Econ 102 1st Edition Lecture 25Outline of Last Lecture I. Chapter 15 (cont.)II. Review Fiscal PolicyOutline of Current LectureI. Review for FinalCurrent LectureI. Review for Finala. Chapters 9, 10, 13, 14, 15 & The Inside Job videoi. Nothing about reserve floatb. Multiple choice 15 points, Short answer 10 pointsc. Exam Locations in Content Folderi. Penalty for going to the wrong roomii. Know your discussion section and TAd. Student Questionsi. Reasons that expansionary monetary policy may be like pushing on a string1. Banks may accumulate excess reserves rather than make loans if..a. Times are risky (Keynesian Model- people get panicky)b. Productivity is low (classical model- GDP and investment spending fall because productivity is lower)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.i. both very likely to happen during reces-sionsc. During the Great Recession, the FOMC i. engaged in direct lending by purchasing Mortgage Backed Securities (bypassed the banking system)ii. Bought long term securities (not just usual short term ones) to try to affect long-term interest rates (thinking that banks would view long-term risk, long-productivity, as solid)1. this is known as Quantitative Eas-ing2. One problem with normal open market operations is that they only affect short term interest rates, and those may not be very important in affecting Aggre-gate Demand (AD)a. Quantitative Easing during the Great Recessionaddressed this problem3. It might be difficult to affect interest rates if we are in a liquidity trap (liquidity trap exists if there had al-ready been as much lending as the market can ab-sorb and interest rates are as low as they can go)a. During the Great Recession the FOMC…i. Offered interest rates on reserves held by banks. Banks wouldn't make loans to households or firms that gave interest rates lower than the ones they earned onreserves.1. Imagine 2% interest rate on re-serves, by leaving it in there. No way loan for less because can get 2% for doing nothinga. keeps interest rates from fall-ing too low2. Then if something bad happens the FOMC could get rid of the interest rate on reserves, letting lending rates fall (no liquidity trap) “some-thing in their pocket just so they could make sure they could avoid a liquidity trap”a. accumulation happens but ex-pansionary policy won't work because you cant lower inter-est rates any further (pushingon a string)ii. Why is monetary policy “neutral”?1. Monetary policy is effective if it changes interest ratesa. if interest rates fall, then C rises (cost of bor-rowing is lower) and our assets are less attrac-tive to foreigners (offer a lower rate of return) so theres less demand for dollars to buy US as-sets and the price of dollars fall, which helps our exporters (NX rises)b. In the long run interest rates go back up, so C, I, NX, the exchange rate and everything else goes right back where it started from. Nothing in real terms changes AT ALL.i. every component of AD goes back to where it startedii. hard to tell whether monetary policy happened/worked.1. thus “neutral”iii. only thing observed is inflationiii. The cause of the Great recession1. Inside job2. deregulation of banks and investment banks3. led to them taking on more risk in the housing mar-ket4. bubble poppediv.Derivatives1. credit default swap: insurance policy taken out on a loan2. sold them under the assumption they would never have to pay anything outa. they were wrong- went bankrupt, then US had to rescue them3. not a productive asset, just
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