Last 4 Chapters: Macro
Pros and Cons of FDIC
Pro: drasticallly decreased frequency of bank runs Cons: created moral hazard: lack fo incentive to guard against risk where one is protected from its consequences. Neither banks nor depositors have an incentive to monitor risk, no matter hwt happens, they are protected from conseuqences of risky beahvior
According to adaptive expectation, To reduce unemployment, inflation must ________
accelerate
an account ______ exists when more *payments are flowing *out of an account * than into an account
account deficit
________ ______ ______ involve strategic use of monetary policy to counteract macroeconomic expansions and contractions
active monetary policy
A tarriff can be a percentage of the value of the good ie _____ _____ tax , a per unit tax ______ tax or a mix of the two
ad valorem tax ( percentage of value of good) or Specific tax (per unit tax)
______ ______ _______ holds that people's expectations of future inflation are based on their most recent experience. If inflation rate is 5% in 2017, then __________ implies that people will also expect 5% inflation rate in 2018
adaptive expectations theory
the move towards transperency reflects the modern view that expectations matter in macroeconomics whether they are
adaptive or rational
The short run Phillips curve is built on assumption that inflation expectations never
adjust , buuuut economists today recognize that because inflation harms some people in the economy, there is an incetive to predict inflation in the future. therefore NOT ALL INFLATION IS SURPRISE INFLATION-- and when it is NOT a surprise, it does NOT affect unemployment rate.
A decrease in teh exchange rate indicates an
appreciation of the domestic currency. The exchange rate decreases when there is a decrease in the demand for foreign goods, services, and financial assets relative to domestic goods, services, and financial assets
Rational for voluntarily having an import quota
foreign producers can avoid having a tariff applied to their goods. Also, becuase the quantity supplied is somewhat smaller than it would otherwise be, foreign suppliers can charge higher prices.
Impact on demand for currency: When the demand for a nation's export rises
the demadn for its currency rises as well.
The supply side of currency markets is determined by
government changes to the supply fo currency
Currency is money , but
it constitutes only a small part of the total money supply
Explain what increasing Money supply can do in the short run
it expands the amount of credit ( loanable funds ) available and paves the way for economic expansion. Increasing M can increase I in the short run.
What is FIAT MONEY
it i money that has no value except as a medium of exchange; there is no inherent or intrinsic value to the currency--- ie Federal Reserve Notes. This paper has value because the government has mandated that we can use the curerncy to pay our debts... "This note is a legal tender for all debts public private "
The Phillips curve implies WHAT powerful role of monetary policy
it impies that a *central bank can choose hgiher or lower unemployment rates simply by adjusting the rate of inflation in an economy* (if this is a realistic observation, a central bank can ALWAYS steer an economy out of recession, simply by creating inflation)
What is commodity backed money?
it is *money that can be exchanged for a commodity at a fixed rate*
When does expansionary monetary policy occur?
it occurs when a central bank acts to INCREASE the money supply in an effort to stimulate the economy, and it typically expands the money supply through Open market purchases: it buys bonds
expansionary policy would be good or bad for workers who have signed 2 year contracts (just before the inflation hit the economy)
it would be baddddd. there wages were set before inflation occured. in real terms, these workers have taken a pay cut Monetary policy derives its potency from sticky prices, but if your price (or wage) is stuck , inflation hurts you
What is expansionary policy aimed at
lower interest rates so as to increase Real GDP and reduce unemployment
the one component of the economy which government exerts great control:
money. The fed controls the money supply and sets monetary policy . it has a dual mandate to control inflation and Maximize employment.. They have used three tools in monetary policy OMO, the reserve requirement ratio, and the discount rate. During and after the Great Recession , the Fed resorted three times to a new tool called quantitative easing
In the past , cirgarretes were often teh preferred unit of account and medium of exchange
multiple functions-- this commodity money was useful as currency in addition to its usefulness for smoking. but in 2004 us outlawed and this led to development of a new medium of exchange can of mackeral- lol medium of exchange and unit of account. cans of fish also serve as reliable store of value. some prisoners even rent lockers from others so that they can store theri mackerel money.
Banks can create money by
multiplying deposits
To decrease the price of the yuan, the CHinese government increases _____________ relative to
the chinese government INCREASES the supply of yuan relative to the supply of dollars. china buyz US dollars and US treasury securities in world market- causes their currency to depreciate,, thisis kind of OMO by purchasing US Treasury Securities.. this is how US federal reserve enacts monetary policy for US.
When monetary funds are deposed into banks, banks can multiply these deposts and when they do
they create money
when actual inflation is expected inflation adaptive expections theory predicts that people do not always what?
they do not always underestimate inflation but when inflation rate ACCELERATES- people do underestimate inflation
adaptive - do they over-estimate or underestimate when inflation rates fall
they over-estimate when inflation rates fall.. AI
Money Market mutual funds and small denomination time deposits(certifiates of depots or CD's) = things in ___ that are not in ___
things in M2 that are NOT in M1
List 1. Uses of Funds 2. Sources of Funds
1. : Assets * Uses of Funds* Loans, Reserves, Treasury Securities, Other Assets 2. Liabilities + Owner's Equity * Sources of Funds * Deposits , Borrowings, Owners Equity
What are the 3 functions of money!!!! important
1. A medium of exchange 2. As unit of account 3. Store of Value *I MUS know the three functions of money
Define Currency:
Currency is the paper bills and coins that are used to buy goods and services.
