UW-Madison ECON 102 - Review for Final Exam (6 pages)

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Review for Final Exam

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Review for Final Exam


Review for Final exam; Chapters 9, 10, 13, 14, 15 & The Inside Job video.

Lecture number:
Lecture Note
University of Wisconsin, Madison
Econ 102 - Principles of Macroeconomics
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Econ 102 1st Edition Lecture 25 Outline of Last Lecture I Chapter 15 cont II Review Fiscal Policy Outline of Current Lecture I Review for Final Current Lecture I Review for Final a Chapters 9 10 13 14 15 The Inside Job video i Nothing about reserve float b Multiple choice 15 points Short answer 10 points c Exam Locations in Content Folder i Penalty for going to the wrong room ii Know your discussion section and TA d Student Questions i Reasons that expansionary monetary policy may be like pushing on a string 1 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 recessions c 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 longproductivity as solid 1 this is known as Quantitative Easing 2 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 Aggregate Demand AD a Quantitative Easing during the Great Recession addressed this problem 3 It might be difficult to affect interest rates if we are in a liquidity trap liquidity trap exists if there had already been as much lending as the market can absorb 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 on reserves 1 Imagine 2 interest rate on reserves by leaving it in there No way loan for less because can get 2 for doing nothing a keeps interest rates from falling too low 2 Then if something bad happens the FOMC could get rid of the interest rate on reserves letting lending rates fall no liquidity trap something 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 interest rates any further pushing on a string ii Why is monetary policy neutral 1 Monetary policy is effective if it changes interest rates a if interest rates fall then C rises cost of borrowing is lower and our assets are less attractive to foreigners offer a lower rate of return so theres less demand for dollars to buy US assets 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 started ii hard to tell whether monetary policy happened worked 1 thus neutral iii iii only thing observed is inflation The cause of the Great recession 1 Inside job 2 deregulation of banks and investment banks 3 led to them taking on more risk in the housing market 4 bubble popped iv Derivatives 1 credit default swap insurance policy taken out on a loan 2 sold them under the assumption they would never have to pay anything out a they were wrong went bankrupt then US had to rescue them 3 not a productive asset just insurance

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