Macro Test 2
19th Century
"panic runs on banks" 1907 Knickerbockers Trust Company Fails (NYC)
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-GM has sold its European Opel Division
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-In 2016, Americans were saving more money (leakage). Sales across the board, whether they are retail, automobiles, or housing, remain rather unpredictable with their ups and downs
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-In early 2017, following the election of President Trump, the stock market has reached new highs. Business (investment) confidence seems to be rising.
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-JC Pennys brought back the JC penny catalog. They saw sales drop when they got rid of the catalog
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-New Health Care "Crisis"
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-Retail and other domestic (consumption) spending still seems to be down.
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-Since 2005, Bernanke, 2% inflation is a sign of a healthy economy. We not near that. The "bonus from falling oil prices" has not bolstered the economy.
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-The after effects of 2008: Will we return to the way we used to operate; are there new frontiers?
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-Where is American retail heading? On-line/discount/fate of traditional? Marketing.
Fall 2014---stronger U.S dollar
-crude oil prices declining -Mobilization against ISIS
Objectives of the FED
1. a high level of employment in the economy 2. economic growth 3. price stability 4.interest rate stability 5. financial market stability 6. exchange rate stability
Golden Age to Stagflation
1960s: Golden Age of Keynesian Economics President Kennedy: proposed a federal budget deficit. President Johnson: cut taxes = The Great Society
Transactions Account
A bank account that permits direct payment to a third party- for example, with a check or debit card
Bank Branches
A banks additional offices that carry out banking operations
1972 Merrill Lynch Money Market Mutual Fund
A collection of short-term interest-earned assets purchased with funds collected from many share-holders (limited check writing privileges)
Bank Holding Company
A corporation that owns banks National Banks are the wave of the future. Merger upon Merge taking place Exhibit 8
Check
A written order instructing the bank to pay someone from an amount deposited
Medium of Exchange
Anything that facilitates trade by being generally accepted by all parties in payment for goods or services
Money
Anything that is generally accepted in exchange for goods and services (money fulfills three important functions: a medium of exchange, a unit of account, and a store of value)
Store of Value
Anything that retains its purchasing power over time
Commodity Money
Anything that serves both as money and as a commodity; money that has intrinsic value
-Big Concern:
Average Household credit card debt: March 2016: $15,000
Competition for Banks
Bank Deregulation: Deregulations and deposit insurance created "moral hazard" S&L Collapse Congress 189-$250 Billion dollar bailout
Representative Money
Bank notes that exchange for a specific commodity such as gold
1933
Banking holiday
The Birth of the FED
Before 1863, banks were chartered by the states in which they operated, thus known as "state banks" Each bank issued notes and they were redeemable for gold. The National Banking Act of 1863 and later amendments created a new system of federally chartered banks called National Banks -they issued notes -they were regulated by the Comptroller of the Currency -state notes taxed out of existence -state banks survived by creating checking accounts -thus we have the dual banking system today: state and federal
2000s
By early 2001 the economy was in recession. This problem was compounded by the attack on 9/11. President Bush within several months, Bush proposed a tax cut to help stimulate the economy. Considering the psychological state of the nation, it was a gamble. However it, along with cuts by FED, helped to get the economy back in gear during the year 2002. The new decade also saw a tremendous deficit begin to grow, largely as a result of the War on Terror. Loss of Jobs in the American Economy began to take its toll The economy continued to stride until late 2007. It began to show indications of a slowdown, and the president in early 2008 issued a check to all tax paying Americans aimed at stimulating the economy. The average amount to each tax paycheck was $600. This actually worked, as a great deal of money was channeled back into the economy.
Election 2016
Central Debate: The Economy and Foreign Affairs
Depository Institutions
Commercial Banks and thrift institutions; financial institutions that accept deposits from the public
Commercial Banks
Depository institutions that historically make short-term loans primarily to businesses
November 2008
Elections. Democrats win. When the economy is in trouble, the party in power generally loses. Can we bring jobs that left the country in the late 1980s and 1990s back home? Will people want to work those kind jobs?
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Energy costs are linked to the overall success of the economy as well
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Entertainment and Retail revenue is in a state of flux across the United states.
Money & Aggregate Demand in the Long Run
Equation of Exchange: The quantity of money, M, multiplied by its velocity, V equals nominal GDP, which is the product of the price level P the real GDP Y M(oney) X V(elocity)= P(rice) X Y(GDP)
1913-1929
FED performed up to expectation
1930-33
FED practiced conservative monetary policies. 1/3 of the banks failed. (lender of last resort)
May 2009
Fannie Mae and Freddie Mac, created by the United States Congress, backing and supporting sub-prime loans, had collapsed, causing a ripple effect throughout the entire financial and banking industries of the united states. Congress had bailed out Fannie Mae and Freddie Mac and issued billions to prop up banks and other financial institutions.