Why strong Growth leads to a BOP Deficit
Current Account: Growing economy leads to wealthier consumers who import more goods and services from around the world. net exports fall, which leads to a greater BOP decific Capital Account: growing economy offers greater returns, which attracts international funds for investment Result: Capital account surplus increases which reinforces the greater BOP deficit.
Problem with Cryptocurrency
Like commodity money if limited in quantity Like fiat money with no intrinsic value
Basic of Commercial Banks:
Accept deposits and extend loans.
you can calculate mm and rr if u have mm or rr
mm = 1 / rr
Until 1971, U.S. dollars were fixed in value to specific quantites of silver and gold. A $1 U.S> silver looks much like dollar bills, but the print along the bottom of the note reads "One dollar in silver payable to the bearer on demand* unttil 1964 we also had US quarters that were mde of real silver--- commodity backed money
"one dollar in silver payable to the bearer on demand " = commodity-backed money
the interest rate banks charge each other on interbank loans is known as the
* federal funds rate * all under federal funds loans it is the *interest rate on loans between private banks *
HOW DOES Expansionary Monetary Policy typically expands the money supply through Open Market Purchases: OMP : it buys bonds : expansionary
* it buys bonds *
What is the main problem with *commodity and commodity backed money
*Changes in price of commodities affect entire economy.* AWH!! from book - if the government is obligated to trade silver for every dollar in circulation, a limit is imposed on the number of dollars it can print which *probably limits inflation levels*
simple money multiply or m ^ m =
1 over the rr ( reserve ratio which is like a deimal)
Current or Capital: 1. Purchase of a Canadian Government Bond by a resident of Pennsylvania 2. Sale of US treasury bond to resident of Ontario Canada 3. Purchase of condomium in Cancun Mexico by US resident 4. Purchase of Samsung television by Best buy 5. Purchase of airplane ticket from United Airlines by resident of Chengdu China to come to US to attend college
1. Capital account ( purchase of financial asset) 2. Capital Account ( sale of financial) 3. Capital Account(purchase of real asset) 4. Current Account ( purchase of a good ) 5. Current ( purchase of a service )
3 major duties of the Fed
1. Central Banking - Take deposits from commercial bansk FF - Make loans to banks "Lendor of discount window 2. Regulate Banks 3. Monetary Policy
First two benefits of trade :
1. Economies of Scale - taking advantage of lower production costs that can acocmany large scale production processes as result of specialization in production 2. Increased Competitiion : increased competition from foreign suppliers forces domestic firms to become more innovative and to compette in terms of both price and quality - also gives consumers more variety-
Two observations regarding reserve requirements:
1. Fed sets the ratio of deposits that banks must hold on reserve: this ratio is the required reserve ratio 2. Simple money multiplier M^M depends on the required reserve ratio rr because m^m = 1 / rr taken together tehse observation imply that the Fed canchange the money multiplier by changing the required reserve ratio.. * if Fed lows rr, m^m increases and vice versa*
What are the 5 reasons PPP may not hold in the short run?
1. For PPP and law of one price to hold, *the goods and services sold in different locations must be identical* 2. *some goods and services are not tradable 3. Trade barriers inhibit the trade of goods across some international borders 4. Shipping costs keeping prices from completely equalizing 5. Some prices take longer to adjust tan others in real world, given these limitations PPP typically does not hold perfectly at any point in time.
Why buy cryptocurrency?
1. For use as a medium of exchange Tax evasion and other illegal transactions Some contracts require payment in cryptocurrency Government currency may be unreliable
Why would one argue that shoe tariff is one of America's worst taxes
1. It failed to protect the U.S. Shoe industry ( the shoe jobs disappeared a long time ago. 2. Consumers who are poor pay a disproportionate amount of the tax 3. Families with children pay even more because the more feet in the family, the more shoes that are needed.
results of china pegging their currency
1. Lower priecs for Chinese exports 2. Lower real wages for Chinese citizens 3. Higher prices for U.S. exports.
Commercial Banks have Two Macroeconomic Roles:
1. Middlemen in Loan Market - they are financial intermediaries, they take in deposits and extend loans. They are the primary source of funds , and loans are primary use of these funds. They can be profitable if the interest rate they charge on loans is higher than the interest rate they pay out on deposits. 2. Channel for Monetary Policy
The Fed's Primary Responsibilities:
1. Monetary Policy : The Fed controls the U.S. money supply and is charged with regulating it to offset macroeconomic fluctuations 2. Central Banking: The fed serves as a bank for banks, holding hteir deposist and extending loans to them 3. Bank Regulation: The Fed is one of primary entities charged with ensuring financial stability of banks, including determination of reserve requirements.
What are three possible reasons why monetary policy was not able to restore expansionary growth during and after the Great Recession
1. Monetary policy is ineffective in the long run 2. Monetary Policy was expected 3. The downturn was at least partially due to an aggregate supply shift (monetary policy works through AD , the effects of MP can be limited if shifts in AS cause a recession)
Why do trade barriers exist
1. National Security 2. Protection of infant industries 3. Retaliation for dumping and subsidies 4. Favors for special interest.
What are the reasons for persistence of trade barriers?
1. National Security 2. Protection of Infant Industries 3 Retaliation for DUmping 4. Favors for special interest.
4 tools of monetary policy
1. OMO - main tool , buys short term us treasury securiites to increase M, or sell short term us to decrease M 2. QE: new type of OMO forcuses on targeted securities purchases in both troubled markets and longterm treasury securities 3. Reserve Requirements : change rr alteres mm. increase in rr reduces mm and therefore M 4. Discount Rate: interest rate that banks pay on loans but now not used for monetary policy
Money includes what things
1. Physical Currency 2. Bank Deposits (because people often make purchases with checks or cards that withdraw from bank accounts)
Why hold reserves?
