Here is a link over, The Balance of Payments, I hope this gives you a better idea !!
https://m.youtube.com/watch?v=W0YwGLz50TA
Monday, May 9, 2016
Last Notes of Unit 7
Absolute Advantage
-Individual- exists when a person can produce more of a certain good/ service than someone else in the same amount of time (or can produce a good using the least amount of resources.)
-National-exists when a country can produce more o a good/ service than another county can in the same time period.
Comparative Advantage
-A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.
Examples of output problem:
*word per minute
*miles per gallon
*tons per acre
*apple per tree
*television produced per hour
Examples of input problems:
*number of hours to do a job
*number of acres to feed a horse
*number of gallon of paint to paint a house
Specialization and trade
-Gains from trade are based on comparative advantage, not absolute advantage
(who can d what in a certain amount of time)
-Individual- exists when a person can produce more of a certain good/ service than someone else in the same amount of time (or can produce a good using the least amount of resources.)
-National-exists when a country can produce more o a good/ service than another county can in the same time period.
Comparative Advantage
-A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.
Examples of output problem:
*word per minute
*miles per gallon
*tons per acre
*apple per tree
*television produced per hour
Examples of input problems:
*number of hours to do a job
*number of acres to feed a horse
*number of gallon of paint to paint a house
Specialization and trade
-Gains from trade are based on comparative advantage, not absolute advantage
(who can d what in a certain amount of time)
***Smallest number is who has opportunity cost***
Thursday, April 28, 2016
Exchanges
Foreign Exchange (FOREX)
- the buying and selling of currency
*example: in order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy Euros
- any transactions that occurs in the balance of payments necessitates foreign exchange
-Exchange Rate (e) is determined in foreign currency markets
Changes in Exchange Rates
-exchange rates (e) are a function of supply and demand for currency
+an increase in the supply of a currency
+a decrease in supply of a currency will increase the exchange rate of currency
+increase in demand for currency will increase the exchange rate of currency
+decrease in demand for a currency will decrease the exchange rate of currency
Appreciation and Depreciation
-appreciation of currency occurs when exchange rate of that currency increases (e^)
-depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants
-consumer tastes
-relative income
-relative price level
-speculation
Exports and Imports
-exchange rate is a determinant of both exports and imports
-appreciation of the dollar causes american goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports
-depreciation of the dollar causes american goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
- the buying and selling of currency
*example: in order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy Euros
- any transactions that occurs in the balance of payments necessitates foreign exchange
-Exchange Rate (e) is determined in foreign currency markets
Changes in Exchange Rates
-exchange rates (e) are a function of supply and demand for currency
+an increase in the supply of a currency
+a decrease in supply of a currency will increase the exchange rate of currency
+increase in demand for currency will increase the exchange rate of currency
+decrease in demand for a currency will decrease the exchange rate of currency
Appreciation and Depreciation
-appreciation of currency occurs when exchange rate of that currency increases (e^)
-depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants
-consumer tastes
-relative income
-relative price level
-speculation
Exports and Imports
-exchange rate is a determinant of both exports and imports
-appreciation of the dollar causes american goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports
-depreciation of the dollar causes american goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
Unit 7 The Balance of Payments
-measure of money inflows and outflows between the US and the Rest of the World (ROW)
+inflows are referred to as CREDITS
+out flows are referred to as DEBITS
-the balance of payments is divided by 3 accounts
1. current account
2. capital/ financial accounts
3. official reserves accounts
Current Accounts
- balance of trade or net exports
-net foreign income
-net transfers (tend to be unilateral)
Capital/ Financial Accounts
- the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the US is a credit to the capital account
-direct investment by US Firms/ individuals in foreign country are debits to capital accounts
-purchase of foreign financial assets represents a debit to a capital account
-purchase of domestic financial assets by foreigners represents a credit to the capital accounts
***the current account and the capital account should zero each other out***
Official Reserves
-foreign currency holdings of US Federal Reserve System
-when there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
-when there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments
Active US passive official reserves
-the US is passive in its use of official reserves
+inflows are referred to as CREDITS
+out flows are referred to as DEBITS
-the balance of payments is divided by 3 accounts
1. current account
2. capital/ financial accounts
3. official reserves accounts
Current Accounts
- balance of trade or net exports
-net foreign income
-net transfers (tend to be unilateral)
Capital/ Financial Accounts
- the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the US is a credit to the capital account
-direct investment by US Firms/ individuals in foreign country are debits to capital accounts
-purchase of foreign financial assets represents a debit to a capital account
-purchase of domestic financial assets by foreigners represents a credit to the capital accounts
***the current account and the capital account should zero each other out***
Official Reserves
-foreign currency holdings of US Federal Reserve System
-when there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
-when there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments
Active US passive official reserves
-the US is passive in its use of official reserves
Friday, April 8, 2016
Unit 5-Extending the Analysis of Aggregate Supply
Short run aggregate supply-
-this is the period in which wages (and other input prices) remain fixed as price level increase or decrease.
long run aggregate supply-
-period of time in which wages have become fully responsive to changes in price level.
****Remember how crucial worker salaries o a businesses out out and bottom line when considering effects on aggregate supply******
effects over short run-
-in the short run , price level changes allow for companies to exceed normal out puts and hire more workers because profits are increasing while wages remain constant.