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Foreclosures have been a consistent problem- in spite of efforts to turn the tide. Many of the foreclosures are still those obtained through sub-prime loans. (Paulson)
Financial Intermediaries
Institutions that serve as go-betweens, accepting funds from savers and lending them to borrowers
1990s Discretionary Fiscal Policy and Presidential Elections--- Error of Judgement and Reasoning
President Clinton: 1993 substantially increased taxes in high income households
1980s Supply-Side Experiment
President cut by: taxes by 23% gov spending 7.1-6.3 the stimulus from the tax cut helped sustain a continued expansion during the 80s---the longest peacetime expansion to that point in the nation's history The national debt increased
The Evolution of Fiscal Policy
Prior to the 1930s, discretionary fiscal policy was seldom used as an instrument of macroeconomic policy 1929 - Stock Market Crash 1930 and beyond - The Great Depression At its height, 25% of the working population was employed Although unemployment dropped, the "invisible hand" was nowhere to be found 1936 - John Maynard Keynes (U.K.), The General Theory of Employment Interest and Money Key findings... Prices and wages inflexible in a downward direction...natural market forces were not correcting the situation Even with low interest rates, bleak business expectation (too conservative) Three developments bolstered the use of discretionary fiscal policy in the US: With the economy operating below its potential, the government needed to increase aggregate demand to boost output and employment WWII - lifted US out of the depression Employment Act of 1946 - gave the federal government responsibility and price stability Overall impact of fiscal policy: don't worry about a balanced budget, promote full employment and price stability
Open-Market Operations
Purchases and sales of government securities by the FED in an effort to influence the money supply
Bank Acts of 1933 & 1935
Regulated the banking system and centralized the power it the FED
1994
Republican Congress: more discipline Federal spending Economy recovered: growing consumer spending, rising business optimism(tech), globalization, the bull market
Thrift Institutions (thrifts)
Saving banks and credit unions; depository institutions that historically lent money to households
Target Area
The middle class and tax arguments.
2008s
This actually worked as a great deal of the money was channeled back into the economy in terms of consumption and investment In late summer 2008, sub-prime loans tied to Freddie Mack and Fannie May, AIG, and numerous banks began to fail along with these institutions. The ramifications were worldwide. The President and the US Congress put together a $700 billion bailout plan for some of these institutions- in essence making the government more of an "owner" of numerous financial institutions in America. Ford, but especially GM and Chrysler ran into steep trouble- Gm and Chrysler shut down hundreds of dealerships across the U.S (along with plant closures.) The economy was in a recession by November 2008 is in recession. This became official as we entered 2009, when figures confirms a recession. Sales of homes and automobiles and plunged along with retail and service sector markets. During this period, the FED and the Treasury began taking extraordinary measures to "prop-up" the economy. Massive loans by these institutions and by Congress were utilized to stabilize banking, investment and other financial institutions. Some were forced to merge because of their debt/bad loans (mostly from the sub-prime mortgage industry) AIG saved- many congressman held money in this institution. Within weeks of the start of his presidency, President Obama issued another tax cut. He has taken extraordinary measures, intervening directly in the economy. The President asked some industrial leaders/CEOs to resign in order for their companies to get federal aid. He has also said "these days of the million dollar bonuses are over" This is still an ongoing battle. Private Sector complained, "This will drive away the best and the brightest" Response: "the best and the brightest got us in the mess we're in" The automobile industry: Dodge Bankruptcy- has combined with Fiat GM had to declare bankruptcy Decided to keep its European Division (Opel), but now in a crisis and undergoing major restructuring. Ford-Worldwide sales help keep it solvent. Housing Industry: In most markets, prices have fallen, but the rebound has been strongly. Over 1.25 trillion in loans from China, alone already (25% of our national loans are foreign) Will the economy rebound? Big psychological push for it to do so... but... Will there be more hits to the service sector?
Double Coincidence of Wants
Two trades are willing to exchange their products directly
Legal Tender
US currency that constitutes a valid and legal offer of payment of debt
Gresham's Law
People tend to trade away inferior money and hoard the best (bad money drives out good- debasing the coinage) Money should maintain a relatively stable value
Reserves
Funds that banks use to satisfy the cash demands of their customers and the reserve requirements if the FED; reserves consist of cash held by banks plus deposits at the FED Reserve banks were also authorized to lend to banks in need of reserves; the interest rate charged is also called a discount rate Any profit additional profit earned by the reserve is turned over to the US Treasury
1970s Stagflation
High unemployment, high inflation resulting from a decrease in aggregate supply. (crop failures, oil shocks and war costs) Demand policies weren't working.
