1 Macroeconomic Principles Microeconomics cycle 3 November 19th Fiscal policies Recent events government is hesitant on economic stimulation because everyone knows that the recession will drag on for years and the unemployment rate is still really high compared to the natural rate of unemployment unwise to input more money in the economy because the country is already in debt Obama administration sold bonds to raise revenue when they put the stimulation packet together they expect the G to affect the multiplier by 1 5 and tax multiplier by 1 the tax multiplier could ve been more if it went to the lower class because they would ve spent the majority of the influx Narrow the most liquid forms of money makes it easy for us to go out and buy stuff the value of the metal coins has to less than the nominal value of the coin M 1 definition only the most liquid forms of money cash and checking accounts Monetary policies Definition of money M 2 definition all the items Kinds of money M 1 Cash in the hands of the public 740 billion Demand deposits checking accounts 350 bil other checkable deposits hybrid between a savings and checking account 316 bil travelers checks 7 bil M 1 M 2 Savings type accounts 3 558 billion less liquid than a checking account because people can t make direct payments with a savings account Retail money market mutual funds 763 billion Small time deposits 1 068 billion Closed accounts CDs the longer you choose to deposit the money in the CD the higher the interest rate large time deposits CD accounts with over credit cards give a promise to make a payment 2 Macroeconomic Principles Commercial banking foundation of monetary policy fractional reserve system Demand deposit liabilities bank is liable checking accounts it is a law in the US for the banks to keep a percentage of the Excess reserve 1 million Loans checking deposits to lower risks Frozen reserve used to occasional withdraw of money checks transactions with other banks hold funds in account with the Federal Reserve to facilitate their unless the ER flows out to the public the value won t increase Assets Liabilities and net worth Property and buildings 20 million Demand deposit liabilities 100 million 25 million Net worth 20 million Required reserve 10k Government and corporate bonds Loans Cash in vault In accounts with the federal reserve Total assets 65 million 2 million 8 million 120 million Total liabilities plus net 120 million worth The bank has a legal entity that is liable to the shareholders the value of assets has to be equal to the liabilities and net worth Central bank and the Federal Reserve The central bank was created because there used to be too many panics regarding depositing money in banks it is used to prevent bank failures Real time events bank failures in the United States spiked in the early 1930s small spike around 1990 during the Reagan administration he issued the deregulation of industries especially banks making loaning money very easy The housing market boomed causing the construction industry to follow suit However when the demand declined the supply side was slow to respond As a result people weren t able to payback the loans causing a medium scale of bank failures Macroeconomic Principles 3 Functions of the Federal Reserve 1 Clears checks transfer money from one bank to another especially for out of town 2 Puts money into circulation issue paper money 3 Acts as a Lender lends money to commercial banks commercial banks can borrow money from other banks or the Fed 4 Regulates banks 5 Regulates the money supply November 21st Instruments of monetary policies sm supply of money 1 Open market operations the Fed buys bonds excess reserves lending ability of banks sm the Fed sells bonds excess reserves lending ability of banks sm 2 Adjustment of reserve ratio RR excess reserves lending ability of banks sm RR excess reserves lending ability of banks sm 3 Adjustment of discount rate DR excess reserves lending ability of banks sm DR excess reserves lending ability of banks sm Primary bond market government sold to the public Secondary bond market bonds are traded between individuals before it expires used to fund the fed s expenses Federal funds rate interest charged by one commercial bank to another most important interest rate in the economy Discount rate interest charged by the Fed to commercial banks Which of the three instruments is most commonly used for monetary policies Open market operations The fed dislikes sudden changes in economy these steps reserve rate makes drastic changes Open market monetary policy small incremental steps fed waits to see effect of it s easier for the commercial banks to borrow money from each other because the federal reserve tend to be more careful with loans Financial crisis 2008 Macroeconomic Principles 4 FDIC agency which ensures that money put into account over 200 000 8 000 banks in the US 150 went bankrupt liability asset Leverage ratio total assets shareholders equity 100mil 10mil 10 Chapter 14 November 26th Demand for money M1 Interest rate and money are inversely related interest rate moves us leftward of the money demand curve Entire money demand curve shifts rightward if the price level or income increases experience an increase in DI people buy more and demand for money increases Supply of money The supply line is vertical instead of sloping because interest rate is an independent variable Money market equilibrium at the equilibrium interest rate of 6 the public is content to hold the quality of money it is actually holding at a higher interest rate an excess supply of money causes the interest rate to fall al a lower interest rate an excess demand for money causes the interest rate to rise deviations in interest rate are eliminated Government securities a bond issued by a government authority with a promise of repayment upon maturity that is backed by said government Treasury bills notes marketable government debt security with a fixed interest rate and a maturity between 1 10 years expires in one year Government bonds long term government securities market value amount of money to buy the bond nominal value the value of the bond difference in the interest you gain profit you make Ex nominal value 1 000 market value 800 It follows i 200 800 25 nominal value 1 000 market value 900 It follows i 100 900 11 When does the fed use what kind of policies During different phases federal funds rate is the most important interest rate of all every