-in the long run , wages will adjust to the price level and previous output level will adjust accordingly.
equilibrium in the extended model-
-the extended model means that both the short run and long run AS curves.
- the long AS curves is represented with a vertical line at full employment level of real GDP.
Demand pull inflation in the AS model-
- demand pulls (to the right) which causes prices to increase based on increase in aggregate demand.
-in the short run , demand pull will drive up prices , and increase production
-in the long run, increase in aggregate demand will eventually return to previous levels.
Cost push and the extended model-
-cost push (to the left) arises from factors that will increase per unit costs such as increase in the price of a key resource.
dilemma for the government-
-in and effort to fight cost push, the government can react in 2 different ways:
1. action such as spending by the government could begin an inflationary spiral.
2. no action however could lead to recession by keeping production and employment levels declining.
-this is the period in which wages (and other input prices) remain fixed as price level increase or decrease.
long run aggregate supply-
-period of time in which wages have become fully responsive to changes in price level.
****Remember how crucial worker salaries o a businesses out out and bottom line when considering effects on aggregate supply******
effects over short run-
-in the short run , price level changes allow for companies to exceed normal out puts and hire more workers because profits are increasing while wages remain constant.
-in the long run , wages will adjust to the price level and previous output level will adjust accordingly.
equilibrium in the extended model-
-the extended model means that both the short run and long run AS curves.
- the long AS curves is represented with a vertical line at full employment level of real GDP.
Demand pull inflation in the AS model-
- demand pulls (to the right) which causes prices to increase based on increase in aggregate demand.
-in the short run , demand pull will drive up prices , and increase production
-in the long run, increase in aggregate demand will eventually return to previous levels.
Cost push and the extended model-
-cost push (to the left) arises from factors that will increase per unit costs such as increase in the price of a key resource.
dilemma for the government-
-in and effort to fight cost push, the government can react in 2 different ways:
1. action such as spending by the government could begin an inflationary spiral.
2. no action however could lead to recession by keeping production and employment levels declining.
Sunday, April 3, 2016
Sunday, March 27, 2016
Unit 4- video summary blogs
#1 blog video
This video was very useful, and informative about general uses of money. There is three types of money which is commodity, representative, fiat money; commodity money is money that can be used in varies ways, representative money is money that has back up such as gold and silver coins, but we do not use anymore in today's uses, also fiat money which is money that we use today and is not backed up by anything, it is money that we are able to apply through transactions. As there is three types of money, there is also three functions of money! Three function of money is medium of exchange, store of value and unit of account. Money of medium is when you buy something you receive something, such as when you go to the store to get a item(s) you will exchange it with money, Store of value is money that is being saved, such as when you store in the bank account, but as you store in the bank the money begins to have less purchasing powers as years pass by, also Unit of account which is to judge the more money it cost the better the quality which isn't always true
#2 blog video
Money Market is a review of what we have done before in class, with the graph, labeling and also graphing with equilibrium. In reference she mentioned how interest rate always goes on the y-axis and the quantity goes on the x axis, also how supply money is vertically in the middle as the original graph. SM which means supply money does not very from interest rate, but can move left or right in order to stabilize the interest rate. supply money is a fixed line that does not change, unless the FED changes it. FED will change the supply money in order to not have a high interest rate during a recession so they increase the supply money by moving it to the right and it will stabilize interest rate to the original equilibrium. Having a stabilized interest rate can fix many problems such as determining investment, also to manipulate the aggregate demand (AD) to find the right economy changes.
#3 blog video
The FED: Tools of Money Policy includes 2 main components which is expansionary known as "easy money" and contractionary known as "tight money". Usually they are the opposite such as when the required reserves (RR) decrease under expansionary, the contractionary increases. Required reserves is the money the bank must hold on to and cannot loan out to the public, or anyone. Excess reserves is part of the money that the bank can loan out from what is kept of the required reserves. Also such as the discount rate which isn't really effective, but represents the rate banks can borrow from the FED. When banks are low on loans they borrow from the FED for at least a day and pay them back which the FED will charge them interest rate for what they borrowed. As discount rate can sell or buy bonds, under expansionary they buy bonds and under contractionary they sell bonds. When they say "buy bonds" they really mean the FED buys the bond and the public receives the money, as you can remember it as "Buy bonds= Big bucks" shown in the video. When they say "sell bonds" they really mean the public are buying the bonds and the FED is receiving the money. What controls the FED is known as Federal Open Market Comity (FOMC) which makes all the FED's decision. There is also something known as the Fed Fund Rate which is when banks borrow money from each other.
#4 blog video
Loan able Funds have the same/ similar graph as all others just representing different shifts of the money market and the the loan able funds market. The money market deficit means that the government wants more money which will increase the interest rate. Increasing loan able funds also increases interest rates, which is taking a demand for both which will also increase the interest rate. Decreasing the supply money government will demand for a great value of money which will cause the supply to decrease and interest rate to increase.
