Modules 22-30- econ
Responsibilities of the Fed
* control the monetary base * set the reserves requirement * oversee and regulate banking system * set the discount tare
Outflows of funds
* domestic savings that finance investment spending
Inflows of funds
* foreign savings that finance investment spending
Budget Deficit
* gov spends more than tax revenue * taxes are less than gov spending
Budget Surplus
* govt spends less than collected
To increase the money supply :
* lower the reserve requirements * lower the discount rate * make open market purchases
To decrease the money supply :
* make open-market sales * increase the reserve requirements * increase the discount rate
Savings-Investment spending identity
* savings and investment are always equal for the economy as a whole * savings = IS
3 Tasks of Financial system
* transaction costs - expense of putting together and executing a deal * risk - uncertainty of future outcomes * desire for liquidity - quickly converted cash
Tools of Monetary Policy
*reserve requirements * open-monetary operations * discount rate
(disposable income - consumption spending) =
= (tax receipts - govt spending)
A rise in money demand shifts the money demanded curve to the right
A fall in money demand shifts the money demand curve to the left
At high interest the demand for money decreases
At low interest the demand for money increases
Bonds
IOU issued by the borrower
The demand for money is negatively related to the interest rate
The demand for money is positively related to real GDP
Mutual Funds
a group of stock, very diverse
Fiat Money
a medium of exchange whose value derives entirely from its official status as a means of payment
Stocks
a share in the ownership of a company
Fisher Effect
an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
If the required reserve ratio is increased ...
banks cannot lend out as much money which decreases the money supply
If the required reserve ratio is reduced ...
banks will lend a larger percentage of their deposits which increases the money supply because of the money multiplier
Pension Funds
collect the savings of members and invest in a wide variety of assets to use for retirement
M1
contains only currency in circulation, cash, traveler's checks, and check-able bank deposits * most liquid
Pessimistic views of opportunities
decrease demand for loanable funds; shift to the left
Decrease in government borrowing
decreases the demand for loanable funds; shift to the left
Demand for loanable funds
downward sloping because investors respond to lower interest rates by increasing their quantity demanded of loanable funds
Loanable Funds Market
hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders * borrowers are represented by the demand for loanable funds
Positive views of interest rate
increase demand for loanable funds; shift to the right
Increase of government borrowing
increases the demand for loanable funds; shift to the right
currency in circulation
is cash held by the public
if the price of an asset is expected to rise in the future ...
it will be more in demand today
Loans
lending agreement between a lender and a borrower
Closed Economy
national savings = private savings + budget balance * savings investment spending identity is I = GDP - C - G
Financial Assest
paper claim
Crowding Out
private investment decreases when the government borrows * negatively affects the economy by reducing investment spending on physical capital
Liability
requirement to pay money back in the future
A decrease in taxes on savings and investment income will ...
shift supply to the right and decrease the interest rate
If people are willing to spend more and save less ...
shift the supply of loanable funds to the left
A decrease in savings by the private sector will ...
shift the supply of loanable funds to the left and increase the interest rate
If people are spending less and saving more ...
shift the supply of loanable funds to the right
An increase in savings by the private sector will ...
shift the supply of loanable funds to the right and decrease the interest rate
The money demand curve
shows the relationship between the quantity of money demanded and the interest rate
M2
starts with M1 and adds several other kinds of assets that can quickly be converted into cash, include saving accounts, CDs, money market accounts
Physical Asset
tangible object
Government can engage in savings when
tax revenues are greater than expenditures
Budget Balance
taxes - govt spending
How does an increase in the money market effect equilibrium rate of interest?
the equilibrium rate falls
Reserve Ratio
the fraction of bank deposits that a bank holds as reserves
Discount Rate
the interest rate the fed charges on loans to banks
If banks increase their excess reserves (funds not lent out) ...
the monetary base increases without increasing the money supply
If the required reserve ratio falls...
the money multiplier increases
Businesses want to borrow to undertake an investment project when ...
the rate of return on that project is greater than the interest rate
Money Multiplier
the ratio of the money supply to the monetary base * equal to 1/reserve ratio
Required Reserve Ratio
the smallest fraction of deposits that the Federal Reserve allows banks to hold
Monetary Base
the sum of currency in circulation and the reserves held by banks
If the interest rate is above the equilibrium rate ...
there will be an excess of money and the interest rate will fall
Taxes
total income - consumption - private savings
Capital Inflow
total inflow of funds - total outflow of funds
Open Economy
total investment = national savings + capital flow
Supply for loanable funds
upward sloping because savers respond to lower interest rates by decreasing their quantity supplied of loanable funds
financial assets that carry more risk ....
usually have a higher rate of return
Bank Deposits
you loan your money to the bank and the back pays you interest
