1. Macro Outline AP Macro Outline – 2005-2006
I.                    Basic economic concepts – 12 %
Chapters 1, 2, 3, 4, 5 & parts of 20
A.     Scarcity, choice and opportunity costs
B.     Production possibilities curve
C.     Comparative advantage, specialization and exchange
D.     Demand, supply, and market equilibrium
E.      Macroeconomic issues: business cycle, unemployment, inflation, growth
II. Measurement of economic performance – 16 %
Chapters 4, 5, 7, 8
A.     National Income Accounts (4-6%)
1.      Circular flow
2.      Gross Domestic Product
3.      Components of GDP
4.      Real versus Nominal GDP
B.     Inflation measurement and adjustment (4-5%)
1.      Price indices
2.      Nominal versus real values
3.      Costs of inflation
C.     Unemployment (4-5%)
1.      Definition and measurement
2.      Types of unemployment
3. Natural rate of unemployment
Macro Outline

2. Macro Outline III. National income and price determination 15 – 25 %
Chapters 9, 10, 11, 12
A.     Aggregate Demand (5-8 %)
1.      Determinants of AD
2.      Multiplier and crowding-out effects
B.     Aggregate Supply (5-8%)
1.      Short run and long run analyses
2.      Sticky versus flexible wages and prices
3.      Determinants of AS
C.     Macroeconomic equilibrium (5-8%)
1.      Real output and price level
2.      Short run and long run
3.      Actual versus full-employment output
4.      Economic fluctuations
IV. Financial Sector – 20 %
Chapters 13, 14, 15
A.    Money, banking and financial markets (7-15%)
1.      Definition of financial assets: money, stocks, bonds
2.      Time values of money
3.      Measures of money supply
4.      Banks and creation of money
5.      Money demand
6.      Money market
7.      Loanable funds market
B.     Central bank and control of the money supply (3-5%)
1.      Tools of central bank policy
2.      Quantity theory of money
3.      Real versus nominal interest rates
Macro Outline

3. V. Inflation, Unemployment and Stabilization Policies 20 – 30%
Chapters 11, 12, 16, 17, 18, 19
A.     Fiscal and Monetary policies (15-20%)
1.    Demand side effects
2.    Supply side effects
3.    Policy mix
4.    Government deficits and debt
B.     Inflation and unemployment (5-10%)
1.    Types of inflation
a)      Demand-pull
b)      Cost-push
2.    The Phillips Curve: short run versus long run
3.    Role of expectations
VI. Economic Growth and Productivity – 6%
Mix of all chapters
Investment in Human capital
Investment in physical capital
Research and development and technological progress
Growth policy
 VII. Open economy: International Trade and Finance 10 – 12%
Chapters 6, 37, 38
A.     Balance of payment accounts
1.    Balance of trade
2.    Current account
3.    Capital account
B.     Foreign exchange market
1.    Demand for and supply of foreign exchange
2.    Exchange rate determination
3.    Currency appreciation and depreciation
C.     Net Exports and Capital flows
D.     Links to financial and goods markets.
Macro Outline

4. Money and Banking 2005 Chapters 13-14-15
An easy but important conclusion to Macro – 20+ AP Questions
Bonus work chapter
By February 10 Chapter 13
Quiz Monday, February 13 Chapter 13
By February 17 Chapter 14
By week of February 20 Chapter 15.
Test Day: Thursday 2/23/06

5. Money & Banking FUNCTIONS OF MONEY SUPPLY OF MONEY DEMAND FOR MONEY
MONEY MARKET
U.S. FINANCIAL SYSTEM
Money & Banking
CHAPTER THIRTEEN

6. The Historical Development of $
From Barter to Electronic Fund Transfers (EFT’s)!

7. Barter The oldest system of exchange!
Problem with the “double coincidence of wants”.

8. Commodity Money Money that is valuable in and of itself.
Cows, salt, shells, tobacco, camels, cigarettes, bullets, tea, anything that is mutually acceptable.
On Mocha it was clam shells!!

9. Problems with Commodity Money
Storage
Making change
Carrying it to market
Consistent Value

10. Precious Metals A decided advantage in making change and storage.
Problems of limited supply and over supply.

11. Bimetallic Systems
With gold in short supply and not enough money in circulation, Gresham, Chancellor of the Exchequer in England in the 1800’s introduced silver to the money supply!
A disaster ensued!

12. Gresham’s Rule: Cheap money drives out expensive!
What happens when gold and silver are used together?

13. Fiat Money Paper Money - Currency
Fiat money’s value is based on FAITH!
Introduced by the Chinese as soon as paper was invented.
Printing too much money can induce hyperinflation.
Today’s Federal Reserve Notes are legal tender – valuable by law!