#5 blog video
Money creation process are such as money multiplier, and multiplier deposit expansion. Money creation process is when it is creating money by making loans. In this video they have used required reserves (RR) which is the percentage that banks must keep in the reserves from someones deposit. They also mention about excess reserves (ER) which is what the bank can loan out frrom someones deposit, which is the part that is not in the required reserves. There is equations to figure out how much for required reserves, excess reserves, and demand deposits. Wording of questions are very tricky on what exactly that they are asking. Money being re deposited is the multiplier deposit expansion.
#6 blog video
American money is not only used for our use, but also for the government to borrow from us. If there is an increase in government spending, there will be an increase in demand of money due to the amount of money the government is borrowing. US has the most debt, from borrowing so much from us, Americans, Aggregate Demand (AD) can increase just how it can in many other scenarios, but in this specific scenario it caused it because government is increasing their spending which will increase the demand of money. Government can either help or hurt us, but in this video it caused aggregate demand to increase. In this video they mention about the fisher effect which is the increase in interest rate so it can be equivalent to the increase in price level, an example is such as when interest rate increases by 1% also will the inflation rate increase by 1%.
This video was very useful, and informative about general uses of money. There is three types of money which is commodity, representative, fiat money; commodity money is money that can be used in varies ways, representative money is money that has back up such as gold and silver coins, but we do not use anymore in today's uses, also fiat money which is money that we use today and is not backed up by anything, it is money that we are able to apply through transactions. As there is three types of money, there is also three functions of money! Three function of money is medium of exchange, store of value and unit of account. Money of medium is when you buy something you receive something, such as when you go to the store to get a item(s) you will exchange it with money, Store of value is money that is being saved, such as when you store in the bank account, but as you store in the bank the money begins to have less purchasing powers as years pass by, also Unit of account which is to judge the more money it cost the better the quality which isn't always true
#2 blog video
Money Market is a review of what we have done before in class, with the graph, labeling and also graphing with equilibrium. In reference she mentioned how interest rate always goes on the y-axis and the quantity goes on the x axis, also how supply money is vertically in the middle as the original graph. SM which means supply money does not very from interest rate, but can move left or right in order to stabilize the interest rate. supply money is a fixed line that does not change, unless the FED changes it. FED will change the supply money in order to not have a high interest rate during a recession so they increase the supply money by moving it to the right and it will stabilize interest rate to the original equilibrium. Having a stabilized interest rate can fix many problems such as determining investment, also to manipulate the aggregate demand (AD) to find the right economy changes.
#3 blog video
The FED: Tools of Money Policy includes 2 main components which is expansionary known as "easy money" and contractionary known as "tight money". Usually they are the opposite such as when the required reserves (RR) decrease under expansionary, the contractionary increases. Required reserves is the money the bank must hold on to and cannot loan out to the public, or anyone. Excess reserves is part of the money that the bank can loan out from what is kept of the required reserves. Also such as the discount rate which isn't really effective, but represents the rate banks can borrow from the FED. When banks are low on loans they borrow from the FED for at least a day and pay them back which the FED will charge them interest rate for what they borrowed. As discount rate can sell or buy bonds, under expansionary they buy bonds and under contractionary they sell bonds. When they say "buy bonds" they really mean the FED buys the bond and the public receives the money, as you can remember it as "Buy bonds= Big bucks" shown in the video. When they say "sell bonds" they really mean the public are buying the bonds and the FED is receiving the money. What controls the FED is known as Federal Open Market Comity (FOMC) which makes all the FED's decision. There is also something known as the Fed Fund Rate which is when banks borrow money from each other.
#4 blog video
Loan able Funds have the same/ similar graph as all others just representing different shifts of the money market and the the loan able funds market. The money market deficit means that the government wants more money which will increase the interest rate. Increasing loan able funds also increases interest rates, which is taking a demand for both which will also increase the interest rate. Decreasing the supply money government will demand for a great value of money which will cause the supply to decrease and interest rate to increase.
#5 blog video
Money creation process are such as money multiplier, and multiplier deposit expansion. Money creation process is when it is creating money by making loans. In this video they have used required reserves (RR) which is the percentage that banks must keep in the reserves from someones deposit. They also mention about excess reserves (ER) which is what the bank can loan out frrom someones deposit, which is the part that is not in the required reserves. There is equations to figure out how much for required reserves, excess reserves, and demand deposits. Wording of questions are very tricky on what exactly that they are asking. Money being re deposited is the multiplier deposit expansion.
#6 blog video
American money is not only used for our use, but also for the government to borrow from us. If there is an increase in government spending, there will be an increase in demand of money due to the amount of money the government is borrowing. US has the most debt, from borrowing so much from us, Americans, Aggregate Demand (AD) can increase just how it can in many other scenarios, but in this specific scenario it caused it because government is increasing their spending which will increase the demand of money. Government can either help or hurt us, but in this video it caused aggregate demand to increase. In this video they mention about the fisher effect which is the increase in interest rate so it can be equivalent to the increase in price level, an example is such as when interest rate increases by 1% also will the inflation rate increase by 1%.
Monday, March 21, 2016
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
(interest rate decrease= AD increases)
#2- If there is an 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 decrease)
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)
Open Market Operations (OMO)- the FED buys/sells government bonds (securities)
- this is the most important and widely used Monterrey policy
To increase the money supply, the FED should BUY government securities.