1. Reduced Risk 2. Reserve Requirements
What are the three primary causes of current account deficits
1. Strong Economic Growth 2. Lower personal savings rates 3. Fiscal Policy
What are the factors that affect the demand side of the market for foreign currency:
1. The price of the currency ( the exchange rate) 2. Demand for foreign goods ands ervices 3. Demand for foreign financial assets.
Recently , unemployment rates in Europe have been relatively high and inflation has been low. Consider the Euorpean economy, in which all market participants expect a 2% inflation rate and the unemployment rate is 9%. Now assume the European Central Bank begins increasing the money supply enough to lead to a 4% inflation rate for a few years If expectaitons are for 0% , what happens to unemployment rate in the short run if expectations are formed adaptively what happens to unemployment rate in both short run and long run if expectations are formed rationally what happens to the unempployment rate in the short run.
1. The unemployment rate falls below 9% because the new inflation rate is a surprise and it can therefore stimulate the economy 2. The unemployment rate falls below 9% in the short run, because the new inflation is different from the past. In LR expectations adapt to 4% and all else being equal, unemployment rate returns to 9 3. People understand the incetives of the central bank and therefore may anticipate the expansionary monetary policy. In this case, the unemployment rate does NOT fall.
Modern Expectations Theories
1. There MAY be a SR Phillips Cruve (if people are surprised by inflation) 2. There is NO *exploitable* LR Phillips curve 3. Best policy is to *limit inflation* (current fed policy = keep inflation at 2% or less)
What are the two reasons banks hold reserves?
1. They must accomodate withdrawals by their depositors. 2. Banks are legally boudn to hold a fraction of it rr is the portion of deposits that banks are required to keep on reserve. required reserves = required reserve ratio * bank's total amount of deposits
Is each consistent with our definition of money? 1. "He had a lot of money in his wallet." 2. "She made a lot of money last year" 3. "I use my Visa when I'm low on money " 4. "She has most of her money in the bank "
1. Yes because currency is part of the medium of exchange 2. No- it refers to *income* not money 3. No - Payment with credit card requires a loan, so using a credit card is technically not counted in money supply 4. Banks deposits count as money because they represent part of our medium of exchange
currently required reserve ratio is
10% for almost all depoists.
Why buy cryptocurrency? 2. Speculation
A bet that the price will rise A bet on blockchain technology A bet against government currencies
Required Reserves = Excess Reserves: Reserves held in excess of those required by the Fed.
= rr x Deposits
interest rate on loans between private banks A ______________ loans from the Federal Reserve to Private banks B___________ interest rate on teh discount loans made by the Federal Reserve to Private Banks C____________
A. Federal Funds Rate B. Discount Loans C. Discount Rate
A new type of OMO QE: Buy other securities. Are they short term or longer term? *targeted purchases* it TARGETS certain markets. QE did not quickly return the economy to strong growth - good criticism of Quantitative Easing.
A. Longer-Term Treasury Securities B. Targeted purchases in troubled markets ∙ Mortgage-backed securities ∙ "Toxic" assets
Problem with AE
AE implies that people make predictable errors
What two assumptions we making to uhnderstand how banks create money ( they create new deposits )
Assumption 1 : all currency iss deposited in a bank Assumption 2 : banks hold no excess reserves *completely unrealistic*
_______ occurs when there is NO commonly accepted medium of exchange. It involves individuals trading some good or service they already have for something else they want
Barter.. If you want food in a barter economy, you must find a grocer who also happens to want whatever you have to trade
WHy do banks keep reserves at the Fed?
Because the Fed clears loans between banks. When banks loan reserves to other banks ,these are *FEDERAL FUNDS LOANS *
Potential downside to "Free zones" where companies can produce goods for export and avoid standard corporate tax rate.
Because the goods have to exported for the manufacturers to take advantage of the tax breaks, there is very little incentive to produce goods for domestic purchase and consumption
Why are exchange rates important?
Because they affect the relative prices of goods and services.-- therefore GDP
Typical OMO:
Buy and sell short-term Treasury securities
Historically, the first medium of exchange has been a commodity that is actually traded for goods and services: ________ _________ involves the use of an actual good for money
Commodity Money : the good itself has VALUE APART from its function as money.. think god, silver... but things like transportation costs , money evolved into certificates that represented a fixed quantity of the commodity-- these certificates became medium of exchange, but still tied to the commodity.. because they could be traded for the actual commodity if the holder demanded it
What makes the creation of value possible?
Comparitive Advantage.
Money Supply ( M ) =
Currency + Deposits.
What does the FDIC do?
Deposit insurance now guarentees that depositors will get back (up to 250,000) even if bank fores bankrupt FDIC has drastically decreased frequency of bank runs, but also reated MORAL HAZARD
Explain how Rapid Domestic Growth leads to Current Account Deficits
Domestic buyers are able to afford imports given the increase in wealth, which widens the current account deficit. At the same time, foreign funds are attracted to higher rates of return in the growing economy, which increases the capital account surplus.
"Lender of Last Resort" refers to
Discount Loans... Fed serves an important role as a backup lender to private banks that find difficulty borrowing elsewhere.
What is the *Problem* with FIAT money Problem:
Discretion can be abused.
_________ occurs when foreign supplier sells a good below the price it charges in its country
Dumping. countries like to enact tariff or quotas in response.
If global demand for goods services and financial assets move away from japan and toward US, the demand for yen will FALL as people move toward dollar- in this case the exhchange rate ______ and the yen_________ but the dollar
ER falls yen depreciates but dollar appreciates
Explain how declining domestic savings ie lower personal saving rate causes current account deficits.