14. Hyper inflation grew to 1 dollar=4 trillion marks

15. Original 5% interest on $10 billion war debt to U.S.
High U.S. tariff of 1922
prevented Europe debt
repayment
Germany unable to pay
$32 billion reparations but
Coolidge demanded
payments: "They hired the
money, didn't they?"
Congress passed 1930 Hawley-Smoot "tariff wall" and Hoover refused veto despite appeal of 38 nations and 1028 American economists

16. Inflation 1923/24: a woman feeds her tiled stove with money.

17. Hyperinflation was rare before the 20th century; older economies would revert to either specie metals or barter once inflation reached a certain level. The widespread use of fiat money created the possibility of hyperinflation as governments often tended to print larger amounts of money to finance their expenses. Inflation results where such an increase in money supply occurs without regard for the actual market demand.
Rates of inflation of several hundred percent per month are often seen. Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 million percent per month; Greece in the mid-1940s with 8.55 billion percent per month; and Hungary during the same approximate time period at 4.19 quintillion percent per month. Other more moderate examples include Eastern European countries in the period of economic transition in the early 1990s and in Bolivia and Peru in 1985 and 1988, respectively.
Nations such as Ghana in North Western Africa continue to this day to have inflation in the order of 30% per annum.

18. Hyperinflation!
Various workers also had to be paid by the Weimar Government, additional currency was printed, which fuelled a period of hyperinflation. The value of the Mark declined from 4.2 per US dollar to 1,000,000 per dollar by August 1923 and 4,200,000,000,000 per dollar on November 20. On December 1, a new currency was established at the rate of 1,000,000,000,000 old marks for 1 new mark, the Rentenmark.

19. Demand Deposits, Share Drafts, NOW Accounts: Checks!
Created by medieval goldsmiths, today checks and checkbook deposits cover 90% of all business transactions.
Most people are paid by check or by direct deposit to a checking account.

20. Electronic Fund Transfer
Increasingly money is merely transferred from one account to another by computer terminals and cash registers.
Debit or check cards automatically transfer funds from a purchasers account to a stores account!
Better than cash because it is faster and a record is kept of transactions.

21. What about credit cards?

22. The most profitable portion of many bank’s business!
They Are Not Money!
They are a SCAM!
Because of suckers who use it
as an expensive loan at up to 35%.

23. Characteristics of Money
Acceptable
Portable
Durable
Divisible
Recognizable
Stable in value-Homogeneous
Stable in time

24. Functions of Money Medium of Exchange
Socially acceptable and allows geographic and human specialization.

25. Functions of Money Medium of Exchange Unit of Account,
Measure of Value
It is a “yardstick” for measuring the relative worth of a variety of goods.

26. Functions of Money Medium of Exchange Unit of Account,
Measure of Value
Store of Value
A convenient way to store wealth, cash is the most liquid.

27. Functions of Money Medium of Exchange Unit of Account, Price
Measure of Value
Store of Value
Standard for deferred
Payment
Can count on its worth in the future.

28. Money Definition

29. Money Definition Coins & Currency Coins , 2- 3 % of M1
Paper Money, 37 % of M1

30. Money Definition
Federal Reserve Notes
Coins & Currency

31. Money Definition Coins & Currency Checkable Deposits 60% of M1
Commercial Banks
Thrift Institutions
Savings & Loan Associations

32. Money Definition Currency Token Money Intrinsic Value
M1 = C + C + C + TLC
Coins, Currency, Checks
Things like Checks!
Currency
Token Money
Intrinsic Value
Checkable Deposits
Commercial Banks
Thrift Institutions
Savings & Loan Associations

33. Money Definition =
Plus...

34. Money Definition =
Plus...
Near-monies

35. = Plus... Money Definition Near-monies
1. Noncheckable Savings Accounts

36. = Plus... Money Definition Near-monies
1. Noncheckable Savings Accounts
2. Money Market Deposit Accounts

37. = Plus... Money Definition Near-monies
1. Noncheckable Savings Accounts
2. Money Market Deposit Accounts
3. Time Deposits

38. = Plus... Money Definition Near-monies
M2 = M1 + <$100,000
Most Watched!
Near-monies
1. Noncheckable Savings Accounts
2. Money Market Deposit Accounts
3. Time Deposits
4. Money Market Mutual Funds

39. Money Definition =
Plus...
Large Time Deposits
M3 = M2 + >$100,000

40. Measuring the Money Supply
M1 smallest and most liquid
M3 largest and least liquid
M2 tracked most closely by the FED
M2 that portion of the money supply controlled by consumers
M1 = C + C + C + TLC
M2 = M1 + <$100,000
M3 = M2 + >$100,000
Money Supply impacts i which impacts both C & I in C + I + G + (X – M) = AD!

41. Monetary Control
The Federal Reserve vs Pure Monetarists
Allen Greenspan Milton Friedman
Expansionary/Contractionary Conservative/Growth

42. The Federal Reserve vs Pure Monetarists
Allen Greenspan Milton Friedman
3 Economic Common Goals:
3-5% RGDP Growth
Stable Prices
Full Employment
Money Supply Growth
At 3-5% Annually no matter
The Cycle of the Economy
MS * V = NGDP
Counter Cyclical Money
Supply Manipulation!
MS i I GDP
Recession
Inflation
Grow Money Supply at
3-5% no matter economic
conditions.

