03/04/16      UNIT 4: Open Market Operations

#1) The Reserve Requirement- 
- Only small percent of your bank deposits is in the safe. The rest of your money has been loaned out. This is called "Fractional Reserve Banking."

   - The FED sets the amount that banks must hold
   - The reserve requirement (reserve ratio) is the percent of deposits that banks must hold in reserve and NOT loan out.
   - When the FED increases the money supply (MS) it increases the amount of money held in the bank deposits.


1 - If there is a recession what should the FED do to the reserve requirement?
      - Decrease reserve ratio
              - banks hold less money and have more excess reserves (ER)
               -banks create more money by loaning out excess
               -money supply increases, interest falls, AD goes up.
            
2 - If there is inflation, what should the FED do to the reserve requirement?
      -increase the reserve ration
            -banks hold more money and have less excess reserves
            -banks create less money
            -money supply decreases, interest rates increases, AD goes down.



#2) The Discount Rate 
- The interest rate that the FED charges commercial banks.

EX.
 - if Bank of America needs $10 million, they borrow it from the US Treasury, but they must pay it back with interest

To increase the money supply, the FED should DECREASE the discount rate (easy money policy)
To decrease the money supply, the FED should INCREASE the discount rate (tight money policy) 


                                               

#3) Open Market Operations (OMO)
the FED buys/sells government bonds (securities)
this is the most important and widely used monetary policy

To increase the money supply, the FED should BUY government securities.
To decrease the money supply, the FED should SELL government securities.


Federal Funds Rate - FDIC member banks loan each other overnight loans
Prime Rate - interest rate that banks give to their most credit worthy customers


*When a customer deposits or withdraws cash from their account (check-able) it has no effect on money supply.

It Only Changes:
composition of money
excess reserves
required reserves

Single Bank

Loan from excess reserves (ER)
EX: Chase bank
Banking System

ER x Multiplier (total money supply)

EX: Chase, Wells Fargo, BOA

03/12/16     

UNIT 4: FED & The Creation of Money

Reserve requirements

-fed requires banks to always have same money readily available to meet consumers demands for cash

-the amount set by fed, is requires reserve ratio

- the most common required reserve ratio = 10%

-the required reserve ratio is the 5 of demand deposits (checking account balances that must not be loaned out

Banks Create money by loaning out fractions of deposits that people put into the bank (as shown in the above photo.)

-by using a balance sheet or a T- account which shows liabilities and assets, potential loans can be calculated.

Bank Liabilities (the right side of the T-account sheet)

-demand deposits (DD) or check able deposits (CD):
    -cash deposits from the public
    -they are liabilities because they belong to the depositors


-owners equity: the values of stocks held by the public ownership of banks shares

Bank assets (the left side op=f the T- account sheet)

-Required Reserves (RR): percentages of demand deposits that must be held in the vault so that some depositors have access to their money


-Excess Reserves (ER): source of new loans

-Securities (bonds)- can be purchased by a bank from the Federal Reserve. These bonds can be purchased from the banks and turned into cash and immediately becomes available as excess reserves

03/14/16

    UNIT 4: Money

Types of Money

 -Commodity Money: It gets its value form the type of material from which it is made

Ex: Gold & Silver coins

-Representative Money: It is paper money back from something tangible that gives it value

Ex: IOU Money

-Fiat Money: Money basic the government "said so"

   Characteristics of Money

-Divisible: break the dollar bill into many ways.

-Portable: Put your money in socks, bra

-Uniform: A dollar it’s a dollar, doesn’t matter if you change the president but a dollar is a dollar.

M1 Money: 

-75 percent of money that comes from circulation comes from here (It is liquid- easy to convert)

-Cash and coins >Currency

-Checkable deposits >Demand deposits 

-Traveler’s checks

M2 Money:

-Consists of M1 Money, Savings accounts, and deposits held by banks outside of the USA

-Saving Account is not a transaction where you can’t pull out ( Only transfer from the saving to checking account)

M3 Money:

-Consists of M2 Money and certificated of deposit money know as CD’s

-CD’s are accounts that apply the concept of keeping money over a period of time, then that money will grow.

Time Value of Money

-A dollar today is worth more than a dollar tomorrow

Why?

