Econ 102 1st Edition Lecture 20Outline of Last Lecture I. Chapter 14Outline of Current LectureI. General InfoII.The Great RecessionIII. 14.4: Interest Rates and How they Change Investment Output (GDP)IV.14.5 Monetary Policy Challenges for the FedV. Film GlossaryCurrent LectureI. General Infoa. Use Exam Content Folder to study for the final!b. Gwen will have 2x the office hours returning from thanksgiving breakII. The Great Recessiona. Information on Great Recession in Chapter 13 & 14!b. The applications, pull all those things togetherc. Traditional Open market i. increased bank reservesii. pushing on the string problemiii. thus Federal Reserve dropped the Reserve requirement 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.1. Didn't change anything because Banks were already saving more than they needed tod. So they lowered the discount ratei. we’ll lend to you with no interest!!ii. still banks didn't want to lend1. might not be able to pay back the loan2. didn't want to take any chancesiii. People are nervous about the short term, but trusting of the long term credit markets1. people aren’t as nervous about the future 2. application in chapter 143. Reserves rescue the banks4. just giving them moneya. Because they are the infrastructure of the economyiv. for 2 days the banks froze and made NO LOANS1. no capital deepening 2. no control of money supplyIII. 14.4: Interest Rates and How they Change Investment Output (GDP)a. Figure 14. 5i. If you can get investment to change you can get aggregatedemand to changeii. This investment is short term stuff!!1. ex: paying debt over night2. therefore no affect on capital deepeningiii. Aggregate Demand Curve shifts right1. increases GDP2. very Keynesian (no long run)b. Study Page! i. Open market bond purchases-> increase in money supply1. the checks they add to bank adds to the bank re-serves, allows banks to “play” with the money (loans)2. ->Fall in Interest rates3. -> Rise in investment spending4. ->Increase in GDPii. Open market bond sale1. -> decrease in money supply2. ->rise in interest rates3. -> fall in investment spending4. -> Decrease in GDPa. (worried things are moving too quickly, so slow it down, but country as a whole is blooming)iii. Know how to compare and contrast monetary and fiscal policy!c. Interest Rates and Exchange Ratesi. The exchange rate is the cost of the domestic currency in terms of units of foreign currencyii. exchange rate will riseiii. with an increase in foreign demand for US goods and services1. two reasons foreigners want US dollars (Euros->dol-lars= exchanging)a. goods and servicesb. financial assets * focus for examd. Monetary Policy and International Tradei. exchange rate1. rate at which currencies trade for one another in the marketii. currency depreciation1. a decrease in the value of a currency2. lousy rate of return3. if this does work, it doesn't distorta. increases demand for the dollar and net ex-portsb. increases GDPiii. currency appreciation1. an increase in the value of a currency2. indirectly hurts our exports3. distorts in the long runa. unintended consequence is measured by the in-terest rate effectsIV. 14.5 Monetary Policy Challenges for the Feda. Lags in Monetary Policyi. Inside lags: time it takes for policymakers to recognize and implement policy changes1. Janet Yellen is going to make a change, she's not “wishy washy” she is just letting the markets know2. interest rates are going to go up3. Policy Makers aren’t worried about being reelected like a president so they try to let people know what they plan to do but its difficultii. Outside Lags: V. Film Glossarya. Bring with you for video next week it has great terminology!i. Investment Bank 1. not a normal bank!2. doesn't have checking and savings account, etc3. provide VERY large loans for VERY large purchases4. “Money managers” rather than bankersa. bunch of wealthy people to buy a hockey teamb. a merger between two airlinesc. help manage pension systems5. Few firms that are extremely powerful and largea. “too big to fail” because every country in the world needs these guys to survive, political powerb. concern that the deregulation will create mon-stersi. strongly influencing who gets electedii. extremely powerful and important to theeconomyii. Investment Grade 1. 3 largest rating agencies2. Moody, S&P, and Fitcha. “how likely are these guys to repay?”b. Giving you information3. Important legal aspect to what they doa. Pensionsi. legally only allowed to invest pension in “A category”ii. thus these agencies determine where the pensions can be invested because they give out the gradeiii. Security 1. pull together a lot of types of loans, diversify2. desensitizes the risks3. making lender more stableiv. Prime1. great credit rating2. always pay off debts, have a good jobv. Sub-prime1. dont usually make payment on time2. declare bankruptcy3. bad credit ratingvi.“Bubble”1. EX: Iron man action figures are collectibles, limited supply, will be worth a bunch in the future, we all buy thema. prices will therefore go upb. people think they're right, thus more buyc. Then someone realizes “this is silly” or mass production occursi. BUBBLE POPSii. not caused by increased productivityiii. caused by the
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