To decrease the money supply , the FED should SELL government securities.
Monetary policy Expansionary Contraction
(easy money) (tight money)
RECESSION INFLATION
-----------------------------------------------------------------------------------------------------------------
OMO buy bonds sells bonds
----------------------------------------------------------------------------------------------------------
Discount Rate decrease increase
---------------------------------------------------------------------------------------------------------
Reserve Requirement decrease increase
loans- increase loans- decrease
AD- increases AD- decrease
GDP- increase GDP- decrease
MS- increase MS- decrease
i- decrease i- increase
Federal Funds Rate- where FDIC member banks loan each other overnight loans
Prime Rate- interest rate that banks give to their most credit worthy customers
(better interest rate-------------> better deals)
+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
(interest rate decrease= AD increases)
#2- If there is an 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 decrease)
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)
Open Market Operations (OMO)- the FED buys/sells government bonds (securities)
- this is the most important and widely used Monterrey policy
To increase the money supply, the FED should BUY government securities.
To decrease the money supply , the FED should SELL government securities.
Monetary policy Expansionary Contraction
(easy money) (tight money)
RECESSION INFLATION
-----------------------------------------------------------------------------------------------------------------
OMO buy bonds sells bonds
----------------------------------------------------------------------------------------------------------
Discount Rate decrease increase
---------------------------------------------------------------------------------------------------------
Reserve Requirement decrease increase
loans- increase loans- decrease
AD- increases AD- decrease
GDP- increase GDP- decrease
MS- increase MS- decrease
i- decrease i- increase
Federal Funds Rate- where FDIC member banks loan each other overnight loans
Prime Rate- interest rate that banks give to their most credit worthy customers
(better interest rate-------------> better deals)
Thursday, March 10, 2016
Banks and the Creation of Money ( Bank balance sheets)
How do banks "create" money?
-by loaning out deposits
Where do loans come from?
-from deposits who take cash and place it in their banks
How are the amounts of potential loans calculated?
-by using a balance sheet or a T- account that shows liabilities and assets
Bank Liabilities (the right side of the T-account sheet)
#1= demand deposits (DD) or check able deposits (CD)
1)cash deposits from the public
2)they are liabilities because they belong to the depositors
#2= owners equity- the values of stocks held by the public ownership of banks shares
Key Concept for AP concerning liabilities-
- If DD comes in from someones cash holdings then that DD is already part of the money supply
- If the DD comes in from the purchase of bonds (by the Fed) then this creates new cash then creates new money supply
Bank assets (the left side op=f the T- account sheet)
#1= Required Reserves (RR)- percentages of demand deposits that must be held in the vault so that some depositors have access to their money
#2= Excess Reserves (ER)- source of new loans
DD=RR+ ER
***************BOTH SIDES MUST BE BALANCED**************
#3= Property
#4= Securities (bonds)- purchased by a bank or new bonds sold to the bank by the Federal reserved. These bonds can be purchased from the banks and turned into cash and immediately becomes available as excess reserves
-by loaning out deposits
Where do loans come from?
-from deposits who take cash and place it in their banks
How are the amounts of potential loans calculated?
-by using a balance sheet or a T- account that shows liabilities and assets
Bank Liabilities (the right side of the T-account sheet)
#1= demand deposits (DD) or check able deposits (CD)
1)cash deposits from the public
2)they are liabilities because they belong to the depositors
#2= owners equity- the values of stocks held by the public ownership of banks shares
Key Concept for AP concerning liabilities-
- If DD comes in from someones cash holdings then that DD is already part of the money supply
- If the DD comes in from the purchase of bonds (by the Fed) then this creates new cash then creates new money supply
Bank assets (the left side op=f the T- account sheet)
#1= Required Reserves (RR)- percentages of demand deposits that must be held in the vault so that some depositors have access to their money
#2= Excess Reserves (ER)- source of new loans
DD=RR+ ER
***************BOTH SIDES MUST BE BALANCED**************
#3= Property
#4= Securities (bonds)- purchased by a bank or new bonds sold to the bank by the Federal reserved. These bonds can be purchased from the banks and turned into cash and immediately becomes available as excess reserves
Fed
Function of Fed-
*issue paper money
*set reserved requirements and hold reserved of banks
* lends money to banks and charge them interest
*they are check cleaning system for banks
*acts like a personal bank to the government
*supervises member banks
*controls money supply in the economy
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 required reserve ratio is the 5 of demand deposits (checking account balances that must not be loaned out
- typically the required reserve ratio = 10%
3 types of multiple deposit expansion questions
type 1 - calculate the initial change in excess reserves
* a.k.a the amount a single bank can loan from the in initial deposit
type 2- calculate the change in loans in the banking system
type 3- calculate the change in the money supply
*sometimes type 2 and type 3 will have the same result. (i.e no Fed involvement)
*issue paper money
*set reserved requirements and hold reserved of banks
* lends money to banks and charge them interest
*they are check cleaning system for banks
*acts like a personal bank to the government
*supervises member banks
*controls money supply in the economy
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 required reserve ratio is the 5 of demand deposits (checking account balances that must not be loaned out
- typically the required reserve ratio = 10%
3 types of multiple deposit expansion questions
type 1 - calculate the initial change in excess reserves
* a.k.a the amount a single bank can loan from the in initial deposit
type 2- calculate the change in loans in the banking system
type 3- calculate the change in the money supply
*sometimes type 2 and type 3 will have the same result. (i.e no Fed involvement)
Wednesday, March 9, 2016
Time Value of Money
Time Value of Money- is a dollar today worth more than a dollar tomorrow?
