econ
S =
(Y + TR - T - C) + (T - G - R) Y - C - G (C + I + G + NX) - C - G I + NX
current account =
- financial account NX
potential money multiplier =
1 / required reserve ratio
current account + financial account
= 0
expansionary policy impact
AD, real GDP, price level, and employment increase
equation of exhange
M * V = P * Y (M = actual money held by public, V = income velocity of money, P = price level, Y = real national output (real GDP))
M2 =
M1 + savings deposit + money market deposit accounts + small denomination time deposits + retail money market mutual funds
MRP(L) =
MP(L) * P
profit is maximized when
MRP(L) = W
S + I =
NFI
if domestic saving is less than investment
NFI is negative
most important tool of fed reserve
OMO, largest daily means to control money supply
S (national saving) =
S private + S public
functions of federal reserve
Supplies the economy with fiduciary currency Provides a clearing mechanism for checks Holds depository institution reserves Acts as the government's fiscal agent Supervises member banks Acts as the "lender of last resort" Regulates the money supply Intervenes in foreign currency markets
unit of accounting
a measure by which prices are expressed; common denominator of the price system (central property of money)
what backs money?
acceptability, predictability of value and confidence, durability, divisibility
what a bank does
accepts deposits, grant loans
bank deposit effect: actual change in money supply =
actual money multiplier * change in excess reserves
OMO effect: actual change in the money supply =
actual money multiplier x change in open market operations
firm's demand for labor depends on
additional output produced by one more worker (marginal product of labor) the additional revenue received from selling the additional output (marginal revenue)
demand for money
amount of money people wish to hold (transactions demand, precautionary demand, asset demand)
determines lending potential of banks
amount of reserves in banking system
medium of exchange
any asset that sellers will accept as payment
checkable deposits
any deposits in a thrift institution or a commercial bank on which a check may be written
money
any medium that people generally accept in exchange for goods and services
legal total reserves
anything that the law permits banks to claims as reserves
board of governors
appointed by the president with senate confirmation 14 yr staggered permanent terms chair chosen by the Pres to a four-year permanent term
net worth =
assets - liabilities
near moneys
assets that are almost money
at high levels, individual labor supply curve may be
backward bending
opportunity cost of holding on to money
benefit of liquidity
labor productivity
better machinery & equipment, increases in human capital, better management & organization
organization of the fed
board of governors, 12 fed reserve district banks, federal open market committee, depository institutions
tools used by fed to increase money supply
buy securities, lower reserve ratio, lower discount rate
open market operations
buying and selling government bonds to the fed
OMO buying/selling securities
buying increases bank reserves and increases money supply selling decreases bank reserves and decreases money supply
federal reserve system
central bank of US
market determinants of exchange rates
changes in real interest rates, perceptions of economic stability, changes in productivity, changes in product and asset preferences, relative price levels, currency expectations
M1 transaction approach
currency, checkable deposits, traveler's checks not issued by banks
categories of balance of payments transactions
current account transactions, financial account transactions, capital account transactions
financial account
deals with buying and selling of real and financial assets (FDI, financial investments), other investment assets, reserve assets)
_______ in interest rate stimulates investment
decrease
increases in labor supply
decrease equilibrium wage and increase equilibrium labor quantity
decreases in labor demand
decrease equilibrium wage and labor quantity
increase in amount of labor ______ amount of work
decreases
increase in wage ____ leisure
decreases
increasing/ decreasing discount rate
decreasing encourages borrowing, increasing required & excess reserves and the money supply increasing discourages borrowing, decreasing required & excess reserves & the money supply
marginal product is ______ due to ____________
decreasing; the law of diminishing marginal product (returns)
liquidity
degree to which an asset can be acquired or disposed without much danger of any intervening loss in nominal value and with small transaction costs
FOMC
determines monetary policy composed of the board of governors, president of NY fed reserve bank, president of 4 remaining district banks
net exports
difference between exports and imports of goods and services (balance of trade + balance of services)
excess reserves
difference between legal reserves and required reserves
discretionary monetary policy
discretionary changes in open market operations, the reserve ratio, and/or the discount rate in order to achieve certain national economic goals
decreases in technology shift the production function
downward
purchasing power parity
equilibrium value of an exchange rare is at the level that allows a given amount of money to buy the same quantity of goods abroad as it will back home