Falling domestic savings leaves a finance gap for investment, the gap is filled with foreign funds which increases the capital surplus
Whereas Federal FUnds are deposits that ___ ____ hold on reserve at teh _______
Federal FFunds-- deposits that PRIVATE BANKS hold on reserve at teh FED Confusing
deposits that private banks hold on reserve * at the Fed * :
Federal Funds "federal " seems to denote that these are government funds , but in fact they are private funds held on deposit at a *fdederal* agency-- the Fed. OOO good test question They are part of the reserves that banks set aside along with the physical currency in their vaults.
Export to Japan : Goods : $20 Export To Japan : Services 47 Import from Japan: Goods $103 Import From Japan: 31 The U.S. goods trade balance = How would you compute the U.S. service trade balance with Japan? Calculate overall U.S. Trade Balance:
Goods Exports MINUS Goods exports so -83 Bllion ie Trade DEficit (imports exceed exports and trade balance is negative) *Service Exports - Service Imports* so 46 - 31 = 16 Billion! Trade surplus! Exports exceeds imports Goods and Services Exports MINUS Goods and services IMPORTS so -67 Billion ie trade deficit
The huge decline in the M was a major contributor to the
Great DEpression
mm and rr are _______ related
INVERSELY
What real world circumsntance might lead to contractionary monetary policy?
If members of the Fderal Open Market Committee at The Federal Reserve thought that inflation was an imminent danger, they might implement contractionary monetary policy
What is Quantitative Easing
It is a special form of Open Market Operations that was introduced in 2008. To increase the money supply , the Fed buys bonds ,to decrease the money supply, the Fed sells bonds.
Reasons for modern trade explosion?
Lower Shipping and Communication Costs, reduced trade barriers, and increased specialization in world economies. total world exports of goods and services are now about 1/4th the size of the world GDP.
What are the* two measures of the money supply * ?
M1 and M2 *m2 more commonly used*
A_______ is primarily the medium of exchange in an economy; it's what people Trade for Goods and Services. ______ also functions as as a WHAT and WHAT Name the three function of ______A_______
Money it's what people *trade for goods and services functions: as a unit of account and a store of value, andacts as primarily the medium of exchange
______ ______ is the total exports of final goods and services MINUS total imports of fianl goods and services
Net Exports
Use new money to buy something in the economy ==
OMO
Buying (and selling) in the open market. Buy → ↑M Sell → ↓M We are trying to control that M
OMO : the Fed purchases bonds, it creates new money and trades this money with financial institutions, when it sells bonds to financial institutions: it exchanges bonds for existing money taking the money OUT of the economy. result is less money in economy.
the _________ curve indicates a short run negative relationship between inflation and unemployment rates
Phillips curve
________ is a blanket term for government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition
Protectionism
_______ _____ _____ is the idea that a unit of currency should be able to buy the same quantity of goods and services in any country
Purchasing Power Parity (PPP) *extensnion of law of one price*
If after converting currencies, the price of oranges is higher in Japan than it is in Florida, the supply to Japan increases and supply in Florida decreases until all prices are equal. We calls this idea
Purchasing Power Parity PPP
_______ ________ is the targeted use of OMO in which central bank buys securiites specifically targeting certain markets
Quantitative Easing:
________ expectations theory holds that people form expectations on the basis of all available information
Rational Expectations Theory:
Compare ADaptive to Rational
Rational are FORWARD looking while adaptive considers only past experiences
In the short run, how does expansionary monetary policy affect real GDP , unemployment and the price level in the economy
Real GDP increases, the unemployment rate FALLS, and the price level rises as all flexible prices adjust
Interest rates and expanding money supply? how they relate
Say the central government decides to EXPAND M , it buys treasury securities from banks, which INCREASES the level of reserves in the banking system, and as result - Interest rates FALL.
Verbally explain graphically what expansionary monetary policy does
So the Fed buys bonds INCREASING the SUPPLY of Loanable fudns, shifting supply to the right cus it increases supply note how now we have a change in Investment which is a component of Demand so now on other graph AD shifts up In the short run , expansionary monetary policy *reduces unemployment (u) and increases real GDP (Y) in addition the * overall price level (p) rises somewhat* as flexible prices increase in teh short run. U up u down, and P up
The simple money multiplier represents the *maximum size of the money multiplier*
THE MAXIMUM size of the MONEY MULTIPLIER that M^M.
_______ are taxes levied on imported goods and services: This is paid by the PRODUCER of the good when the good arrives in a foreign country
Tariffs (THEY ARE PAID BY THE PRODUCER*)
What are the two types of *trade barriers*
Tarrifs and Quotas:
When the Fed wants to increase the money supply, Feds conduct what? and what to do they buy
They conduct Open Market Operations, and to increase the money supply , *the Fed buys bonds * and sells bonds when they need to decrease the money supply
Talk about * federal funds loans * which are when banks loan reserves to other banks
They enable banks to make quick adjustements to their balance sheets and are typically very short- term - often overnight. if University Bank somehow dips below its required reserve level, it can approach township bank for a short term loan. If Township happens to have excess reserves, making a short term oan enables it to *earn interest* the interest rate banks charge each other on interbank loans is known as the * federal funds rate *
How does the Fed conduct Open Market Operation? How does the Fed conduct OMO's?
