monetary policy video

http://youtu.be/9v7Gkp-RJpE

*Basic concepts.
There are 3 different types of money.
1.commodity money (most primitive)
2. Representative money

3. Fiat money

there are 3 functions of money
1. Money is a median of exchange

2. Money has a store of value
3. Money is a unit of account (which implies price has more worth, with higher quality. 
*Money market graph.
Always label your axis correctly. Interest rate with an I on the vertical line and Qm on the horizontal line. Demand (Dm) slopes down. Because when the price is high, quantity demanded is low. The supply of money is vertical, because it does not vary depending on the interest rate. (which is set by the fed). Increasing, you would shift to the the right. And vice versa for decreasing.
*The fed tools of monetary policyexpansionary(easy money)
fed has control over the required reserves. They can decrease it. The fed can decrease the discount rate
buying and selling bonds and securities. To expand the money supply, the fed buys bonds

contractionary(tight money)

They increase the required reserves. They can increase the discount rate.

If the fed wants to contract or reduce the money available they would sell bonds.
Remember: buy bonds=big bucks. And FOMC is in charge of that.

*loanable funds

Your y axis on a loanable funds graph is I (interest rate). On your x axis is QLF which is quantity of loanable funds. And demand for loanable funds (which is DLF) is at a downward slope. Demand slopes down, supply slopes upward. Supply of loanable funds (SLF) comes from the amount of money people have in banks and also depends on savings. If people have an incentive to save more, then you can increase the supply of loanable funds and vice versa.
If the government is running a deficit, that means the government is demanding money in order to spend it.


*money creation process
banks create money by making loans.If you want to know the total money created after they give you the reserve requirement and the loanable amounts, you have to know the money multiplier. The money multiplier is 1/RR. And you would get something high or so because of multiple deposit expansion.


* money market, loanable funds, and AD-AS
deficit spending, in the money market, money demanded would increase because the government is borrowing it. In loanable funds, deficit spending will also increase (even though it can both ways). Lastly, since deficit spending affects government spending, it will increase aggregate demand (AD). A change in the supply of money will be a change in price. Excluding the Q in the formula MV=PQ. Making it the fisher effect (has to be equivalent).

The Spending Multiplier Effect
*an initial change in spending ( C, Ig, G, Xn) causes a largerr change in aggregate spending or aggregate demand
-Mulitiplier = change in AD over change in spending
- Multiplier = change in AD / Change in C, Ig,G, Xn
*Why does this happen?
- expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating Spending Multiplier
-Multiplier = 1/1 - MPC or 1/ MPS
*multiplers are (+) when there is an increase in spending and a (-) when there is a decrease in spending.
Calculating Tax Multiplier
*when the govt taxes, the multiplier works in reverse.
*why?
- because now money is leaving the circular flow
*tax multiplier(its negative)
= -MPC/1 - MPC or -MPC/MPS
*if there is a tax CUT, then the multiplier is positive , b/c there is now more money in the circular flow.
Fiscal Policy
-changes in the expenditures or for revenues of the federal government
- 2 tools of fiscal policy
>taxes- govt can increase or decrease taxes
>spending- govt can increase or decrease spending
- fiscal policy is enacted to promote our nations economic goals.

Deficits, Surpluses, and Debt
*balanced budget
-revenues = expenditures
*budget deficit
-revenues< expenditures
*budget surplus
-revenues> expenditures
*government debt
-sum of all deficits - sum of all surpluses
*governtment must borrow money when it runs a budget deficit.
*government borrows from:
 -individuals
 -corporations
 -financial institutions
 - foreign entities or foreign governments.

Fiscal Policy Two options
*discretionary fiscal policy (action)
expansionary fiscal policy- think deficit (recession)
contractionary fiscal policy- think surplus
* non-discretionary fiscal policy ( no action)

Discretionary Vs Automatic
*Discretionary
- increasing or decreasing govt spending and /or taxes in oreder to return the economy to full employment. discretionary policy involves policy makers doing fical policy in response to an economic problem.
*Automatic
- unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. automatic fiscal policy takes place w/o policy makers having to respond to economic problems.

Progressive Tax System
* average tax rate (tax revenue/ GDP) rises w/ GDP
Proportional Tax System
* average tax rate remains constant as GDP changes
Regressive Tax System
* average tax rate falls w/GDP

Disposable income (DI)
-income after taxes or net income
- DI =gross income - taxes

2 Choices
- W/ disposable income, households can either:
  - consume (spend money on goods and services)
  - save (not spend money on goods and 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 = 0 ?
> autonomous consumption
Saving
-household not spending
- the ability to save is constrained by
>the amount of disposable income
>the propensity to consume
-Do households save if DI = 0?
> no.
-- APS = S/DI = %DI that is not spent

FORMULAS
APC & APS
* APS + APC = 1
* 1 - APC = APS
* 1 - APS = APC
* APC > 1.: Dissaving
*-APS.: Dissaving

MPC & MPS
* marginal propensity to consume
- change in consumption/ change in DI
- % of every extra dollar earned that is spent
* marginal propensity to save
- change in savings/change in DI
- % of every extra dollar earned that is saved
* MPC + MPS = 1
* 1 - MPC = MPS

Three Schools of Economics

*Classical*
-John B. Say
Adam Smith
David Ricardo
Alfred Marshall
-competition is good(invisible hand)
*-Say's Law- supply creates its own demand
-AS determines output
-economy is always close to or @ full employment.
- in the long run the economy will balance at full employment.
*Triple down Effect
^will help rich first,then everyone else later.
^savings is considered a leakageis equal to investment which leads to injection.
-Prices & wages are flexible downward
-whatever output is produced will be demanded.
-instituted concept of laissez-faire. (no govt intervention)

*KEYNESIAN*(this is what we use)
-John Maynard Keynes
-competition is flawed
-AD is key, not AS
- leaks cause constant recession
-savings cause recessions
-ratchet effects & sticky wages
-in the long run we are all dead.
-demand creates its own supply, therefore AD curve is unstable.
-savers & investers save and invest for diff. reasons.
-the economy is not always close to or @ full employment
-prices and wages are inflexible downward (monopolistic competition creates a situation)
**- there is govt intervention
       -they intervene through fiscal or monitary policy.