43. The Future?!? Ben Bernanke has replaced Alan Greenspan.
Greenspan’s last day was Friday, February 3, 2006
Bernanke replaced on Monday, February 6, 2006!

44. The Supply of Money plus Checkable deposits
Currency (coins & paper money)
plus Checkable deposits
1997 Data
(billions of dollars)

45. The Supply of Money M1 plus Checkable deposits equals M1
Currency (coins & paper money)
plus Checkable deposits
equals M1 M1
$1057
1997 Data
(billions of dollars)

46. The Supply of Money M1 plus Checkable deposits equals M1
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Noncheckable savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
balances (MMMF’s) M1
$1057
1997 Data
(billions of dollars)

47. The Supply of Money M1 M2 plus Checkable deposits equals M1
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Noncheckable savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
balances (MMMF’s)
equals M2 M1 M2
$1057
$3964
1997 Data
(billions of dollars)

48. The Supply of Money M1 M2 plus Large time deposits
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Noncheckable savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
balances (MMMF’s)
equals M2
plus Large time deposits M1 M2
$1057
$3964
1997 Data
(billions of dollars)

49. The Supply of Money M1 M2 M3 plus Large time deposits
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Noncheckable savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
balances (MMMF’s)
equals M2
plus Large time deposits
equals M3 M1 M2 M3
$1057
$3964
1997 Data
(billions of dollars)
$5205

50. MONEY SUPPLY plus Savings deposits, plus Savings deposits,
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
(MMMF) balances
equals M2
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
(MMMF) balances
equals M2
plus Large time deposits
equals M3
$1101
$4827
2000 Data
(billions of dollars)
$6853

51. What Backs the Money Supply?

52. What Backs the Money Supply?
Money as Debt
Paper money and checks are promises to pay. In other words,
issued money to be used in financial transactions. Monetary authorities
attempt to provide the amount of $ needed for a level of business
activity that will promote full employment.

53. What Backs the Money Supply?
Money as Debt
Value of Money

54. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Society accepts it as a medium of exchange.

55. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
By law creditors must accept money as a form of payment.

56. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Fiat Money
$ backed by the faith that the government will keep it stable.

57. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
When demand stays constant, the supply of money will determine
its purchasing power.

58. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices

59. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices
Value of the Dollar
The 50 cent dollar – “Ya sure can’t buy what you used to for a buck”

60. = What Backs the Money Supply? NOTES: Money as Debt Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices
Value of the Dollar
NOTES:
Reciprocal relationship
between the price level
and the value of the
dollar. D = 1 P

61. What Backs the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices
Value of the Dollar
Inflation and Acceptability
If rampant inflation, society will not accept, value is gone!

62. Maintaining Money’s Value
What backs the money supply?

63. Stable Value! through.... Maintaining Money’s Value
What backs the money supply?
Stable Value!
through....

64. Stable Value! through.... Maintaining Money’s Value
What backs the money supply?
Stable Value!
through....
Appropriate fiscal policy

65. Stable Value! through.... Maintaining Money’s Value
What backs the money supply?
Stable Value!
through....
Appropriate fiscal policy
Intelligent management of
the money supply
Fiscal Policy = Congress + President Money Supply = The FED

66. The Demand For Money

67. The Demand For Money varies directly with nominal GDP
Transactions Demand, D1
varies directly with nominal GDP
Primary function – Medium of exchange

68. illustrated.... The Demand For Money varies directly with nominal GDP
Transactions Demand, D1
varies directly with nominal GDP
Asset Demand, D2
varies inversely with the interest rate
illustrated....
AP Essay
Primary function store of value

69. Rate of interest, i (percent)
The Demand For Money +
Transactions
Demand, Dt 10
7.5 5
2.5
Rate of interest, i (percent) Dt
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

70. Rate of interest, i (percent) Rate of interest, i (percent)
The Demand For Money + =
Transactions
Demand, Dt
Asset
Demand, Da 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent) Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

71. + = The Demand For Money Transactions Demand, Dt Asset Demand, Da
Total demand
for money, Dm 10
7.5 5
2.5 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent)
Rate of interest, i (percent) Dm Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

72. + = The Demand For Money ADD THE MONEY SUPPLY TO FIND THE
Transactions
Demand, Dt
Asset
Demand, Da
Total demand
for money, Dm
ADD THE
MONEY SUPPLY
TO FIND THE
EQUILIBRIUM RATE
OF INTEREST 10
7.5 5
2.5 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent)
Rate of interest, i (percent) Dm Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

73. + = The Demand For Money Equilibrium Interest Rate ie Transactions
Demand, Dt
Asset
Demand, Da
Total demand
for money, Dm Sm 10
7.5 5
2.5 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent)
Rate of interest, i (percent) ie Dm Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Equilibrium
Interest Rate
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

