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UT GOV 312L - A Puzzle

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GOV 312L 1st Edition Lecture 20 Outline of Current Lecture I. TMFPQII. A PuzzleIII. Money fundamentalsIV. Monetary policy in the USV. The US and the international monetary systemVI. Exchange rates and global capital marketsVII. The Bretton Woods systemCurrent LectureTMFPQ- Aftermath of democratic losso people expected obama to reassess and lay low. Presidents usually lay low and concerning on foreign policyo trade and climate control, reduce deportations of illegals in US, issued public support of net neutrality. These are his moves- Obama’s move on immigrationo plans to use executive power and discretiono millions of undocumented people will be allowed to remain and get work permits- Is he being undemocratico critics say he is abusing executive powerso he should be upholding the land of law, but is making decreeso obama effectively lost an election, his actions on immigration go against the will of the voters as expressed in the last election- Institutionso We have a president and not a parliament, and president has a fixed termo in parliament, the prime minister changes with the majority of congresso Seeing as he is a lame duck president, he can carry out policies based on other reasons rather than following congress. o It is freeing as he can use executive actions, but these are temporary. The next president can undo them- Good or bad?o Some say that this will put back the immigration topic, he is overreachingo Some say that the republicans will overreact and come out as racist, it’s a trap- Keystone Pipelineo On agenda for senate voteThese 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.o 1200 miles of pipeline, carrying 830,000 barrels a day of crude from canada’s oil sando This is dirty oil, takes more carbon emissions to extract it, tree huggers pissed offo Defenders say oil will be used for export- Environmental and job impacts,o These are generally overblowno environmental impact is minimalo impact on jobs is also minimalo so the issue is a symbolic issue, it’s easier to go against a single issue like a pipeline rather than go against the changing consumer’s - Obama has threatened to veto, but he’s muted. He has no real stake in thisPower of finance, why?- Bill - “You mean to tell me that the success of my program and my re-election hinges on the Federal Reserve and a bunch of f***ing bond traders”- Carvill - “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”- US dollar is the backup currency of the world. The world needs the US to be in debt so it can sell bonds and allow other to get influence in the US - How does debt in the US strengthen the US influence around the worldMoney Fundamentals- Money has three important functionso Medium of exchange: facilitates trade and specializationo If we bartered, it would be hard- Whew…Rob doesn’t have to trade lectures on the Cold War to his banker to pay his mortgageo Unit of account: means to measure value of things and compare different goods and serviceso Store of value: allows wealth/value to be held over timeMoney and Interest Rates- Price of money reflected in interest rates, set by interaction of supply and demando Cost of borrowingo As costs down, economic activity tends to go up (easier to borrow and buy)o As costs up, economic activity tends to slow (GDP growth slows or negative)o Policy implication: governments can stimulate economic activity by pushing interest rates downInterest Rates- Set by interaction of demand…o Price level: As prices up, need more money to make same quantity of purchaseso Aggregate economic activity (GDP): as increase, more goods and services sold; need more money to facilitate transactionso Risk: Can government maintain sound economic policies? Control inflation? Will it repay its debts?o Dollar unique role as reserve currency, because the US pays its debts and can collect a lot of taxes- And supplyo Fractional reserve banking Banks as intermediaries: generate profits by lending money (e.g. mortgages) at higher rates than they borrow (deposits) Have to hold some deposits as reserves: willingness to lend deposits shapes rate at which money supply expands Banks can create currency by loaning it out. This s a function of demand for moneyo Gov’t issues currency Key role for central bank (the national bank of banks) Regulate money supply through interest rates, open market operations, and reserve requirements for banks banks adjust their reserve ratios, higher ratio = lower supply open market operations are transaction where the central bank buys and sells bonds ( quantitative easing), making new deposits by buying their holdings in US federal interest bonds government can always just print money instead of taxing. Risk of inflation or hyper inflation Policy challenge: gov issue new currency to pay debts?Monetary Policy and Inflation- Inflation is just rising priceso Measured by CPI consumer price index and PPI producer price index, which track price movements over time in bundle of goods- Bad because erodes value of…o Savings as reduces its purchasing power of money, income stays the same, but prices increase 25 cents bought a candy bar in 1979, but not in 2014 o Creditors’ assets (loans), erodes the value of loans, their key assets Financial sector strong interests in low inflation- But deflation bad tooo If people think prices falling (e.g. houses in 2008-11), then wait to buy; if everyone waits, then economic activity collapses and firms go bankrupt and/or lay people off- Optimum: moderate price growth of around 2%- How choke off inflation? Slow economic activity by raising interest rates- And…surrender responsibility for monetary policy to unelected officialsFederal Reserve- Central bank of the United States- Regulates banking sector- Lender of last resort to banks- Banks’ bank but different bank because not tasked with earning profits- Policy goals of employment and limit inflation- Last three leaders: Greenspan, Bernanke, Yellen- Influence short term interest rates (loans with terms in days and months) through discount (lending) rate- Influence long term interest rates with open market operationso Quantitative easing: Fed purchase of US Treasury Bonds (Fed


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