-yes
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)
**********expressed as a decimal************
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
---
k
EXAMPLE PROBLEM
Assume that inflation is expected to be 3% and that the nominal interest rate on simple interest saving is 1%.
Step 1: Calculate the real interest rate
r%= i% - π%
r%= 1%- 3%= -2% or -.02
Step 2: Use the simple interest formula to calculate the future value of 1$1.
v= (1+ r)^n *P
v=(1+(-.02))^1 *1
v= (0.98) * 1
v= $0.98
--------------------------------------------------------------------------------------------------------------------------
Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded
1. What happens to the quantity demanded of money when interest rates increase?
- quantity demanded falls because individuals would prefer to have interest earnings assets instead of borrowed liabilities.
2. What happens to the quantity demanded increases. There is no incentive to convert cash into interest earning assets.
The Demand for Money
- money = downward slope
What causes money to shift?
1. Δ in price level
2. Δ in income
3. Δ in taxation that affects investment
********money supply is always vertical*********
Increase in Money Supply
Increase money supply--> decrease interest rate-->increase investments--> increase AD
Decrease in Money Supply
Decrease money supply-->increase interest rates-->decrease investment-->decrease AD
-----------------------------------------------------------------------------------------------------------------------
Financial Sector
Financial Assets VS. Financial liabilities
Financial Assets:
- stocks and bonds
-provide an expected future benefits
- it is what you OWN
VS.
Financial Liabilities
- it is simply what you OWE
Interest rate- it is the cost of borrowing money
Stocks VS. Bonds
Stocks:
- financial assets that convey ownership in a company (part owner)
VS.
Bonds:
- a promise to pay a certain amount of money plus interest in the future
What do banks do?
- a bank is a financial intermediary
+uses liquid assets (bank deposits)to fiance the investments of borrowers
+process is known as Fractional Reserve Banking\
(Fractional Reserve Banking- a system in which depository institutions hold liquid assets less than the amount of deposits)
-can take the form of
1. currency in bank vaults
2. Bank reserves- deposits held at the Federal Reserve
Basic Accounting Review
*T- account (balance sheet)
+statements of assets and liabilities
*Assets (amounts owned)
+items to which a bank holds legal claim
+the uses of funds by financial intermediaries
*Liabilities (amounts owed)
+the legal claims against a bank
+ the sources of funds for financial intermediaries
-yes
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)
**********expressed as a decimal************
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
---
k
EXAMPLE PROBLEM
Assume that inflation is expected to be 3% and that the nominal interest rate on simple interest saving is 1%.
Step 1: Calculate the real interest rate
r%= i% - π%
r%= 1%- 3%= -2% or -.02
Step 2: Use the simple interest formula to calculate the future value of 1$1.
v= (1+ r)^n *P
v=(1+(-.02))^1 *1
v= (0.98) * 1
v= $0.98
--------------------------------------------------------------------------------------------------------------------------
Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded
1. What happens to the quantity demanded of money when interest rates increase?
- quantity demanded falls because individuals would prefer to have interest earnings assets instead of borrowed liabilities.
2. What happens to the quantity demanded increases. There is no incentive to convert cash into interest earning assets.
The Demand for Money
- money = downward slope
What causes money to shift?
1. Δ in price level
2. Δ in income
3. Δ in taxation that affects investment
********money supply is always vertical*********
Increase in Money Supply
Increase money supply--> decrease interest rate-->increase investments--> increase AD
Decrease in Money Supply
Decrease money supply-->increase interest rates-->decrease investment-->decrease AD
-----------------------------------------------------------------------------------------------------------------------
Financial Sector
Financial Assets VS. Financial liabilities
Financial Assets:
- stocks and bonds
-provide an expected future benefits
- it is what you OWN
VS.
Financial Liabilities
- it is simply what you OWE
Interest rate- it is the cost of borrowing money
Stocks VS. Bonds
Stocks:
- financial assets that convey ownership in a company (part owner)
VS.
Bonds:
- a promise to pay a certain amount of money plus interest in the future
What do banks do?
- a bank is a financial intermediary
+uses liquid assets (bank deposits)to fiance the investments of borrowers
+process is known as Fractional Reserve Banking\
(Fractional Reserve Banking- a system in which depository institutions hold liquid assets less than the amount of deposits)
-can take the form of
1. currency in bank vaults
2. Bank reserves- deposits held at the Federal Reserve
Basic Accounting Review
*T- account (balance sheet)
+statements of assets and liabilities
*Assets (amounts owned)
+items to which a bank holds legal claim
+the uses of funds by financial intermediaries
*Liabilities (amounts owed)
+the legal claims against a bank
+ the sources of funds for financial intermediaries
Friday, March 4, 2016
Unit 4 Money
UNIT
4
Money
I.