Through the buying an selling of bonds
A nation's ____ _____ is the difference between TOTAL EXPORTS and TOTAL IMPORTS
Trade Balance
True or False: All else equal , market driven international trade certainly helps nations to prosper
True
True or False: When supply shifts cause the downturn, monetary policy is much less likely to restore the economy to its prerecession conditions
True
True or false: the following are examples of medium of exchange Gold & silver Wampum Tobacco Paper currency
True
True or False: Law of One price also holds across international bordes
True buut when oranges ship across international borders a new issues arises because different nations generally use different currencies.
True or false: fiat money , unlike commodity or commodity back , offers no such constrain on teh expansion of money supply
True -- rapid monetary expansion and then inflation can occur without a commodity standard that ties the value of money to something real.
True or false: the deposit that backs a loan is considered money
True! A new loan represents new purchasing power while * the deposit that backs the loan is ALSO considered money
True or false : the Fed has several other tools to control teh money supply-- if true give example
True, like reserve requirements and the discount rate but these tools have not been used in quite a while.
True or false: the Fed sets the Discount Rate
True-- because it is a loan directly from a branch of US government to private financial instituions.
True or false: Even though trade agreements often stipulate protections for particualr industries, they still increase trade between nations
True. The reduction in trude barriers has enabled nations to move toward production of goods and services in which they enjoy a comparitive advantage
Bank Reserves: Why hold reserves? 1. Reduced Risk 2. Reserve Requirements
Vault - like 100% they are required to hold 100% of it.. they don't loan out deposits; they are essentially just safes deeping deposits on hand until depositors decide to make withdrawall Fractional Reserve Banking tho occurs whne banks hold only a fraction of deposits on hand:: they loanout most of deposits because * reserves earn very little interest* think of guy wanting to get loan to expand factor, assume bank has reserves available to loan and that the current interest rate on these commercial loans is 5% - which the firm is willing to pay (alternative is to just keep on reserve earning just .25% interest*) if banks rejects -- then costs of decision is difference between these two interest rates of 4.75% OPPORTUNITY COST AY! . cash or deposits at the central bank (Fed). These are costly. Reserves earn little or no interest.
A STORE OF VALUE IS A MEANS FOR HOLDING WHAAAAT
WEALTH but things like being able to put dollars into bank accounts or investment accounts that earn interest have caused money's role as a store of value to decline
Also m^m works in reverse: how?
When funds are withdrawn from banking system, these are funds that banks cannot multiply, in effect the money supply * contracts.* the maximum contraction is the withdrawal TIMES the simple money multiplier
The trade deficit is driven by ________ decific
a merchandise (goods) deficit because the US enjoys a trade surplus in services
Comparitive advantage refers to
a situation where an indiviudal, business or country can produce at a lower opportunity cost than a competitor can.
An increase in the exchange rate indicates what
an *increase in the exchange rate* indicates a depreciation of the domestic currency*
Accounting terms --- =balance sheet: an accounting statement that summarizes a firm's key financial information. left side of bs details assets: which are the items the firm owns. This indicates how the bamkng firm USES the funds it has raised from various sources, RIght side is bank's liabilities and owner's equity: liabilities are financial obligations the firm owes to others owner's equity is he difference between the firm's assets and it's liabilities. When a firm has more assets than liabilities, it has positive owner's equity. Overall, the right side of the balance sheet identifies the bank's source of funds.
asset: items that a firm owns Owner's equity : difference between firm's assets and liabilities Reserves: Portion of bank deposits that are set aside and NOT loaned out.
______ ____ _____ is a record of all payments between that country and the rest of the world
balance of payments anytime a payment is made across borders, the payment is tracked in the BOP
Why is M2 a better measure of our economy's medium of exchange?
because both checking and savings accounts are now readily available for purchasing goods and services (M2 includes both types of deposits)
Why aren't credit cards considered part of money supply?
because credit card purchases involve the use of borrowed funds, ( a third party is paying until the loan is repaid ) they are not included as part of the money supply
WHy do banks keep reserves at the Fed ?
because the Fed clears loans between banks-- when banks loan reserves to other banks, these are federal funds loans
Why does the economy as a whole lose from a tariiff
because the loss in consumer surplus is greater than the gains obtained by producers and government.
the yuan has been pegged at a value BELOW or ABOVE whichc would naturally prevail if exchange rate were allowed to be flexible
below!
Open market operations involve the purchase or sale of _______ by a central bank
bonds
Open market SALE = Open market PURCHASE =
contractionary ( Fed exchanges bonds for existing dollars ) result: less money in teh economy Open market PURCHASE = expansionary : Fed buys bonds with new dollars -> more money in the economy
Reserves: poriton of bank deposits that are set aside and not loaned out. They include
both currency in teh bank's vault and funds that the bank holds and deposts at its own bank , the Federal Reserve
imagine inflation trending upward Rational would expect increase, whereas if 4% today, then 4% tomorrow for AE's
but Rational Expectations does NOT imply that people always predict inflation correctly. NO ONE KNOWS exactly what the level of i will be next year. But people are unlikely to underpredict consistently , even when inflaton is accelerating. *it identifies prediction errors as RANDOM*
the ______ _____ tracks payments for real and financial assets between nations and extensions of international loans
capital account
When Abu Dhabi Investment Council purchased the Chrysler Building in NYC, the transaction was recorded in the ______ account as an _____ payment
capital account (becus much of it is in financial securities we sometimes call it the financial account) *incoming payment*
When the production of one unit of food requires a greater quantity of capital per unit of labor than production of one unit of clothing, we call the food as ___________________ and the clothes as
capital intensive clothes: labor intensive
deposits in bank accounts form which depositors may make withdrawals by writing checks
checkable deposits
______ ____ occurs when a currency becomes more valuable relative to other currencies _____ _______ occurs when a currency decreases in value relative to other currencies
currency appreciation currency depreciation
Exchange rates are determined by the *demand for and supply of* ____________________ __
currency in foreign exchange markets
M1 is composed of
currency, checkable deposits , and traveler's checks
when we import TVs from Japan or strawberries, (goods) ro when we utilize technical advice from a call center in Mumbai(service) or when we supply internationa aid to refugees( Gift) these transactions are recorded where?
current account
trade deficits are synonymous with
current account deficits.. as such they increase when the current account deficit or the capital account surplus increases
the ____ ____ is the BOP (balance of payments) account that tracks all payments for goods and services, current income from investments , and gifts
current account.