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How will Health Reform progress... and at what cost to the economy (can it handle it right now?)
The Quantity Theory of Money
If the velocity of the money is stable or at least predictable, changes in the money supply have predictable effects on nominal GDP If M increase 5% and V remains constant then P x Y or nominal GDP must also increase 5% Increase in the money supply= more spending (long run) which leads to a higher nominal GDP Velocity of Money has increased due to technology cards; pay checks etc Money as a store of value; the great the store power the lower the velocity
Fiat Money
Money not redeemable for any commodity; its status as money is conferred initially by the government but eventually by common experience
Token Money
Money whose face value exceeds its cost of production
2013
National Health Care-Economic Impact
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New home starts, and used home sales staring to turn the corner, as of August 2012- again inconsistency. Summer 2014, up again.
2014:
Numerous aspects of the health care Reform delayed in implementation.
Fractional Reserve Banking System
Only a portion of bank deposits is back by reserves
Bank Notes
Originally, papers promising a specific amount of gold and silver to anyone who presented them to issuing banks for redemption; today, Federal Reserve notes are mere paper money
Federal Open-Market Committee(FOMC)
The 12-member group that makes decisions about open-market operations- purchases and sales of US government securities by the FED that affect the money supply and interest rates; consists of the 7 board governors plus 5 of the 12 presidents of the reserve banks
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The Economy needs sustained economic growth
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The Fed and the Treasury are working today at an unprecedented level; to date, the "bail-outs" are getting mixed reviews. (CEO's) Some banks did not pass the "stress test" administered by the treasury and have a limited amount of time to negotiate for more asset injection (support). More continue to be shut down in 2011 and even into 2012
Velocity of Money
The average number of times per year each dollar is used to purchase final goods and services. 2003: Nominal GDP- 11 trillion, Money Stock M1: 1.3 trillion Velocity was 11/1.3 or 8.5 trillion Given the GDP and the money supply, each dollar must have been spent about 8.5 times on average to pay for final goods and services. Velocity only measures spending on final goods/services
Federal Reserve System (the Fed)
The central bank and monetary authority of the United States -to serve as the central bank and monetary authority of the US -All banks joined the FED (except state banks) -it now issued all notes -other powers -to buy and sell gov securities -to extend loans to member banks -to clear checks -to require that member banks hold reserves equal to at least some specified of their deposits The reserve banks hold deposits of member bank and extend all loans to member banks.
Seigniorage
The difference between the face value of money and the cost of supplying it; the "profit" from issuing money. U.S coin production: 25 cents/3 cents US MINT: $500 million a year off seigniorage
Unit of Account
a common unit for measuring the value of each good or service
Contractionary Fiscal Policy
a decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; policy used to close an expansionary gap
Classical Economist
a group of 18th and 19th century economists who believed that economic downturns were short-run phenomena that corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention
Expansionary Fiscal Policy
an increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to return the economy to its potential output thereby reducing unemployment; policy used to close a contractionary gap
Progressive Income Tax
during economic expansion and recession
Unemployment Insurance
during economic expansion, the system automatically increases the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, moderating aggregate demand During downward economic turns, transfer payment increase Because of automatic stabilizers, GDP fluctuates less than it otherwise would, and disposable income varies proportionately less than does GDP [consumptions also fluctuates less than GDP]
The board of governors
responsible for setting and implementing the nation's monetary policy -12 reserve banks moved under the Board of Governors (7 members appointed by the President confirmed by Senate) -Each member serves a 14 year nonrenewable term (staggered apt; one every 2 years)(designed from political pressure) -One governor is pointed to chair the Board of Governors- a four year renewable term
Automatic stabilizers
structural features of government spending and taxation that reduce fluctuations in disposable income and thus consumption, over the business cycle Automatic stabilizers smooth out fluctuations in disposable income over the business cycle, thereby stimulating aggregate demand during recessions and dampening aggregate demand during expansions
Janet Yellen
the Middle class is in trouble. A growing income gap between "the rich and the rest" is a serious problem
Discretionary Fiscal Policy
the deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth Is a demand-management policy; the objective is to increase or decrease aggregate demand to smooth economic fluctuations.
Simple Tax Multiplier
the ratio of a change in real GDP demanded to the initial chance in autonomous net taxes that brought it about; the numerical value of the simple tax multiplier is -MPC/(1-MPC)
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uneven economic growth continues to plague service and manufacturing... especially the automobile industry, department stores, some regions in housing, etc.
