- HW #5 is due next Wednesday- Office Hours: Thursday 5-6:30 in 6203 Social Science------------------------------------------------------------------------------------------------------------------------------------ Lags in Keynesianism (time lags)o Recognition lag: need to realize that there is an economic problemo Legislation lag: the government must decide what they want to do about the problemo Implementation lag: it takes a while for the policy to be effective in the economy- Observationso We could make a more complicated and realistic modelo We talked about fiscal policy (G & T) but we need to talk about monetary policy as wello In the real world the multiplier is smaller Automatic stabilizers- Reduce the impact of spending shocks on the economy- They keep the economy from swinging too far towards a boom or a recession- E.g.o Taxes- if a boom occurs income will rise, but so will taxes, whichdampen the boomo Transfer payments- if there is a recession transfer payments willincrease which will dampen the recession- Recap of ideaso LR (classical) LF market Economy operates at full employment LR saving can lead to faster economic growth and higher living standards No role for fiscal policy (b/c the economy is already at full employment)o SR (Keynesian) Aggregate expenditure model Recessions & booms are possible due to spending shocks SR saving can cause/worsen a recession paradox of thrift Role for fiscal policyo Money and the federal reserve Money is a standard object used in exchanging goods and services- Acts as:o A medium of exchange (for buying things)o Store of value (can save money and it still has value, unless there is a lot of inflation)o Unit of account (lets you know the value of goods and services) M1: narrowest measure of money- Coins, currency in circulation- Demand deposits (DD)- Traveler’s checks- Other checkable deposits (debit cards are implicit)- *NOT credit cards (which are pre-approved loans)- M1 is very liquid (you know its value and can easily convert it to cash)- *NOT savings accounts- Commercial banking (not investment banking) Fractional reserve banking system- Only keep a fraction of their money in accounts available- Not everyone will come in at the same time and demand all of their funds (known as runs)- But this can still be a big concern because it is a possibility *Inherent conflict between bank profitability and safety/soundness issues- bank regulation- Government insures deposits (if the bank goes bankrupt you won’t lose your money)o Lowers risk of runso Creates moral hazards (banks may engage in riskier behavior)- Bank examinations- Required reserves- Capital requirements T-accountLiabilities (L)Assets (A)oweNet worth= Total liabilities + net worthTotal assets Required reserves = minimum amount of reserves a bank must hold- Depends on DD liabilities Excess reserves = (actual reserves) – (required reserves) Required reserve ratio (RR) = minimum fraction of DD balances banks must hold as reserves Money multiplier = 1/RR- The Federal Reserveo Est 1913o Financially independent funds activity from interest it earns from treasury bills it owns Gives extra money to the US treasuryo Legislatively dependent on congresso Appointees = nominated by the president and approved by the senateo Chair of the Fed. Reserve = Janet Yelleno Board of governors 7 members: 6 governors + the chairo Federal Open Market Committee (FOMC) 7 governors NY Fed. Reserve District Bank President 4 other Fed. Reserve District Bank Presidents who rotate Total =
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