74. Rate of interest, i (percent) Amount of money demanded
The Money Market Sm
Suppose the money
supply is decreased
from $200 billion, Sm,
to $150 billion Sm1. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

75. Rate of interest, i (percent) Amount of money demanded
The Money Market
Sm1 Sm
A temporary shortage
of money will require
the sale of some assets
to meet the need. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

76. lower prices associated
The Money Market
Sm1 Sm
Bonds are assumed
as a typical asset with
lower prices associated
with higher
interest rates
A temporary shortage
of money will require
the sale of some assets
to meet the need. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

77. Rate of interest, i (percent) Amount of money demanded
The Money Market
Sm1
After adjustments to
asset holdings, a new
equilibrium will be
seen at a higher level
of interest. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

78. Rate of interest, i (percent) Amount of money demanded
The Money Market Sm
Suppose the money
supply is increased
from $200 billion, Sm,
to $250 billion Sm2. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

79. Rate of interest, i (percent) Amount of money demanded
The Money Market Sm
Sm2
A temporary surplus
of money will require
the purchase of some
assets to meet the de-
sired level of liquidity. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

80. Rate of interest, i (percent) Amount of money demanded
The Money Market
Sm2
After adjustments to
asset holdings, a new
equilibrium will be
seen at a lower level
of interest. 10
7.5 5
2.5
Rate of interest, i (percent) ie Dm
Amount of money demanded
(billions of dollars)

81. The United States Financial System

82. The United States Financial System
The Federal Reserve System

83. The United States Financial System
The Federal Reserve System
Board of Governors

84. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice

85. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee

86. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils

87. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils
The Twelve Federal Reserve Banks

88. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils
The Twelve Federal Reserve Banks
Central Bank Role

89. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils
The Twelve Federal Reserve Banks
Central Bank Role
Quasipublic Banks

90. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils
The Twelve Federal Reserve Banks
Central Bank Role
Quasipublic Banks
Banker’s Banks

91. The United States Financial System
The Federal Reserve System
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils
The Twelve Federal Reserve Banks
Central Bank Role
Quasipublic Banks
Banker’s Banks
Commercial Banks & Thrifts

93. FED Functions and the Money Supply

94. FED Functions and the Money Supply
Issuing Currency

95. FED Functions and the Money Supply
Issuing Currency
Setting Reserve Requirements & Holds Reserves

96. FED Functions and the Money Supply
Issuing Currency
Setting Reserve Requirements & Holds Reserves
Lending Money to Banks & Thrifts

97. FED Functions and the Money Supply
Issuing Currency
Setting Reserve Requirements & Holds Reserves
Lending Money to Banks & Thrifts
Check Collection

98. FED Functions and the Money Supply
Issuing Currency
Setting Reserve Requirements & Holds Reserves
Lending Money to Banks & Thrifts
Check Collection
Fiscal Agents for the Federal Government

99. FED Functions and the Money Supply
Issuing Currency
Setting Reserve Requirements & Holds Reserves
Lending Money to Banks & Thrifts
Check Collection
Fiscal Agents for the Federal Government
Supervision of Member Banks

100. FED Functions and the Money Supply
Issuing Currency
Setting Reserve Requirements & Holds Reserves
Lending Money to Banks & Thrifts
Check Collection
Fiscal Agents for the Federal Government
Supervision of Member Banks
Control of the Money Supply

101. NOTES: FED Functions and the Money Supply Issuing Currency
Setting Reserve Requirements & Holds Reserves
Lending Money to Banks & Thrifts
Check Collection
Fiscal Agents for the Federal Government
Supervision of Member Banks
Control of the Money Supply
NOTES:
Federal Reserve
Independence from
Federal Government

102. Recent Developments
Relative Decline of Banks & Thrifts

103. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services

104. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services
Mergers

105. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services
Mergers
Regulatory Reform

106. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services
Mergers
Regulatory Reform
Market Globalization

107. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services
Mergers
Regulatory Reform
Market Globalization
Electronic Money

108. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services
Mergers
Regulatory Reform
Market Globalization
Electronic Money
E-Cash

109. Recent Developments Relative Decline of Banks & Thrifts
Expansion of Services
Mergers
Regulatory Reform
Market Globalization
Electronic Money
E-Cash
Smart Cards

110. Questions and Discussion
Recent Developments
Relative Decline of Banks & Thrifts
Expansion of Services
Mergers
Regulatory Reform
Market Globalization
Electronic Money
E-Cash
Smart Cards
Questions
and
Discussion

111. money market mutual fund legal tender fiat money transactions demand
time deposits
money market mutual fund
legal tender
fiat money
transactions demand
asset demand
total demand for money
money market
Federal Reserve System
Board of Governors
Federal Open Market Committee
Advisory Councils
Federal Reserve Banks
commercial banks
E-cash
smart cards
medium of exchange
unit of account
store of value
M1, M2, M3
token money
intrinsic value
Federal Reserve Notes
checkable deposits
thrift (savings) institutions
savings & loan associations
mutual savings banks
credit unions
near-monies
noncheckable deposits
money market deposit account
Copyright McGraw-Hill, Inc. 1999

