Econ 104 Introduction to Econ March 4 Chapter 16 Macroeconomics is what is used to purchase things is not money until it is converted into some form that can be used to purchase things Money v Wealth Money and wealth are different Money Wealth Liquidity 4 Functions Characteristics of Money 515 A medium of exchange A store of value A unit of account o Being able to save money is possible and easier with money o Establishing relative value to other items A standard of deferred payment o Combines all of above o Allows an exchange to take place at a give time or over a period of time Commodity Money money that has value outside of being used for money A double coincidence both want each others goods A horse for a barrel of wheat Fiat Money money that has no value outside of being used for money Every major currency on earth is fiat money Monetary Aggregates M1 currency and coins checking account balances travelers checks o 2 68 Trillion currently everything in M1 plus savings accounts money market accounts money market mutual M2 funds and small CDs 100 000 o 11 13 Trillion currently Money v Credit Debit Card Credit Card and paying them back with interest gives you access to money your OWN money gives you access to a pre arranged loan you re spending someone else s money Money in checking and savings accounts is part of the money supply When money is deposited in your account it doesn t just in there The bank loans it out but it isn t allowed to loan all of it out The bank is required to keep part of it there in the banks Reserves Required Reserves is the amount they must put in reserves They then loan out the rest of the money The smaller the reserve requirement the more the bank can loan out the more the bank can loan out the more it can increase the money supply Excess Reserves money that could be loaned out but isn t Money Multiplier Equation 522 Whatever the reserve requirement is take 1 divided by that Example Reserve requirement of 5 and deposited 10 000 o 1 05 20 o 20 TIMES initial deposit 200 000 total increase Money Multiplier with Currency Equation look in Written Notes People don t put all money back in the bank Keep some out as currency This affects the amount of money that can be created Constraints on Money Creation Deposits Willing Borrowers Willing Lenders have to be there in the first place there have to be people interested in borrowing the money the banks themselves have to be willing to loan out the dollars Monetary Policy Is using the money supply and interest rates to influence certain macroecon activity Monetary policy is conducted by the Federal Reserve o The Fed is the central bank of the US and its job is Be the governments bank Regulate and oversee commercial banks Control the money supply Keep prices controlled and keep the economy strong Facts about the Federal Reserve Created in 1913 to create confidence in our currency Before 1913 anybody could print money o Over 30 000 different currencies in this country 3 Parts of The Fed 529 Board of Governors located in DC o Oversees the 12 Regional Banks o In charge of Monetary Policy and Banking Supervision 7 Members of Board of Governors 5 Regional Bank Presidents Make Up o Federal Open Market Committee FOMC make policy and the big decisions 12 Regional Banks o Primarily involved in banking and bank supervision o Heavy community involvement Who Controls the Fed President appoints the 7 members of Board of Governors Chairman has to be approved by the Senate After being approved Fed does NOT need anyone s authority to act Fed provides reports to congress but does not report to congress Janet Young Chairman of Fed How can does the Fed Control the Money Supply Number One Setting the reserve requirement 531 o Lower reserve requirement allows for MORE money creation MORE US doesn t use this really but other countries do o Higher reserve requirements allows for LESS money creation LESS Number Two Buying Selling bonds Open Market Operations o Fed buying bonds it is increasing money supply vise versa MORE US does this a lot to increase economic growth o Fed sells bonds it is decreasing the money supply LESS Number Three By Adjusting Certain Interest Rates 531 o Fed Funds Rate v Discount Rate 503 and 556 B o n d w i l l r e c e v e t h e i e l s e a n d t h e y t o s o m e b o d y c a n s e l l b o n d a o r l o a n Y o u i l S m p y a n I O U Sometimes banks need to borrow money to meet reserve requirement Can borrow from other banks or from Fed has an interest rate it is a loan Borrow from one bank to another bank interest rate is called Fed Funds Rate Borrow from the Fed interest rate is called Discount Rate Current Fed Funds Rate 0 to 25 Current Discount Rate 75 Fed Funds Rate Lowering the Fed Funds Rate increases the money supply Increasing the Fed Funds Rate decreases the money supply Current Reserve Requirements Less than 13 3 M 0 From 13 3 to 89 M 3 More than 89 M 10 Instruments of Monetary Policy how fed affects money supply Open Market Operation Are the buying and selling of government securities gov bonds o Bought from and or sold to primary dealers JP Morgan Other big banks Commercial Banks vs Investment Bank Commercial Bank the mom and pop banks o Cash paychecks and so on subject to reserve requirement Investment Bank firm using finical insurance betting on stocks and such March 6 Chapter 16 17 Fed Increase the Money Supply Buying bonds Reducing the reserve requirement Lowering the target for the fed funds rate Shifts AD Right Fed Decrease the Money Supply Selling bonds Increasing the reserve requirement Increasing the target for the fed funds rate Shifts AD Left Bonds 101 Refer to Bond Definition Above When the price of a bond goes up rate it pays goes down When the price of a bond goes down rate it pays does up If rate people are receiving bonds goes down rate people pay on tings houses cars should go down Somehow increasing the price of bonds should lower interest rates people pay on things like car loans How might Fed increase the price of bonds by buying a BUNCH of them demand for anything increases price increases Federal Reserve s Operation Twist Goal Nudge down long term interest rates o The Problem Currently our interest rates are near zero so can t go any lower Resolution Twist tries to twist down long term interest rates Fed SELLS a bunch of short term bonds o Selling bonds lower their prices raising rates Uses that money to BUY longer …