When we evaluate the trade balance, we are really focusing on the
current account... likely reading about our current account deficit.
Tarriffs create
deadweight loss , revenue for governemtn and increased producer surplus for domestic firms ( without a tariiff the domestic market is dominated by imports )
The exchange rate also increases when there is a decline in what?
decline in the supply of foreign currency relative to the domestic currency- increases the exchange rate
If the Fed wanted to encourage borrowing by banks and to increase money supply, they would
decrease the discount rate to encourage borrowing by banks and to increase the money supply. - they used this during great deepression but currently fed discourages borrowing, changing the discount rate is no longer viewed as a helpful tool for changing the money supply.
The exchange rate INCREASES when there is an increase in ________ for _____ ____ , ______ , and ______ ______ relative to the DEMAND for ___________________ , ________ and _________.
demand for foreign goods, services , and financial assets relative to the demand for *domestic goods , services, and financial assets *
checkable deposits:
deposits in bank accounts from which depositers may make withdrawals by writing checks. These deposits represent *purchasing power*
_________ ________ is demand for a good or service that derives from the demand for another good or service
derived demand like if go to Belgium wanna buy belgium chocolates, gotta go get some euros first to buy em .
The loans from the Fed to private bajks are known as
discount loans: loans from the Federal Reserve to Private Banks
Who is better off after a tariff
domestic suppliers beause they are now able to charge 120$ and also sell more.
Barter requires a _________ _______ _____ _____ : in which each party in an exchange transaction happens to have what the other party desires.
double coincidence of wants. **This is pretty unusual, which is why a medium of exchange naturally evolves in any exchange envrionment**
Why is double coincide of wants pretty unusual?
each party in an exchnage just so happens to have what the other party wants... like u just so happen to have a turkey sandwhich and need a pencil .. swag.. double coincidence of wants
access to new markets allow countries to take advantage of _____ _ _____ and therefore lower per unit costs as production _________
economies of scale expands Increased production gives companies the opportunity to economize on Distribution costs and marketing and to utilize assembly lines and other forms of automation
What does NAFTA do
eliminated nearly all trade restrictions between Canada, Mexica, and the United States. Currently we have trade agreements with 20 nation
Under normal economic conditions, including the situation in which there is no surprise inflation, we expect the unemployment rate to
equal the natural rate ( u = u* ) monetary policy can push u rate down but only in short run effects of inflation are dampened or eliminated when inflation is fully expected.
Any reserves above the required level are called
excess reserves excess reserves = total reserves - required reserves
An _____ _____ is the price of foreign currency, indicating how much a unit of foreign currency costs in terms of another industry.
exchange rate
price in US =
exchange rate * price in the UK
______ ______ ______ occurs when a national government intentionally adjusts its money supply to affect the exchange rate of its currency
exchange rate manipulation. (think CHina who do depreciates their own currency to make their exports more affordable to buyers worldwide )
Equation to determine price according to ppp P(a) =
exchange rate x p(b)
Flexible(*floating*) exchange rates areeee
exchange rates that are determinde by *the supply of and demand for currency*)
Solow II focuses on
exogenous technological advancement
Banks ____ the money supply when they *extend loans* , and they ___________ the money supply when they *increase* their level of _________________
expand M when extend loans *contract* M when increase level of reserves
A Trade Surprlus occurs when
exports exceed imports , indicating a positive trade balance
Banks create money whenever they ____
extend a loan. A new loan represents new purchasing power, * while the deposit that backs the loan is ALSO considered money. *
interest rate on short term loans between banks
federal funds rate buying short term treasury securities, decreases shrot term interest rate or selling short term treasury securities increases the short term interest rate.
This note is a legal tender for all debts public private " sounds like
fiat money
Capital Account consists of _____ and ______
financial assets ( US citizen buys shares of stock in foreign country , foreign gov buys US treasury seucirities) Real Assets: US citizen buys vacation home in another country, foreign citizen buys office building in US.
We have a _________ banking system. Banks are not required to keep 100% on reserve.
fractional reserve
Friedman and Phelps challenged Phillips curve they predicted high inflation would not always deliver low unemployment , a prediction proved right
given that surprise inflation harms people , they have an incentive to anticipate inflation.
When would a central bank undertake contractionary policy?
hen the economy is expanding rapidly and the bank fears inflation
The power of inflation to reduce unemployment is directly related to how people's inflation expectations adjust throughout the economy. Modern expectations theory allows for adjusting expectations , which is why most economists now believe that the Phillips curve relationship does not
hold in the long run
Store of value is a means for
holding wealth
______ _____ are limits on the *quantity of products* that can be imported into a country
import quotas
a Trade Deficit occurs when
imports EXCEED exports, indicating a negative trade balance.
