary Policy

Fed vs. Government The Federal Reserve creates money –By buying bonds in open market operations –Too much money can lead to inflation The Government creates debt –By borrowing money for deficit spending –Too much debt can lead to crowding out Loanable Funds = Gov’t Money Market = Fed

Illustrates Fed’s Monetary Policy Supply of Money is fixed by Fed Fed buys/sell bonds to shift MS which changes short term interest rates (federal funds rate) Use for Gov’t Debt questions Model of National Savings & Private Investment => (I) in GDP Supply = National Savings Demand = Investment (borrow $) Money Market Loanable Funds Private + Public Savings

MS 1 MD Nominal Interest Rate Qty of $ MS i1i P2P2 Affects AD LRAS 1 Price Level Real GDP AD 1 SRAS 1 2 Types of Monetary Policy Expansionary Contractionary AD 2 Contractionary Policy Currently 0.75% Currently 0.0% target => Sell Bonds, ↑ discount rate & ↑ reserve requirement MS ↓ => ↑ interest rate => C↓ & I ↓ => AD ↓ P1P1 Y1Y1 Y* E1E i2i2

Measuring Money Supply M1 - most liquid (cash, checking deposits, travelers checks, etc…) M2 - slightly less liquid (M1 + savings acct., money markets,…) M3 = least liquid (M2 + large time deposits (over $100,000) ) MONEY Commodity money Fiat money Types of Money (Std. of value)

Example: –$100 Deposit –10% Reserve Ratio This loan causes money creation Excess Reserves can be lent out by bank Banks Create Money by lending Fractional Reserve Banking System. 1 st Bank Balance Sheet

Money Multiplier = 1/R Reserve Requirement = 10% Money Multiplier = 1/10% = 10 Money Supply Change = Money Multiplier X Initial Excess Reserves $90 * 10 = $900 increase Money Supply

Quantity Theory of Money Velocity of money is relatively constant Real GDP is fixed in short run ↑ MS only will ↑Price Level Monetarists economists believe that money is neutral ! That is changes in Money Supply (MS) have affect on real GDP in long run Qty Theory of Money Equation

CROWDING OUT S2S2 1 ) Government Borrowing reduces Supply of Loanable Funds 2) Real Interest Rates rise 3) Private Investor is “crowded out” of debt market Loanable Funds

Review Practice Questions Practice Free Response 1D14A 2B15D 3D16D 4E17A 5D18D 6B19B 7C20E 8B 9D 10D 11A 12C 13E