Econ 2133 1st Edition Lecture 13 Outline of Last Lecture Recap of Worker Retiree Ratio Population Growth Problems with Social Security Social Security versus Medicare Medicaid Monetary Policy Treasure The Fed Outline of Current Lecture Monetary Base Money Supply How the Money Multiplier works Current Lecture Stairway to Heaven graph that shows different policies the Fed tried to compensate Blew up monetary base by 5 historically unprecedented 900 billion to 4 5 Trillion Come June the Fed will start unwinding this and let it shrink How though We don t know how to get back to normal 900 billion Danger is that all these reserves potentially could cause extreme inflation Assets Liabilities for fed because it has no net worth Mo Monetary base foundation from which money supply springs currency bank reserves Fed central bank for Us bank for banks where bankers keep deposits Have to by law and choose to keep reserves there over and above what s needed by law M1 money supply 1 748 5 B currency checkable deposits demand deposits Most is currency 55 of our currency is in foreign hands because it maintains its value among any other Main erosive of wealth is inflation value keeps depreciating in terms of purchasing power American inflation rate has never gone above 2 in our lives so far so it s safer to get paid and keep a dollar based investment because only subject to inflation in America Costa Rico s annual inflation rate 15 Banks charge their best customers 20 Most money is traded via electronic book entries when you deposit a check to a bank Some places don t take American Express because it charges a 4 fee from establishments Money supply more geared towards peoples transactions regular daily weekly purchases Fed may raise interest rates in June while Euro is dropping Makes people want to buy dollars which raises the dollar price Will the euro survive M2 money supply 8 780 7 Billion M1 Savings Deposits small time deposits where small means less than 100 000 Retail money market mutual fund Small Time Deposits CDs can t liquidate quickly and comes with fees 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 Savings Deposits can liquidate much easier and quicker Money market mutual fund all assets must be short term less than a year low risk and highly liquid in order to buy them together Money supply more geared towards portfolio distribution Have certain amount of wealth and where do you want that wealth to be bonds equities properties etc Liquidity ease of conversion into cash without high cost or capital loss sell something really cheap just to get rid of it Pawn Shop gives you 20 cents per dollar that s not good though High powered money monetary base Putting Redistribution First and Growth Last The New Mediocre where 2 growth is the best you can expect M1 MB x Money Multiplier So changes in M1 changes in MB x changes in Money Multiplier In Great Recession money multiplier tanked and therefore monetary supply fell by 33 Ben Bernanke increased monetary base in response during recession to stop money supply from falling into an abyss Currently money supply is up but not off long run trend MB Federal Reserve controls this completely Can move it up or down by any amount any time they want to Money Multiplier 4 way interaction to create the MM value 1 Federal Reserve 2 Banks for profit institutions Take in deposits and then transform them into long term assets Asset transformation process Take in short term liquid liabilities then purchase or lend long term assets and that s how they make their money Checkable deposits Must keep 10 of deposits as required reserves Choose to keep excess in reserves can keep them or loan invest them in order to increase their profits Banks MUST have excess reserves to make loans and investments Total Reserves required reserves excess reserves Total Reserves vault cash deposits federal bank 3 Depositors how they choose to keep their money in currency or in banks 4 Borrowers