  - Opportunity cost & inflation

  - This is the reason for charging and paying interest

How to Calculate 

- Let:

     V = future value of money

     P = present value of money

     r = real interest rates (nominal rate- inflation rate)

     n =  years

     k = number of times interest is credited per year

The Simple Interest formula

v= (1+r)^n *P

Compound Interest Formula

v= (1+ r ) ^nk * P

Here is a veryyyyy important video that will help you guys out with the most important parts of Unit4: Monetary Policy. Take notes and enjoy!

https://m.youtube.com/watch?v=qDro-FIv8t4

03/26/2016      UNIT IV: Youtube Videos on Monetary Policy 

https://m.youtube.com/watch?v=YLsrkvHo_HA&feature=results_video&list=PL2CB281D126F65E26&playnext=1

Video 1: I never knew money had as many purposeful functions as it does from buying, to saving, to judging what an item is actually worth. I also feel that there is so much to learn about the concept of money from commodity to representative. Representative through me for a small loop in understanding as it is sort of money that functions as a certain quantity in coin value. While commodity simply means a good that has other purposes while also functioning as money.

https://m.youtube.com/watch?list=PL2CB281D126F65E26&params=OAFIAVgC&v=gzFdeM6lUno&mode=NORMAL

Video 2: This video explored the concept of money market graphs. The vertical axis is the price, as price you pay to get money. The horizontal axis is the quantity money. I found it interesting that Demand will slope down due to a high price - low quantity demand relationship.

https://m.youtube.com/watch?list=PL2CB281D126F65E26&lf=results_video&v=XJFrPI8lLzQ&feature=bf_next

Video 3:  The tools explored in this video was on the FED and manipulation of money supply. Expansionary is used to battle a recession and also known as easy money. Contractionary is used to battle inflation and is also known as hard type money. All falling under when the FED engages in open market operations, you get the FOMC, or the Federal Open Market Committee, who is the piece of the FED entity that makes those decisions.

https://m.youtube.com/watch?lf=results_video&feature=bf_next&v=rdM44CC0ELY&list=PL2CB281D126F65E26

Video 4: This video gave thorough details of the Equation of Exchange, which is MV=PQ.
M = money supply, V = velocity.  (MV) = GDP. Q= total quantity in volume of goods. (PQ)= GDP income where who is eating money changes in M, will impact prices, and changing M if price is stable will effect the quantity.

https://m.youtube.com/watch?feature=bf_next&list=PL2CB281D126F65E26&lf=results_video&v=1tUC59pz95I

Video 5: This video talks about the circulation of money through loans. More or less dealing with how banks create money by offering loans with interest. The formula for the money multiplier is 1/ RR (Reserved Requirements). Then through multiple deposit expansion loans increase .

https://m.youtube.com/watch?list=PL2CB281D126F65E26&params=OAFIAVgI&v=k37Y6BKcpsY&mode=NORMAL

Video 6: This video describes Loanable Funds as well as ties together all of the videos for one final understanding. I found the Fisher Effect the most interesting as it states MV and PQ must be set equal. This sort of declares a 1:1 direct ratio. The increase in the interest rate, ties into the increase in price level, goes back to the Fisher Effect, ties into the equation of exchange, and there you have it .... The key to the connection between all concepts in unit 4.

02/ 28/ 16    Fiscal Policy

There are two types of economics:

Classical:-Competition is a good thing.

                  -The invisible hand (means market will fix itself no government needed.)

                  -In the long run, the economy will balance at full employment. 

                  -Trickle down effect (help the rich first and everybody else second.)

                  -The economy is always close to or at full employment. 

Keynesian:  -Competition is not beneficial

                     -AD is the key to saving an economy.

                     -Saving money causes recessions.

                     -Ratchets effects & sticky wages blocked Say's Law.

                     -In the Long Run, we are all dead. 

Two tools of Fiscal Policy: -Taxes, in which the government can increase or decrease

                                             -Spending, in which the government can increase or decrease 

Policy Two Options: -Discretionary Fiscal Policy (action) 

                                   -Expansionary fiscal policy (think deficit)

                                   -Contractionary fiscal policy (think surplus)

                                   -Non-Discretionary Fiscal Policy (no action) 

View this video for a visual and descriptive view of the differences between stablizers: 

http://study.com/academy/lesson/automatic-stabilizers-in-economics-definition-examples.html

02/22/16        Consumption vs. Savings

Here's a brief video with a very interesting way to cath on to the idea of Consumtion vs Savings.

https://www.youtube.com/watch?v=vj7XExwChwI

Heres the formulas: 

02/18/16             Aggregate Supply:

• The level of Real GDP (GDPr) that firms will produce at Price Level (PL)

Short Run- Level of GDPr  which is directly related to the price level.