112. The Demand For Money

113. The Demand For Money varies directly with nominal GDP
Transactions Demand, D1
varies directly with nominal GDP

114. illustrated.... The Demand For Money varies directly with nominal GDP
Transactions Demand, D1
varies directly with nominal GDP
Asset Demand, D2
varies inversely with the interest rate
illustrated....
AP Essay 04

115. Rate of interest, i (percent)
The Demand For Money +
Transactions
Demand, Dt 10
7.5 5
2.5
Rate of interest, i (percent) Dt
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

116. Rate of interest, i (percent) Rate of interest, i (percent)
The Demand For Money + =
Transactions
Demand, Dt
Asset
Demand, Da 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent) Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

117. + = The Demand For Money Transactions Demand, Dt Asset Demand, Da
Total demand
for money, Dm 10
7.5 5
2.5 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent)
Rate of interest, i (percent) Dm Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

118. + = The Demand For Money ADD THE MONEY SUPPLY TO FIND THE
Transactions
Demand, Dt
Asset
Demand, Da
Total demand
for money, Dm
ADD THE
MONEY SUPPLY
TO FIND THE
EQUILIBRIUM RATE
OF INTEREST 10
7.5 5
2.5 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent)
Rate of interest, i (percent) Dm Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

119. + = The Demand For Money Equilibrium Interest Rate ie Transactions
Demand, Dt
Asset
Demand, Da
Total demand
for money, Dm Sm 10
7.5 5
2.5 10
7.5 5
2.5 10
7.5 5
2.5
Rate of interest, i (percent)
Rate of interest, i (percent)
Rate of interest, i (percent) ie Dm Dt Da
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Equilibrium
Interest Rate
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

120. Rate of interest, i (percent) Amount of money demanded
The Money Market Sm
Suppose the money
supply is decreased
from $200 billion, Sm,
to $150 billion Sm1. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

121. Rate of interest, i (percent) Amount of money demanded
The Money Market
Sm1 Sm
A temporary shortage
of money will require
the sale of some assets
to meet the need. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

122. lower prices associated
The Money Market
Sm1 Sm
Bonds are assumed
as a typical asset with
lower prices associated
with higher
interest rates
A temporary shortage
of money will require
the sale of some assets
to meet the need. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill, Inc in your text book before AP Curriculum

123. Rate of interest, i (percent) Amount of money demanded
The Money Market
Sm1
After adjustments to
asset holdings, a new
equilibrium will be
seen at a higher level
of interest. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

124. Rate of interest, i (percent) Amount of money demanded
The Money Market Sm
Suppose the money
supply is increased
from $200 billion, Sm,
to $250 billion Sm2. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

125. Rate of interest, i (percent) Amount of money demanded
The Money Market Sm
Sm2
A temporary surplus
of money will require
the purchase of some
assets to meet the de-
sired level of liquidity. 10
7.5 5
2.5 ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

126. Rate of interest, i (percent) Amount of money demanded
The Money Market
Sm2
After adjustments to
asset holdings, a new
equilibrium will be
seen at a lower level
of interest. 10
7.5 5
2.5
Rate of interest, i (percent) ie Dm
Amount of money demanded
(billions of dollars)

127. Coming up next...
How Banks Create Money
Chapter 14

128. Banks begin in Medieval Europe
Goldsmiths would hold peoples coins in their safes!
Rather than take their coins on a trip which was unsafe.
Goldsmiths issued script based on a person’s deposits

129. Fractional Reserves
An enterprising goldsmith realized that at anyone time only a portion of money on deposit circulated.
Taking a risk the goldsmith was able to loan out someone else’s deposit at interest and make a profit.
In so doing, the banking industry was born!
But there were risks—Panics caused banks to fail!
FDIC & FSLIC

130. How Banks Create Money Total Reserves, Reserves, or Deposits
Excess Reserves
Required Reserves
Loan able Funds
Required Reserve Ratio (RRR)

131. New Deposit = $100,000 with a
Required Reserve Ration of 20%
Required Reserves Excess Reserves
$20, $80,000
Excess reserves may be loaned out. The difference between the interest it receives on this money loaned and what it pays depositors determines a banks profitability.
Required reserves the amount of money a bank must keep for safe operation. The % is under the control of the Federal Reserve!

132. How Banks Create Money
Banks create money by making loans, receiving deposits, and reloaning that money until all new deposits become required reserves.
With no required reserves, how much money could be created?

133. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

134. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

135. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

136. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

137. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

138. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

139. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
Copyright McGraw-Hill, Inc. 1999

140. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Copyright McGraw-Hill, Inc. 1999

141. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
$400.00

142. Money Destruction when Money is held and not reloaned!
Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank
Money
Destruction when
Money is held and
not reloaned! A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
$400.00

143. The Monetary Multiplier1
Monetary
Multiplier =
Required reserve ratio

144. The Monetary Multiplier1
Monetary
Multiplier =
Required reserve ratio
Maximum
Demand-deposit
expansion = x
Excess
reserves
Monetary
Multiplier

145. Outcome of Money Expansion
$100
New reserves
$20
Required
reserves
$80
Excess
reserves
$100
Initial
Deposit
$400
Bank system lending
Money Created
Copyright McGraw-Hill, Inc. 1999

146. Bank does not give out loan. People not wanting loans.
Outcome of Money Expansion
Leakages exist...
Currency Drains
People hold on to cash.
Excess Reserves
Bank does not give out loan.
People not wanting loans.
$100
New reserves
$20
Required
reserves
$80
Excess
reserves
$100
Initial
Deposit
$400
Bank system lending
Money Created
Copyright McGraw-Hill, Inc. 1999

147. TI –ers and Ritger’s Formula
TR – (TR x RRR)
Potential Change in Money Supply! =
RRR
Knowing this formula is dangerous and may harm your ability to pass the AP Test in May????????????

148. AP Essay Questions From the 1993 Exam:
The reserve requirement for the banking system is 20%. Currently, Third National Bank has no excess reserves. Then Behroz deposits $100 in her checking account at Third National.
A. Explain, without using mathematical formula, why Behroz' deposit can lead to greater increase in the money supply.
B. Discuss two limitations on this process.
From the 1995 Exam: What are the excess reserves and required in the third round with an initial deposit of $100 and a RRR of 20%?

149. Multiple Deposit Expansion Process
Amount bank
can lend - New
money created
Acquired reserves
and deposits
Required
reserves
Excess
reserves
Bank A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Total amount of money created by the banking system
$400.00

150. All money creation and destruction is only a potential change in the money supply???
Money held as cash and not redeposited diminishes money creation or destruction.
Banks holding excess reserves and not making new loans also diminishes the process.

151. Transmission Graphs
Ready to run in circles!

152. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned
investment, I AS
MEI – Marginal Efficiency of Investment
As interest falls more Investment becomes
Possible and Profitable!
Price level P1
AD1
Real domestic output, GDP

153. Monetary Policy and Equilibrium GDP
Sm1
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I
If the money supply
increases to
stimulate the
economy.... AS
Price level P1
AD1
Real domestic output, GDP

154. Monetary Policy and Equilibrium GDP
Sm1
Sm2
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I AS
Price level P2 P1
AD1
AD2
Real domestic output, GDP

155. If the money supply increases again....
Monetary Policy and Equilibrium GDP
Sm1
Sm2
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I
If the money
supply increases
again.... AS
Price level P2 P1
AD1
AD2
Real domestic output, GDP

156. Monetary Policy and Equilibrium GDP
Sm1
Sm2
Sm3
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I AS
Long Run Effects:
Increased planned investment
will lead to increased AS
2. i down = international $ down,
PL up = X down
3. Canceling effect: AD up, MD up,
i up, and I down, = AD down P3
Price level P2 P1
AD1
AD2
AD3
Real domestic output, GDP

157. Quantity of money demanded and supplied
Fiscal Policy and Equilibrium GDP
Sm1 10 8 6
Price level
Real rate of interest, i
Dm2
Dm1
AD1
AD2
Quantity of money demanded and supplied
Real domestic output, GDP R i 10 8 6
Long Run Effects:
Decreased planned investment
will lead to decreased AS
2. Canceling effect: I down, AD down,
MD down, and i down, = AD up
3. i up = international $ up, PL down = X up
MEI
PI2
PI1
Amount of planned investment, I

158. It's all #$@% %$&*! Money Supply Effects interest rate
Interest rate effects Investment
Investment effects AD and AS
AD and AS effect price level
Price Level effects exports and imports
It's all %$&*!

159. Monetary Policy
CHAPTER FIFTEEN
FEDERAL RESERVE BANK OF NEW YORK

160. Fiscal and Monetary Goals are identical in that both seek to prevent wild inflationary and recessionary swings while guiding the economy on a path of steady economic growth, with full employment and stable prices!

161. Tools of the Fed!!! *For an extended period of time!
Required Reserve Ratio
Open Market Operation
Discount Rate
Federal Funds Rate
Moral Suasion*
*For an extended period of time!

162. Federal
Funds Rate

166. Federal Funds Rate Over night lending rate Set by the Fed
Used to direct Banks and Money Supply
Most often used between banks
Less costs
Less oversight

167. Allan Greenspan
Dr. Greenspan took office June 20, 2000, as Chairman of the Board of Governors of the Federal Reserve System for a fourth four-year term ending June 20, Dr. Greenspan also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. He originally took office as Chairman and to fill an unexpired term as a member of the Board on August 11, Dr. Greenspan was reappointed to the Board to a full 14-year term which began February 1, He has been designated Chairman by Presidents Reagan, Bush and Clinton.