Uses of
Money
a. Medium
of exchange: it is basically borrow or trade
b. Unit Of
Account: It establish economic value
-EX:
Piano lesson and you pay $10 for ever lesson. Instead of paying instead the
teacher wanted a cake. So from now on they pay with cake
c. Store
Of Value: money holds its value over a period of time where as products may not
( no matter where you store your money it doesn’t lose its value) Except the
purchasing power
II.
Types
of Money
A.) Commodity
Money: It gets its value form the type of material from which it is made
-
EX: GOLD AND SILVER COINS
B.) Representative
money: It is paper money back from something tangible that gives it value
-
EX: IOU MONEY
C.) Fiat
Money: Money basic the government said so
III.
Characteristics
of Money
A. Divisible:
break the dollar bill into many ways.
B. Portable:
Put your money in socks, bra
C. Uniform:
A dollar it’s a dollar, doesn’t matter if you change the president but a dollar
is a dollar
D. Acceptable:
E. Scare: Money
will always be around but it wont
F. Durable:
IV.
Money
Supplied
A. M1
Money: 75 percent of money that comes from circulation comes from here (It is
liquid- easy to convert)
1. Cash
and coins >Currency
2. Checkable
deposits >Demand deposits
3. Traveler’s
checks
B. M2
Money
-
Consist 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)
C. M3
Money
-
Consists of M2 Money and certificated of deposit
money know as CD’s
-
What CD’s are if you keep money in it will grow
Monday, February 29, 2016
Fiscal Policy (last unit of Unit III)
Fiscal Policy- changes in the expenditures or tax revenues of the federal government.
2 tools of fiscal policy
1. Taxes- government can increase or decrease spending.
2. Spending- government can increase or decrease spending.
Deficits, Surplus, and Deficit
- balanced budget
+revenues= expenditures
(it has been 16 years since we have had one)
- budget deficit
+revenues < expenditure
-budget surplus
+revenues > expenditures
- government debt
+sum of all deficits - sum of all surpluses
-deficits
+government must borrow money when it runs a budget deficit
+government borrows from:
1. individuals
2. corporations
3. financial institutions
4. foreign entities of foreign government
Fiscal Policy Two Options
- discretionary fiscal policy (action)
+expansionary fiscal policy (think deficit)
+contraction fiscal policy (think surplus)
+Non- Discretionary fiscal policy (no actions)
Discretionary VS. Automatic Fiscal Policies
Discretionary-
+Increasing or decreasing governments spending and/ or taxes in order to return the economy to full employment discretionary policy involves policy makers doing fiscal policy in response to an economic problem.
CAN NOT HAPPEN AT THE SAME TIME
Automatic-
+unemployment compensation and marginal tax rates are examples of automatic polices that help militate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.
Expansionary Fiscal Policy (easy) VS. Contraction Fiscal Policy (tight)
* combat a recession *combat inflation
*increase government spending * decrease government spending
decreases taxes increase taxes
Automatic or Built in Stabilizers
-anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring expect action by policy makers.
EX. transfer payments, social security, Medicare, medicate, unemployment, VA benefits
Tax Structures
- progressive tax system
+average tax rate rises with GDP
EQUATION: tax revenue
------------------
GDP
-proportional tax system
+average tax rate remains constant as GDP changes
-regressive tax system
+average tax rate falls with GDP
2 tools of fiscal policy
1. Taxes- government can increase or decrease spending.
2. Spending- government can increase or decrease spending.
Deficits, Surplus, and Deficit
- balanced budget
+revenues= expenditures
(it has been 16 years since we have had one)
- budget deficit
+revenues < expenditure
-budget surplus
+revenues > expenditures
- government debt
+sum of all deficits - sum of all surpluses
-deficits
+government must borrow money when it runs a budget deficit
+government borrows from:
1. individuals
2. corporations
3. financial institutions
4. foreign entities of foreign government
Fiscal Policy Two Options
- discretionary fiscal policy (action)
+expansionary fiscal policy (think deficit)
+contraction fiscal policy (think surplus)
+Non- Discretionary fiscal policy (no actions)
Discretionary VS. Automatic Fiscal Policies
Discretionary-
+Increasing or decreasing governments spending and/ or taxes in order to return the economy to full employment discretionary policy involves policy makers doing fiscal policy in response to an economic problem.
CAN NOT HAPPEN AT THE SAME TIME
Automatic-
+unemployment compensation and marginal tax rates are examples of automatic polices that help militate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.
Expansionary Fiscal Policy (easy) VS. Contraction Fiscal Policy (tight)
* combat a recession *combat inflation
*increase government spending * decrease government spending
decreases taxes increase taxes
Automatic or Built in Stabilizers
-anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring expect action by policy makers.
EX. transfer payments, social security, Medicare, medicate, unemployment, VA benefits
Tax Structures
- progressive tax system
+average tax rate rises with GDP
EQUATION: tax revenue
------------------
GDP
-proportional tax system
+average tax rate remains constant as GDP changes
-regressive tax system
+average tax rate falls with GDP
Thursday, February 25, 2016
Here is a link below that can explain further in depth about consumption and spending ! Hope you all enjoy it ! :)
https://www.youtube.com/watch?v=vj7XExwChwI
https://www.youtube.com/watch?v=vj7XExwChwI
Consumption and Savings
-disposable Income (DI)
-income after taxes or net income
- DI=gross income - taxes
2 choices
-with disposable income, households can either
+consume (spend money on goods and services)
+save (not spend money on goods and services
Consumption
-household spending
-the ability to consume is constrained by
+the amount of disposable income
+the propensity to save
-do households consume DI= 0
+autonomous consumption
+dis saving
Saving
-household NOT spending
-the ability to save is constrained by
+the amount of disposable income
+the propensity to consume
-do house holds save if DI= 0?
