ECON 2105 1nd Edition Lecture 21 Outline of Last Lecture I. Federal Reserve Banks II. Open-Market Operations Outline of Current Lecture I. Practice Current LectureReview for Test 3 www.learningcatalytics.com  YAK9JZE  create a student account, free code, find the class, sign up. (Module 19) If US real GDP dropped while the aggregate price level rose, according to the AD ASmodel, were there just one shock that hit the economy, what would be the nature of the shock?Was it a demand or supply shock? Was it positive or negative? - Answer: Higher prices, lower GDP, negative demand shock o Any time cost of production rises (negative supply shock) wages go up (Module 20) if an economy is at an inflationary gap created by a positive demand shock, the fed can stabilize the output by _______. - Y > YP - Answer: lowering money supply - We are to the right of potential output level - Will cause a Open market sale (Module 20) 2 shocks n 2007. One is increase in oil supply, other is collapse of the housing market. Economy was in long run equilibrium before the shocks, by using AD AS model, in the short run, what will happen to aggregate price levels and real GDP? - Increase in oil prices –supply, prices go up, demand goes down These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Collapse in housing market- demand, prices go down, demand goes down - Aggregate price levels: ambiguous change - Real GDP: falls (Module 20) Assume that the economy is at a recessionary gap created by a negative demand shock, - recommend fiscal policy that will stabilize the output (taxes) lower tax on income - recommend a fiscal policy that would stabilize prices (demand shock will stabilize prices) same policy - recommend monetary policy that would stabilize the output more money supply - monetary policy that stabilizes prices money supply increase o all fiscal and monetary policies will only shift the aggregate demand curve, but the companies will cause a movement along the supply curve indirectly because of money (Module 23) types of questions - is a gift card money? NO - when you use money for a specific purpose and depending how you use it what is the role of money? ( unit of accounts, service, ect) - What happens to M1 and M2 if…. Transfer money from check to savings, what happens to M1 and M2?(Module 25) If the minimum required reserve ratio is 5% the bank is holding excess reserve of __10 million __- Bank reserves = money kept in vault + federal reserve - 100mil in deposit so 5% of that is 5 mil,- bank reserve is 2 mil in vault and 13 mil in federal reserve so 15 mil in reserves - 15 mil – 5 mil = 10mil of excess reserves - ^M1= excess reserves/rr= excess reserve+ money multiplier = 10 mil * 20 mil = 200 million (Module 25) rr=10% bank reserves depsots 1$ ----------------- 10$2$------------------ 20%12mil $----------- 100 mil --- 12 mil will cover 120 mil$ deposit, can raise deposits by 20 mil (module 25) banks don’t hold excess reserves, required reserve ratio is 20%. Jhn deposits 2,000$ to checking account, the money supply can increase at the maximum (in a checkable only banking system with banks that desire to hold zero excess reserve) by ______ - ^M1= initial excess reserve / rr - ^D(change in deposit)= initial deposit/ rr - 1600/.2= 8000 = ^M1- 2000/.2= 10000=^D (Module 25) Assume that the commercial banks initially have zero excess reserves. If the required reserve ratio is 5% and the depositer withdraws $800 from her checkable deposit, at the maximum, the money supply (M1) will change by how much? - ^D= -800/.5=-1600- ^M1= ^D + ^C (change in cash) - -16000 + 800= -15200(Module 27) If the federal reserve wants to decrease the money supply, the fed might:- ___raise ___ required reserve ratio - _____ raise___ discount ratio - conduct open market ____sale___  bank reserve excess reserve goes down- ___ raise__ target federal funds rate (Module 27) if the fed conducts an open market sale then….- Bank reserves  fall - Bank excess reserve fall - Monetary base fall - Assets of the fed  fall- Banks liabilities no change - Banks assets will no change (t-bills rise, bank reserve falls) - Fed’s liabilities will  (same as monetary base) fall o Open market sale of 20 mil= bank excess reserve 20 mil Can the fed create new treasury bill at will? NOWhere do treasury bonds come from? Printed by the govt and auctioned off.Does the fed produce t-bills to conduct open market operations or can they use existing t-bills? No How do nominal wages shift the SRAS curve? Profits per unit go down= price – cost per unit going up  meant that production will