                 - where input prices are sticky and do not adjust to the price level

Long Run- input prices are flexible, and adjust to changes in price level

                 -GDPr independent of price level

     

         

02/12/16      UNIT 3: Aggregate Demand vs. Supply

Aggregate Demand Curve (AD)

- AD is the demand by consumers, government, and foreign countries.

-What definitely doesn't shift the curve? Changes in price level.

*Formula for AD*

Reason for downward slope of AD curve:

1.) Real-Balance Effect:

• Higher price levels reduce the purchasing power of money.
• Lower price levels increase purchasing power and increase expenditures.
• This decreases the quantity of expenditures.

2.) Interest-Rate Effect:

• When the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. 
• Higher interest rates discourage consumer spending and business investment. 

3.) Foreign Trade Effect: 

• When U.S. price level rises, foreign buyers purchase fewer  U.S.> goods and Americans buy more foreign goods. 
• Exports fall and imports rise, causing real GDP demanded to fall. (Xn decreasing) 

Full Employment: - where AD intersects LRAS & SRAS at the same point.

Recessionary Gap: -when equilibrium occurs below full employment output.

Inflationary Gap: - when equilibrium occurs beyond full employment output.

• More wealth = more spending (AD shifts ->)
• Less wealth = less spending (AD shifts <- )

Consumer Expectations

• Positive expectations = more spending (AD shifts ->)
• Negative expectations = less spending (AD shifts <-) 

Household indebtedness

• Less debt = more spending (AD shifts ->)
• More debt = less spending (AD shifts <- )

Taxes

• Less taxes = more spending (AD shifts ->)
• More taxes = less spending (AD shifts <- )

Gross Private Investment: 
Investment Spending is sensitive to:
The Real Interest Rate

• Lower Real Interest Rate = More Investment (AD ->)
• Higher Real Interest Rate = Less Investment (AD <- )

Expected Returns

• Higher Expected Returns = More Investment (AD ->)
• Lower Expected Returns = Less Investment (AD <- )
• Expected Returns are influenced by:

           - Expectations of future profitability
           - Technology
           - Degree of Excess Capacity (Existing Stock of Capital)
           - Business Taxes

Government Spending: 

• More Government Spending (AD ->)
• Less Government Spending (AD <- )

Net Exports:
Net Exports are sensitive to: 
Exchange Rates (International value of $)

• Strong $ = More imports & Fewer Exports = (AD <- )
• Weak  $ = Fewer Imports & More Exports = (AD ->)

Relative Income

• Strong Foreign Economics = More Exports = (AD ->)
• Weak Foreign Economics = Less Exports = (AD <- )

02/02/16      Inflation & Interest Rates:

Nominal Interest Rate- % increase in $$$; the borrower must pay a lender for a loan.

                                     - NOT adjusted for inflation.

Real Interest Rate- he % increase in purchasing power; the borrower must pay a lender for a loan.

                              - adjusted for inflation

                              - Nominal interest rate - Inflation - Real interest rate

02/04/16      Unemployment:

The failure to use available resources, particularly labor, to produce desired goods and services.

Labor Force- above 16 years old

                     - able and willing to work
                     -employed to unemployed

Excluded from Labor Force:

1. Military
2. Students
3. Retired
4. Disabled
5. Homeowners
6. Mental Instituted People
7. People in jail/ prison
8. Those people not looking for a job.

Unemployment Rate- ideal rate 4% - 5% ( Full Employment / Natural Rate of Unemployment)

4 Types of Unemployment:

Frictional- those searching for a job 

                - temporary unemployed or in between jobs

                - transferable skills

                - ex. college; high school graduates

                - ex. laid off, looking for better jobs

Structural- changes in structure of labor force that makes some skills obsolete

                 - non transferable skills

                 - have to learn new skills to get a job 

                 - ex. move from NASA to automobile job

Frictional + Structural = NRU

Seasonal- due to time of year and nature of job.