+NO
APC and APS
APC= Average Propensity to Consume
APS= Average Propensity to Save
ALWAYS =1
*APC + APS = 1
* 1 - APS= APC
*APC> 1 (dis saving)
* -APC (dis saving)
Marginal Propensity to consume (MPC)
-the fraction of any change in disposable income that is consumed
EQUATION: Change in Consumption
--------------------------------
Change in Disposable Income
MPC= ΔC
-------
ΔDI
Marginal Propensity to Save (MPS)
-the fraction of any change indisposable income that is saved
EQUATION: Change in Savings
-----------------------------
Change in disposable income
MPS= ΔS
-------
ΔDI
Marginal Propensity
ALWAYS = 1
* MPC + MPS= 1
*MPC = 1 - MPS
*MPS = 1 - MPC
***********remember, people do two things with their disposable income, they consume it or save it*******
The Spending Multiplier Effect
- an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending (AS) or aggregate demand (AD)
EQUATION: Change in AD
-----------------------
Change in spending
Multiplier= ΔAD
---------------
ΔC, Ig, G, or Xn
Calculating the Spending Multiplier
-the spending multiplier can be calculated from the MPC or MPS
Multiplier= 1 1
-------- OR -----
1 - MPC MPS
-multipliers are positive (+) when there is an increase in spending, a negative (-) is when there is a decrease.
Calculating the Tax Multiplier
-when the government taxes, the multiplier works in reverse
+because now money is leaving the circular flow
Tax Multiplier (it's negative)
= -MPC -MPC
------------ OR ----------
1- MPC MPS
-if there is a tax cut then the multiplier is positive, because there is now more money in the circular flow
-disposable Income (DI)
-income after taxes or net income
- DI=gross income - taxes
2 choices
-with disposable income, households can either
+consume (spend money on goods and services)
+save (not spend money on goods and services
Consumption
-household spending
-the ability to consume is constrained by
+the amount of disposable income
+the propensity to save
-do households consume DI= 0
+autonomous consumption
+dis saving
Saving
-household NOT spending
-the ability to save is constrained by
+the amount of disposable income
+the propensity to consume
-do house holds save if DI= 0?
+NO
APC and APS
APC= Average Propensity to Consume
APS= Average Propensity to Save
ALWAYS =1
*APC + APS = 1
* 1 - APS= APC
*APC> 1 (dis saving)
* -APC (dis saving)
Marginal Propensity to consume (MPC)
-the fraction of any change in disposable income that is consumed
EQUATION: Change in Consumption
--------------------------------
Change in Disposable Income
MPC= ΔC
-------
ΔDI
Marginal Propensity to Save (MPS)
-the fraction of any change indisposable income that is saved
EQUATION: Change in Savings
-----------------------------
Change in disposable income
MPS= ΔS
-------
ΔDI
Marginal Propensity
ALWAYS = 1
* MPC + MPS= 1
*MPC = 1 - MPS
*MPS = 1 - MPC
***********remember, people do two things with their disposable income, they consume it or save it*******
The Spending Multiplier Effect
- an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending (AS) or aggregate demand (AD)
EQUATION: Change in AD
-----------------------
Change in spending
Multiplier= ΔAD
---------------
ΔC, Ig, G, or Xn
Calculating the Spending Multiplier
-the spending multiplier can be calculated from the MPC or MPS
Multiplier= 1 1
-------- OR -----
1 - MPC MPS
-multipliers are positive (+) when there is an increase in spending, a negative (-) is when there is a decrease.