*Monetary*
-Allen Greenspan
Ben Bernanka
-congress cant time policy options
-govt can best control health of economy by regulating banks and interest rates.
- easy money- recession
-tight money- inflation
-monitary policy( change is required reserves)
-use bonds through open market
- use the interest rate to change discount rate and federal fund rate.

The Full Employment
*Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point.
Recessionary Gap
* A recessionary gap exists when equilibrium occurs below unemployment output.
-AD is decreasing at a recessionary gap
Inflationary Gap
* An inflationary gap exists when equilibrium occurs beyond full employment output.
- Inflationary gap, AD shifts right.
Interest Rate & Investment Demand
*What is Investment?
^Money spent or Expenditures on:
-Newplants (factories)
-Capital Equipment (machinery)
-Technology ( hardware/ software)
-New home
-Inventories (goods sold by producers)
Expected Rates of Returns
*How does business make investment decisions?
^Cost & benefit analysis
*How does businesses determinate the benefits?
^Expected rate of return.
*How does businesses count the cost?
^Interest costs
*How does businesses determinate the amount of investment they undertake?
^Compare expected rate of return to interest costs.
-If expected return> interest cost, than investment.
Real (r%) Vs.  Nominal (i%)
*Whats the difference?
-Nominal is the observable rate of interest. Real subtracts out inflation ( pie%) and is only known ex post facto.
*How do you compute the real interest rate (r%)?
- R% = i% - pie%

Investment demand curve (ID)
*What is the shape of the investment demand curve?
- Downward slopping
*Why?
- When interest rates are high fewer investments are profitable, when interest rates are low, more investments are profitable.
Shifts in investment demand
- Cost of production
   low cp, shifts right
   high cp, shifts left
- Business Taxes
   lower bt, ID shifts right
   higher bt, ID shifts left
-Technological change
  new tech, shifts right
  lack of tech, shifts left
-Stock of capital
  Eco low, ID shift right
  Eco high, ID shift left
-Expectations
 investment(positive), shifts right
 Investment(negative), shifts left

GDP (Gross Domestic Product)

• Total dollar value of all goods and services produced within a country's borders within a given year

GNP (Gross National Product)

• Total value of all final goods and services produced by Americans in a year

Included in GDP:

• C+Ig+G+Xn
• C-Consumption
• 67% of the economy
• Final good or service
• Ig-Gross Private Domestic Investment
• Factory Equipment Maintenance
• New Factory Equipment
• Construction of Housing
• Unsold Inventory of Products Built in a Year
• G-Government Spending
• Military Spending
• FBISD Hires New Workers etc.
• Xn-Net Exports
• Exports-Imports

Excluded from GDP:

1. Non-market Activities
• Volunteering
• Family Work
• Illegal drugs
2. Intermediate Goods
• Goods and services that are purchased for resale or for further processing and manufacturing
• Anything that goes into making a product
• Avoid multiple or double counting
3. Used or Secondhand Goods
• Clothing from a thrift shop
4. Financial Transactions
• Stocks
• Bonds
• Real Estate
5. Gifts or Transfer Payments
• Public
• Public transfer payments
• Recipients contribute nothing to the current production
• Welfare payments or social security
• Taxes paid by individuals are given to the public
  
  
  
• Private
• Private transfer payments produce no output
• Simply transfer funds from one private individual to another
• Ex: Scholarship

FORMULAS!! 😀😀😀

• C+Ig+G+Xn=GDP

• Budget= Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collection
  (If Number is Positive, It is a deficit. If Number is negative, it is a surplus)
• Trade= Exports-Imports
• GNP=GDP+Net Foreign Factor Payments
• NNP(Net National Product)= GNP-Depreciation
• NDP(Net Domestic Product) = GDP - Depreciation
• National Income =
• GDP-Indirect Business Taxes - Depreciation - Net Foreign Factor Payments
• Compensation of Employees + Rental Income + Interest Income + Proprietor’s Income + Corporate Profits
• Disposable Personal Income = National Income - Personal Household Taxes + Government Transfer Payments

Nominal GDP

• Value of output produced in current prices
• Price x Quantity = Nominal GDP
• Can increase from year to year if either output or price increase

Real GDP

• Value of output produced in constant or base year prices
• Price x Quantity = Real GDP
• Can increase from year to year only if output increases
• Output is measured by quantity
• Reason why real GDP reflects base year price is because it accounts for inflation
  
  
  
  

  Price Index

  • Measures inflation by tracking changes in the price in the market basket of goods compared with the base year
  • (Price of market basket of goods in current year)/(Price of market of goods in base year) x 100 = Price Index

  GDP Deflator

  • Price index used to adjust from nominal to real GDP
  • In the base year, GDP deflator will equal 100
  • For years after the base year, the GDP deflator is greater than 100
  • For years before the base year, the GDP deflator is less than 100
  • (Nominal GDP)/(Real GDP) x 100 = GDP Deflator

  Calculate Inflation

  
  

  • ((New GDP Deflator) - (Old GDP Deflator)) / (Old GDP Deflator) x 100