policy used to increase AD
expansionary
production function
explains the relationship between the production of goods and services based on the factors of production
current account surplus
exports exceed imports
possible monetary policy options to solve gaps
federal reserve buys or sells bonds buy itself, raises or lowers reserve ratio by itself, raises or lowers discount ratio by itself, combination
thrift institution
financial institutions that receive most of their funds from the savings of the public
traveler's checks
financial instruments purchased from a bank or a nonbanking organization and signed during purchase that can be used as cash upon a second signature from the purchaser
when MRP(L) < W
firms should hire less labor
when MRP(L) > W
firms should hire more labor
leakages
forces that reduce the money multiplier (currency drains, excess reserves)
determines purchasing power of domestic currency
foreign prices
money multiplier
gives maximum potential change in the money supply due to a change in excess reserves
at lower wages the substitution effect is _____ than the income effect, resulting in _____ ____ labor supply curve
greater; upward sloping
equation of exchange in terms of growth rate
growth rate of money supply + growth rate of velocity = growth rate of the price level (inflation rate) + growth rate of real GDP
near moneys characteristics
highly liquid, easily converted to cash
transactions demand
holding money as a medium of exchange to make payments (varies directly with nominal national income)
asset demand
holding money as a store of value instead of other's assets (level varies with interest rate)
precautionary demand
holding money to meet unplanned expenditures and emergencies (level varies with interest rate)
market labor supply curve
horizontal summation across all individual workers constructs the market quantity of labor supplied at that wage
market demand labor curve
horizontal summation across all perfectly competitive firms constructs the market quantity of labor demanded at that wage
factors affecting the marginal product of labor
human and physical capital, technology progress, output per day (Q)
complement
if capital increases and is a complement for labor, then the marginal revenue product curve shifts right
substitute
if capital increases and is a substitute for labor, then the marginal revenue product curve shifts left
current account deficit
imports exceed exports
decreases in labor supply
increase equilibrium wage and decrease equilibrium labor quantity
increases in labor demand
increase equilibrium wage and quantity
decrease in amount leisure ____ amount of work
increases
decrease in wage ____ leisure
increases
impact of expansionary monetary policy
increases money supply, interest rate decreases, value of dollar decreases (depreciates), net exports increase, net export effect complements effectiveness of monetary policy
when interest rate rises, OC of holding money _______ ad quantity of money demanded ______
increases; falls
balance of trade determinants
inflation among trading partners, political stability, interest rates among trade partners
if growth rate of velocity is constant
inflation rate = growth rate of the money supply - growth rate of real GDP
financial intermediation sources and uses of funds
institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers
cause of recessionary gap
insufficient AD
discount rate
interest the Fed Res charges for its reserves it lends to depository institutions (only small amounts)
determines equilibrium wage and labor
intersection of the labor demand and labor supply curves
at wages above the equilibrium wage,
labor quantity supplied is greater than labor quantity demanded
at lower interest rates,
larger quantity of money will be demand, interest rate falls
decreases in technology or capital shift the marginal product of labor curve
leftward
excess reserves (ER) =
legal reserves - required reserves
as wage decreases, ___ people want to work
less
at higher wages the substitution effect is _____ than the income effect, resulting in _____ ____ labor supply curve
less; backward bending
quantity theory of money
links between changes in money supply and GDP; money supply and inflation
M2
liquidity approach
demand for leisure
marginal benefit derived from not working
real exchange rate
market exchange rate adjusted for price differences between countries (price of domestic goods in terms of foreign goods)
foreign exchange rates
market for buying and selling foreign currencies
financial account transactions
measure of net capital flows (capital inflows - capital outflows), opposite of net foreign investment (outflows - inflows)
functions of money
medium of exchange, unit of accounting, store of value, standard of deferred payment
capital account transactions
migrant transfer of goods and assets, copyrights & trademarks, relatively small
currency
minted coins and paper currency not deposited in financial institutions
when level of income or price level changes,
money demand curve shifts
stable price level if
money supply grows at same rate as real GDP
inflation occurs if
money supply grows faster than real GDP
deflation occurs if
money supply grows slower than real GDP
as wage increases, ___ people want to work
more
increases in labor cause a _______ along the production function