When residents of one nation buy financial securities such as stocks and bonds from one nation, these payments are recorded WHERE
in capital account (when chinese gov buys US treasury seucriites, that is recorded in capital account , even if you trade for currency of another nation, your transaction is recorded in capital account) also purchases of real assets also enter capital- if you ubuy a vacation home in Cozumel Mexico , it counts as an outgoing payment in the capital account*
KEY POINT TO REMEMBER: money supply in an economy includes both currency and bank deposits.
in order to empphasize , the key point to remember is that money supply in an economy includes * both currency and bank deposits *
In the short run , PPP holds up ? True or false
in short run PPP may not hold perfectly, but in long run after all adjustments have taken place *ppp holds* Ppp holds in the long run
Implications for Monetary Policy
in the 1960's , before development of expectation theory, monetary policy prescriptions were strictly activists *active monetary policy involves the strategic use of monetary policy to counteract macreconomic expansons and contractions* : : stimulate inflation during economic downturns and reduce inflation when economy is booming. this policy assumed that the Phillips curve relationship between inflation and unemployment would hold up in the long run.
Decrease in the value of domestic currency ( depreciation ) causes an
increase in AD
Explain how the Fed could use the discount rate to discourage borrowing by BANKS and to DECREASE the money supply
increase the discount rate would discourage borrowing and decrease the money supply
Explain how government budget deficits can cause *current account deficits*
increased government borrowing means greater competition for investment funds. All else being equal, more foreign funds are needed to lend to government, and this activity widens the capital account surplus.
the only predictable result of more money in the economy over the long run is __________
inflatioN!!!!
Imagine how new discovery of gold affects prices in nation with gold- backed prices - an increase in supply reduces golds prices and therefore MORE gold is required in exchange for other goods and services;: this situation constitutes __________
inflation the price of everything in terms of the money(gold) rises. Because a change in the value of a medium of exchange affects the prices of all goods ands ervices in the macroeconomy, it can be risky to tie a currency to a commodity
inflation harms *input or output* suppliers that have sticky prices
inflation harms input suppliers that have sticky prices in addition (lenders ( suppliers of funds used for expansion) are harmed when inflation greater than anticipated
Why can monetary policy have immediate real short-run effects
initially, no prices have adjusted but as prices adjust in the long run, the effects of the new money wear off. injecting new money into the economy eventually causes inflation but inflation doesnt happen right away and prices do not rise uniformly
The price in the loanable funds market is the
interest rate Lower interest rates increase the quantity of investment demand, just as lower prices increases quantity demanded in any product market investment is one component of AD, so changes in Investment demand indicate corresponding changes in AD IN short run , increases in AD increase output and lower the unemployment rate.
One key factor in foreign exchange markets is _____ _____ across nations. If______ ________ rise in one country ( relative to rates in the rest of the world ) the demand for its currency will increase since there is greater demand for the assets with higher returns
interest rates
law of ____ __ : says that after accounting for transportation costs and trade barriers, identical goods sold in different locations must sell for the same price
law of one price! p(a) is price of good in location a will == p(b) price of same good in location B
Banks increase the money supply when they
loan out reserves (they decrease M when they HOLD more reserves)
PPP is a theory abotu the determinants of _____ ___ exchange rates
long run
If expectations adjust, the optimal monetary policy is to
maintain transparency and stability . this conclusions holds if expectations are formed either adaptively or rationally.
theory behind the Phillips curb relationship:
monetary expansion stimulates the economy, and htis outcome reduces the unemployment rate. Similarlly lower inflation is associated with higher unemployment rates. lower unemployment rates were consistently correlated with higher inflation rates.
The cause of inflation is
monetary growth
* The idea that the money supply does NOT affect real economic variables is known as * (we know printng more money doesn't affect economy's long run productivity or ability to produce-- these are determined by resources, technology, and institutions
monetary neutrality
Money deposited into the banking system multiplies This is _____ creation but not _____ creation
money creation but NOT wealth creation
______ ___ can make input suppliers reluctant to lower their prices-- wages are at times set by contracts
money illusion
The simple money multiplier is the _______ money multiplier. It assumes no excess reserves and no currency held outside banking system.
maximum
buying grocieries exhibits which function of money accepting money as payment
mediu of exchange- * it is what people trade for goods and services *
In colonial virginia without government provision, tobacco was a common
medium of exchange. because it is what people traded for goods and services
if instead expectations formed rationally, activist monetary policy may yield
no gains whatsoever
When price of currency rises, demand for goods falls : TRUE OR FALSE
no when price of currency falls, the QUANTITY of those goods demanded increases
when we talk about exchange rates we mean the
number of dollars to buy one unit of foreign currency
PPP is based on the law of
one price
What is the primary TOOOOOOL of monetary policy?
open market operations *which the Fed conducts through the buying and selling of bonds. Quantitative easing is a special form of open market operations that was introduced in 2008. To increase the money supply , Feds buy bonds . To decrease the money supply, the Fed sells bonds.
Accoring to adaptive expectations theory, market participants consistently ______ inflation when it is accelerating and ___________ inflation when it is *decelerating*
overestimate = when accelerating underestimate when decelerating
We can derive exchange rate from p(b) and p(a)
p(A) / P(b) = exchange rate
________ monetary policy occurs when central banks purposefully choose only to stabilize the money supply and price levels through monetary policy.
passive
_____ _____ _____ ______ are exchange rates that are * fixed at a certain level through the actions of a government *
pegged (fixed) exchange rates. CHINA
What is the key incentive for anticipating the correct rate of inflation?
people are harmed when inflation is a surprise but when expected - real effects on economy are limited
Data shows us that trade deficits are often a by-product of
positive economic periods trade deficits widens during periods of expansion and shrinks during recessions. we are not worse off when more goods and services flow in.
examples of negative efffects of inflation
price confusion, wealth redistribution, uncertainty about future price levels
Exchange rates are _____ that are determined by WORLD CURRENCY MARKETS. there are people that buy and sell currencies- these markets are called *foreign exchange markets* places where people buy and sell international currency.
prices
In the long run, _____ effects of monetary policy wear off
real
When all prices adjust, there are no real effects from monetary policy . That is there are no effects on
real GDP or unemployment inflation rate and unemployment rate Short run phillips curb sloped downward like supply, and LR is at positiion when Short run phillips curb hits the x axis.
if expected , monetary policy has no real effect on economy ie
real gdp and unemployment do not change. only lasting change is NOMINAL because the price level rises from 110.