168. Ben Bernanke
Before his appointment as Chairman, Dr. Bernanke was Chairman of the President's Council of Economic Advisers, from June 2005 to January 2006.
Dr. Bernanke has already served the Federal Reserve System in several roles. He was a member of the Board of Governors of the Federal Reserve System from 2002 to 2005; a visiting scholar at the Federal Reserve Banks of Philadelphia ( ), Boston ( ), and New York ( , ); and a member of the Academic Advisory Panel at the Federal Reserve Bank of New York ( ).
From 1994 to 1996, Dr. Bernanke was the Professor of Economics and Public Affairs at Princeton University. He was the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs and Chair of the Economics Department at the university from 1996 to Dr. Bernanke had been a Professor of Economics and Public Affairs at Princeton since 1985.

169. Organization of the Fed!!
Fed Chairman – Ben Bernanke!
Board of Governors
Federal Open Market Committee (FOMC)
Federal Reserve Banks

170. Organization of the FED
FOMC
Ben+11 5
12 Federal Reserve Banks 7
7 Board of Governors
DR & FFR
OMO
RRR

172. GOALS OF MONETARY POLICY
to assist the economy in achieving a full-employment, noninflationary level of total output....

173. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS

174. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS
Securities
T-bills and T-bonds

175. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS
Securities
Loans to Commercial Banks

176. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS
Securities
Loans to Commercial Banks
LIABILITIES

177. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS
Securities
Loans to Commercial Banks
LIABILITIES
Reserves of Commercial Banks

178. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS
Securities
Loans to Commercial Banks
LIABILITIES
Reserves of Commercial Banks
Treasury Deposits

179. Consolidated Balance Sheet of the Federal Reserve Banks
ASSETS
Securities
Loans to Commercial Banks
LIABILITIES
Reserves of Commercial Banks
Treasury Deposits
Federal Reserve Notes

180. Open Market Operations
TOOLS OF MONETARY POLICY
The FED can influence the $ creating abilities of commercial banks.
Open Market Operations

181. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities

182. From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...

183. From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities

184. From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities
FED pays bank

185. From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities
FED pays bank
Banks have increased reserves

186. From individuals... From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities
FED pays bank
Banks have increased reserves
From individuals...

187. From individuals... From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities
FED pays bank
Banks have increased reserves
From individuals...
Individual gives up securities

188. From individuals... From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities
FED pays bank
Banks have increased reserves
From individuals...
Individual gives up securities
Individual deposits check in bank

189. From individuals... From commercial banks... Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
Buying Securities
From commercial banks...
Bank gives up securities
FED pays bank
Banks have increased reserves
From individuals...
Individual gives up securities
Individual deposits check in bank
Banks have increased reserves

190. Federal Reserve Bond Purchase of Bonds
Purchase of a
$1000 bond
from a bank...
New reserves
$1000
Excess
Reserves
$5000
Bank System Lending
Money Created

191. Federal Reserve Bond Purchase of Bonds
Purchase of a
$1000 bond
From the public...
New reserves
$200
Required
reserves
$800
Excess
Reserves
$4000
Bank System Lending
$1000
Initial
Deposit
Total Increase in Money Supply ($5000)

192. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio

193. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio

194. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves

195. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves
Banks decrease lending

196. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves
Banks decrease lending
Money supply decreases

197. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves
Banks decrease lending
Money supply decreases
Lowering the Reserve Ratio

198. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves
Banks decrease lending
Money supply decreases
Lowering the Reserve Ratio
Banks may hold less reserves

199. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves
Banks decrease lending
Money supply decreases
Lowering the Reserve Ratio
Banks may hold less reserves
Banks increase lending

200. Open Market Operations The Reserve Ratio
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
Raising the Reserve Ratio
Banks must hold more reserves
Banks decrease lending
Money supply decreases
Lowering the Reserve Ratio
Banks may hold less reserves
Banks increase lending
Money supply increases

201. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
This differs from the Federal Funds Rate and the prime interest rate.
Discount Rate – the rate the FED charges banks to borrow.
Federal Funds Rate – the rate commercial banks charge each other.
Prime Interest Rate – the rate banks charge their best customers.

202. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy

203. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Buy Securities

204. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Buy Securities
Decrease Reserve Ratio

205. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Buy Securities
Decrease Reserve Ratio
Lower Discount Rate

206. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Tight Money Policy

207. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Tight Money Policy
Sell Securities

208. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Tight Money Policy
Sell Securities
Increase Reserve Ratio

209. Open Market Operations
TOOLS OF MONETARY POLICY
Open Market Operations
The Reserve Ratio
The Discount Rate
Easy Money Policy
Tight Money Policy
Sell Securities
Increase Reserve Ratio
Raise Discount Rate

210. Discuss relative Importance of each control
TOOLS OF MONETARY POLICY
Open Market Operations
Discuss relative
Importance
of each control
The Reserve Ratio
The Discount Rate
Easy Money Policy
Tight Money Policy
Sell securities
Increase Reserve Ratio
Raise Discount Rate

211. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Cause-Effect Chain

212. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Cause-Effect Chain
Money supply impacts interest rates

213. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Cause-Effect Chain
Money supply impacts interest rates
Interest rates affect investment

214. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Cause-Effect Chain
Money supply impacts interest rates
Interest rates affect investment
Investment is a component of AD

215. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Cause-Effect Chain
Money supply impacts interest rates
Interest rates affect investment
Investment is a component of AD
Equilibrium GDP is changed

216. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i AS
Price level P1
AD1
Real domestic output, GDP
Copyright McGraw-Hill, Inc. 1999

217. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i
If the money supply
increases to
stimulate the
economy.... AS
Price level P1
AD1
Real domestic output, GDP
Copyright McGraw-Hill, Inc. 1999

218. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1
Sm2 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i AS
Price level P2 P1
AD1
AD2
Real domestic output, GDP
Copyright McGraw-Hill, Inc. 1999

219. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1
Sm2 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i
If the money
supply increases
again.... AS
Price level P2 P1
AD1
AD2
Real domestic output, GDP
Copyright McGraw-Hill, Inc. 1999

220. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1
Sm2
Sm3 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i AS P3
Price level P2 P1
AD1
AD2
AD3
Real domestic output, GDP
Copyright McGraw-Hill, Inc. 1999

221. Transmission Graphs

222. Quantity of money demanded and supplied
Monetary Policy and Equilibrium GDP
Sm1
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned
investment, I AS
MEI – Marginal Efficiency of Investment
As interest falls more Investment becomes
Possible and Profitable!
Price level P1
AD1
Real domestic output, GDP

223. Monetary Policy and Equilibrium GDP
Sm1
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I
If the money supply
increases to
stimulate the
economy.... AS
Price level P1
AD1
Real domestic output, GDP

224. Monetary Policy and Equilibrium GDP
Sm1
Sm2
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I AS
Price level P2 P1
AD1
AD2
Real domestic output, GDP

225. If the money supply increases again....
Monetary Policy and Equilibrium GDP
Sm1
Sm2
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I
If the money
supply increases
again.... AS
Price level P2 P1
AD1
AD2
Real domestic output, GDP

226. Monetary Policy and Equilibrium GDP
Sm1
Sm2
Sm3
MEI R i 10 8 6 10 8 6
Investment
Demand
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of planned investment, I AS
Long Run Effects:
Increased planned investment
will lead to increased AS
2. i down = international $ down,
X up
3. Canceling effect: AD up, MD up,
i up, and I down, = AD down
Secondary effects – PL up, X down P3
Price level P2 P1
AD1
AD2
AD3
Real domestic output, GDP

227. Quantity of money demanded and supplied
Fiscal Policy and Equilibrium GDP
Sm1 10 8 6
Price level
Real rate of interest, i
Dm2
Dm1
AD1
AD2
Quantity of money demanded and supplied
Real domestic output, GDP R i 10 8 6
Long Run Effects:
1. Decreased planned investment
will lead to decreased AS
2. i up = international $ up, X down
3. Canceling effect: I down, AD down,
MD down, and i down, = AD up,
4. Secondary effects – PL down = X up
MEI
PI2
PI1
Amount of planned investment, I

228. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Effects of an easy money policy
Decrease i, Increase I, Increase AD, RGDP Increases

229. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Effects of an easy money policy
Effects of a tight money policy
Increase i, Decrease I, Decrease AD, Inflation declines

230. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Effects of an easy money policy
Effects of a tight money policy
Policy effectiveness
An increase in I will cause an increase in money demand.
That will offset the reduction in interest rates.

231. MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Effects of an easy money policy
Effects of a tight money policy
Policy effectiveness
Monetary policy & aggregate supply
Where should monetary policy be employed?

232. Effectiveness of Monetary Policy

233. Effectiveness of Monetary Policy
Strengths of monetary policy

234. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility

235. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure

236. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes

237. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes
Shortcomings and problems

238. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes
Shortcomings and problems
Less control?

239. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes
Shortcomings and problems
Less control?
Cyclical asymmetry

240. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes
Shortcomings and problems
Less control?
Cyclical asymmetry
Changes in velocity of money

241. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes
Shortcomings and problems
Less control?
Cyclical asymmetry
Changes in velocity of money
The investment impact

242. Effectiveness of Monetary Policy Strengths of monetary policy
Speed and flexibility
Isolation from political pressure
Recent successes
Shortcomings and problems
Less control?
Cyclical asymmetry
Changes in velocity of money
The investment impact
Interest as income

243. Monetary Policy and the International Economy
Net export effect
Interest rates affect the demand for the $, increased i rates,
increased demand for $, $ appreciates, lower exports.

244. Monetary Policy and the International Economy
Net export effect
Macro stability and
the trade balance

245. Monetary Policy and the International Economy
Net export effect
Macro stability and
the trade balance
Discussion...

246. monetary policy
open-market committee
reserve ratio
discount rate
easy money policy
tight money policy
velocity of money
prime interest rate

247. Extending the Analysis
of Aggregate Supply
Next
Chapter 16