movement along
current account transactions
net exports, net income on investments, net transfers (gifts by and to citizens and governments)
NX =
net foreign invesment
real exchange rate (XRr) =
nominal exchange rate * (domestic price level / foreign price level)
shadow banking
nonbank financial institutions raise funds from investors and purchase securitized loans from banks less regulated and highly leveraged
3 tools of federal reserve
open market operations, discount rate, reserve requirements
determinants of money supply
open market operations, reserve ratio, discount rate
production function eq
output time / period = some function of labor Q = A*f(L) (Q = a firm's output L = labor; A = available technology, physical and human capital)
discrimination
paying a person a lower wage or limiting job opportunities based on irrelevant characteristics such as race or gender
required reserve ratio
percentage of total deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
central banks role
perform banking functions for their nations government provide financial services for private banks conduct their nation's monetary policies
change in physical capital
physical capital can be a complement or substitute for labor
determinants of labor demand
physical capital, human capital, price of the product, technology, number of firms
labor supply curve
positive relationship between the wage and hours worked
exchange rates
price of one currency in terms of another
marginal product of labor is determined based on
production function
when wage increases
profit maximizing amount of labor decreases
when wage decreases
profit maximizing amount of labor increases
standard of deferred payment
property of an asset that makes it desirable for use as means of settling debt maturing in the future (essential property of $)
open market operations (OMO)
purchase and sale of existing US government securities in the open private market by the federal reserve system
raising and lowering reserve ratio
raising increases required reserves, decreases excess reserves, thus decreases money supply lowering increases money supply
determinants of money demand
real GDP, price level
current and financial account relation
related in absence of interventions by finance central banks current account + financial account = 0
marginal revenue product of labor
represents a firm's additional revenue from hiring one more worker
reserve ratio
required percentage banks must hold at Fed or in vault
most powerful tool of fed
reserve ratio (not used much)
balance sheet assumptions
reserve ratio is 10% checkable deposits are the bank's only liabilities an individual bank can lend all it wants up to its excess reserve amount loan proceeds are deposited into checkable accounts zero excess reserves banks have zero net worth
required reserves (RR) =
reserved ratio * checkable deposits
increase in capital shifts MRP(L) curve
right
Increases in technology or capital shift the marginal product of labor curve
rightward
balance of payments
summary record of a country's economic transactions with foreign residents and governments over a year
wages differ
superstars are compared to essential workers, diamond-water paradox, increase in relevant incomes of superstars
lending money
supply is affected, loan is approved --> borrower gets $, bank gets IOU, IOU not part of M1
labor quantity supplied exceeds labor quantity demanded
surplus --> equilibrium wage and quantity decrease equilibrium wage decreases and labor quantity increases
balance of trade categories
surplus and deficit items
fractional reserve banking
system in which depository institutions hold reserves that are less than the amount of deposits
arbitrage
taking advantage of a price discrepancy between two markets
store of value
the ability to hold value over time
labor demand is derived from or dependent on
the demand for good or service produced by labor
barter
the direct exchange of goods and services for other goods and services without the use of money
arbitrage could occur until
the exchange rate settles back into "long - run equilibrium" exchange rate or prices will adjust in one or both countries
compensating differentials
undesirable characteristics of some jobs, time preferences, bad working conditions
increases in technology shift the production function
upward
balance of trade
value of goods bought and sold in the world market
required reserves
value of reserves that a depository institution must hold in the form of vault cash or deposits with the Fed
balance of services
value of services bought and sold in the world market
equation of exchange is not an accurate inflation predictor if
velocity of money is not constant
substitution effect
when wage increases, opportunity cost of leisure increases; workers will substitute more work for less leisure, increasing quantity supplied of labor
income effect
when wage increases, people can afford more goods and services, including leisure; workers will substitute more leisure for less work, decreasing quantity supplied of labor
rational amount of leisure
where marginal benefit of leisure interests the wage
types of discrimination
worker, customer, negative feedback loops
US dollar appreciates -->
yen depreciates decrease in supply and/ or increase in demand for USD decrease in demand and/or increase in supply of yen