                   Examples:

1.  School bus drivers
2.  Santa Claus/ Easter Bunny workers
3.  Lifeguards
4.  Firework stands
5.  Construction workers

Cyclical- results from economic downturns (recession)

             - as demand for goods/services fall, demand for labor and workers are laid off

             - NOT present where there is full employment

02/04/16         Inflation- increase in prices

Formula- Price Index in 2 years - Price Index in 1 year / Price Index in 1 year

Hurt by Inflation:

1. Savers
2. Lenders/ Creditors
3. People who are on a fixed income - (elderly, wellfare)

Helped by Inflation:

1. Delators; people who owe money; borrowers

Cost of Living Adjustments- automatic wage increase when inflation occurs (New York and California due to standard of living)

GDP Gap- the amount by which actual GDP falls short of potential GDP

Okun's Law- For every 1% in which actual enemployment rate exceeds the NRU, a GDP of about 2% occurs.
                    - Ex. In 2012 the unemplyment for Mexico was 7.4%. The NRU is 6%. Calculate GDP Gap.
(Actual) 7.4 - 6 (NRU) = 1.4 X 2 = 2.8

Rule of 70- used to determine how many years it takes for a value to double; given a particular annual growth rate.
                  - Ex. If you put $20,000 in the bank, and it earns a yearly interest of 7%. How many years will it take for your income to double? 10 years due to rule of 70.

02/01/16      Gross Domestic Product Cont...

National Income- (Personal Household + Taxes + Gov't Transfer Payment)

Nominal GDP- Value of output produced in current year prices (Price X Quantity)

Real GDP- value of output produced in constant based year prices.

                - adjusted for inflation (base year X Quantity)

                - real GDP to measure economic growth

                - measure increase in prices (inflation) use Nominal GDP

                - can increase from year to year if either price quantity increases

                - real increases only if output increases

                - earliest year ALWAYS = base year if not stated.

Nominal to Real GDP- 

(Nominal GDP / Real GDP) X 100

CPI- (most commonly used) measures cost of market basket of goods of a typical urban American family.

          - Cost of Market Basket of goods in a given year / "  " of goods in a based year.

01/28/16    Gross Domestic Product-  

the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time.

Formula- C + IG + G + Xn

C- Personal Consumption Expenditures [65%] (Tory Burch, Louis Vuitton, etc..)

IG- Gross (total) Private Domestic Investment [17%] (House being built but not sold)

1.) Factory Equipment Maintenance   2.) New Factory Equipment   

3.) Construction of Housing    4.) Unsold Inventory Built

G- Government Spending: [20%] (Teacher salary in a year)

Xn- Net Exports (Exports - Imports)

GNP- Total Market Value of all final goods and services by citizens of that country on its land or foreign land.     Ex. Nike using Indonesia to make shoes.

NDP- Net Domestic Product (GDP - Depreciation)

NNP- Net National Product (GNP - Depreciation)

GNP- Gross National Product (GDP + Net Foreign Factor Payment)

Let's not forget Price Ceiling & Price Floors!

01/26/16      Circular Flow Diagram-

represents transactions in an economy

Product Market- firms sell goods/ services that produce to the households.

Factor Market- it is a place here households sell their resources and business by their resources.

Firms- organization that produces goods/ services for sale

Households- a person or group of people that share income

*There is no better way to understand this than with a visual representation!

Hey Guys! So to better understand the business cycle, here is some very helpful photos(:

01/14/16      Elasticity of Demand:

the measure of consumer reactions to price changes.

Elastic Demand- Demand sensitive to change in price E > 1  

                           - NOT a necessity

                           - Available substitutes

Inelastic Demand- Not very sensitive E<1

                             - Necessity

                             - Few or no substitutes

Unitary Demand- ALWAYS equal (=) to 1

Price Elasticity of Demand- (PED)

1. Quantity (new-old)

2. Price (new-old /old)

3. (%change in quantity demanded / % change in price)

Total Revenue- Total amount of money a firm receives from selling goods and services.

Formula- (price x quantity)

Production Costs-

Fixed Cost- a cost that doesn't change no matter the quantity produced.

                  - Ex. rent, mortgage, insurance, salaries

Variable Cost- a cost which rises/ falls depending upon how much is produced.

Marginal Cost- a cost of producing 1 more unit of a good.