Econ 2133 1st Edition Lecture 13Outline of Last Lecture Recap of Worker/ Retiree RatioPopulation GrowthProblems with Social SecuritySocial Security versus Medicare & Medicaid Monetary PolicyTreasure & The FedOutline of Current Lecture Monetary BaseMoney SupplyHow 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 worthMo = 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 powerAmerican 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 AmericaCosta 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 feesThese 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 Reserve2. 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 reservesTotal Reserves = vault cash + deposits @ federal bank3. Depositors (how they choose to keep their money, in currency or in banks)4.