Exchange rates of two currencies are _______ of each other
reciprocals
When interest rates fall , there is a _____ demand for the nation's currency
reduced
there may be a downward sloping Phillips curve relationship between inflation and unemployment, but this
relationship holds only in the short run.. In the long run, when expectations adjust , additional inflation CANNOT reduce the unemployment rate
In the long run, exchange rate flucations are driven by
relative changes in price levels.
PPP implies that the exchange rate between two nations is determined by a ratio of r__________________ If a nation experiences more inflation than its trading partners, its exchange rate will rise, indicating a________ of its currency
relative price levels in the two nations. depreciation
required reserves = required reserve ratio * bank's total amount of deposits
required reserves = required reserve ratio * bank's total amount of deposits
default risk:
risk that a borrower will not pay the face value of a bond on the maturity date
rr goes up , m^m goes down ,and M goes down
rr goes down - > m^m goes up, and M goes up
M2 is the money supply measure that includes EVERYTHING in M1 PLUS
savings deposits, money market mutual funds, and small denomination time deposits (CSs)
Passive policy does not
seek to use inflation to affect real variables, including unemployment adn real GDP.
Good to know that the US has a what kind of surplus
service trade surplus WE GOTS ONE OF THEM SERVICE TRADE SURPLUSES MMHMH
if inflation is expected , prices are not sticky ; they adjust because people plan on inflation to the extent that all prices rise, the tthe effect of monetary policy will be limited , even in the
short run.
If banks hold *excess reserves* , these dollars are not multiplied and the real mulitplier is _______ than simple version
smaller
If people hold on to some currency ( relaxing assumption that all currency is depostied in banks ) banks cannot multiply that currency , so the MORE realistic multiplier is __________ than simple money multiplier
smaller
________ is the combination of high unemployment rates and high inflation
stagflation
What is the Infant Industry Argument?
states that domestic industries need trade protection until they are established and able to compete internationally so once the fledgling industry gains traction and can support itself, the trade restriction can be removed. problem- relatively hard to remove trade barriers ,, much easier to enact them
Monetary has real effects only when some prices are
sticky. but if infltation is expected prices are NOT sticky. they adjust because people plan on inflation.
The exchange rate also falls when there is an increase in
supply of foreign currency relative to the supply of domestic currency.
Therefore if current account is in deficit, the capital account is in
surplus by the same amount.
if expectations are adaptive , activist monetary policy will lead only to
temporary short run gains in employment. In the long run , it will lead to high inflation or unemployemnt or both as it did in 1970's
The place where tax revenue was on graph is now the _______ _______ for import quots
the Gain to foreign suppliers compared with a tariff
How are *import quotas different from tariffs *
the government does NOT reveive any tax revenue ( we have import quotas on things like milk, tuna cottom)
Important implocation of long run result of expansionary monetary policy
the lack of real economic effects from monetary policy; in the long run , all prices adjust. THerefore, in the long run, monetary policy does NOT affect real GDP or unemployment.. only predictable result of more money in the economy over the long run is INFLATION
the maximum contraction is the withdrawal TIMES the simple money multiplier
the maximum contraction is the withdrawal TIMES the simple money multiplier withdrawal * m^m = maximum contraction
how do u undertake contractionary policy ?
through OMO bu selling bonds in the Loanable funds market.
Strong relationship between *trade and economic activity* : what is it
trade expands during economic expansions and contracts during recessions
True or false: a bank can fail without experiencing a bank run
true
the world's largest economy is becoming ever more intertwined with those of other nations : true or false
true lol since 1975 US imports have exceeded US exports. ie we have had a trade deficit since 1975. in 2014 alone we exported 2.34 trillion in goods but imported 2.85 trillion,, ie compute dat trade deficit -- it is 500 billion
True or false: domestic suppliers are indifferent between a tariff and a quota but Foreign proucers are NOT indifferent between a tariff and a quota system.
true- they have same results foreign producers get to keep that triangle in import quotas whereas in tarriffs that went to government.
imagine you are a banker who extends a loan with an interest of 3% then turns out inflation is 5%.. The fisher equation implies that the loan's real interest rate is actually -2% , a negative interest rate will def harm one's bank
unexpected inflation, while potentially helpful to overall econoy, is harmful to those whose prices take time to adjust
the measure in which prices are quoted:
unit of account
money serves as a measuring stick and recording device. Think of chck book, we right down that we spent $4 , you use dollar amounts ot keep track of your account and record transactions in a consistent measure
unit of account - money enables you and someone you don't know to speak a common language --- it is the measure in which prices are quoted.
If we say that awe have a current account deficit, we are also saying that
we have a capital account surplus
the two types of people most often harmed by inflation are
wrokers with fixed wages and lenders with fixed interest rates
While either account can be deficit or surplus, together they sum to
zero ie current account balance + capital account balance = 0