Calculating the Tax Multiplier
-when the government taxes, the multiplier works in reverse
+because now money is leaving the circular flow
Tax Multiplier (it's negative)
= -MPC -MPC
------------ OR ----------
1- MPC MPS
-if there is a tax cut then the multiplier is positive, because there is now more money in the circular flow
Wednesday, February 24, 2016
More about Classical VS. Keynesian
Classical Keynesian
- competition is good the invisible hand -competition is flawed
(economy will fix itself) -AD is the key not AS
-economy will balance at full employment -in saving cause recession leaves
-believed in the trical down effect -ratchet effects and sticky wages block
-economy is always close to or at Say's Law
full employment - in the long run we are all dead
- competition is good the invisible hand -competition is flawed
(economy will fix itself) -AD is the key not AS
-economy will balance at full employment -in saving cause recession leaves
-believed in the trical down effect -ratchet effects and sticky wages block
-economy is always close to or at Say's Law
full employment - in the long run we are all dead
Classical VS. Keynesian Debate
Topic Classical Keynesian
Modern followers - Adam Smith -J.M Keynes
-J.B Say
-David Ricardo
-Alfred Marshall
----------------------------------------------------------------------------------------------------------------------
Say's Law -supply creates its own demand -depression refuit Say's Law
-production= income= spending -demand creates its own supply
-under spending is unlikely -under spending persist
-whatever output that is production will be demanded
-----------------------------------------------------------------------------------------------------------------------
Savings and -Savings=Investment Income Saving does not equal investment
Investments Savings(leakage)=investment Different Motivations
(injection) Savings Motivations
-future needs -interest rates
-precaution -rate of profit
expectations
-habit
-income level
1965 -interest rate
-------------------------------------------------------------------------------------------------------------------------
Lonable Funds Market -investment from savings, cash,
checking accounts
Ig=gross investment -lending creates money which
r=real interest rate causes supply of money to
sm= supply of money increase (-->sm ^)
-inflation and unemployment
are unstable
------------------------------------------------------------------------------------------------------------------------
Wage/price flexibility -prices and wages are -prices and wages are inflexible
flexible downward downward(ratchet effect)
-----------------------------------------------------------------------------------------------------------------------
Supply Curve -vertical line -horizontal line
-----------------------------------------------------------------------------------------------------------------------
Output and Employment -AS determines output and -AD determines output and employment employment
--------------------------------------------------------------------------------------------------------------------------
Unemployment -rarely exists due to wage/ -usually exists with
price flexibility +external (war)
s=saving -cause:external (war) +internal
i=investment (s does not equal i)
-------------------------------------------------------------------------------------------------------------------------
Aggregate Demand (AD) -AD determines the price -AD changes due to the
level determinate
-AD reasonably stabled if -AD is unstable even if money
money supply is stabled supply is stabled due to fluctuation
in investment spending
-----------------------------------------------------------------------------------------------------------------------
Basic equation MV=PQ (1965-1972) C+Ig+g+Xn=GDP
(1973-present)
------------------------------------------------------------------------------------------------------------------------
Role of Government -monitory rules -believed in fiscal policy
-maintain a steady money supply (tax and spend)
-Laiz Fairs is best -believe in an active government
-economy is self regulating -economy is not self regulating
-------------------------------------------------------------------------------------------------------------------------
Inflation -caused by too much money -caused by too much demand
% Change in PL^
--------------------------------------------------------------------------------------------------------------------------
How long the short -short time -very long time
run is
-----------------------------------------------------------------------------------------------------------------------
Emphasis Today -microeconomics -macroeconomics
Modern followers - Adam Smith -J.M Keynes
-J.B Say
-David Ricardo
-Alfred Marshall
----------------------------------------------------------------------------------------------------------------------
Say's Law -supply creates its own demand -depression refuit Say's Law
-production= income= spending -demand creates its own supply
-under spending is unlikely -under spending persist
-whatever output that is production will be demanded
-----------------------------------------------------------------------------------------------------------------------
Savings and -Savings=Investment Income Saving does not equal investment
Investments Savings(leakage)=investment Different Motivations
(injection) Savings Motivations
-future needs -interest rates
-precaution -rate of profit
expectations
-habit
-income level
1965 -interest rate
-------------------------------------------------------------------------------------------------------------------------
Lonable Funds Market -investment from savings, cash,
checking accounts
Ig=gross investment -lending creates money which
r=real interest rate causes supply of money to
sm= supply of money increase (-->sm ^)
-inflation and unemployment
are unstable
------------------------------------------------------------------------------------------------------------------------
Wage/price flexibility -prices and wages are -prices and wages are inflexible
flexible downward downward(ratchet effect)
-----------------------------------------------------------------------------------------------------------------------
Supply Curve -vertical line -horizontal line
-----------------------------------------------------------------------------------------------------------------------
Output and Employment -AS determines output and -AD determines output and employment employment
--------------------------------------------------------------------------------------------------------------------------
Unemployment -rarely exists due to wage/ -usually exists with
price flexibility +external (war)
s=saving -cause:external (war) +internal
i=investment (s does not equal i)
-------------------------------------------------------------------------------------------------------------------------
Aggregate Demand (AD) -AD determines the price -AD changes due to the
level determinate
-AD reasonably stabled if -AD is unstable even if money
money supply is stabled supply is stabled due to fluctuation
in investment spending
-----------------------------------------------------------------------------------------------------------------------
Basic equation MV=PQ (1965-1972) C+Ig+g+Xn=GDP
(1973-present)
------------------------------------------------------------------------------------------------------------------------
Role of Government -monitory rules -believed in fiscal policy
-maintain a steady money supply (tax and spend)
-Laiz Fairs is best -believe in an active government
-economy is self regulating -economy is not self regulating
-------------------------------------------------------------------------------------------------------------------------
Inflation -caused by too much money -caused by too much demand
% Change in PL^
--------------------------------------------------------------------------------------------------------------------------
How long the short -short time -very long time
run is
-----------------------------------------------------------------------------------------------------------------------
Emphasis Today -microeconomics -macroeconomics
Monday, February 22, 2016
Interest Rates and Investment Demand
What is investment?
-money spent or expenditures on:
+New Plants factories)
+ Capital equipment (machinery)
+Technology hardware and software)
+New homes
+inventories goods sold by procedures)
Expected Rates of Return
How does business make investment decisions?
- cost/benefit analysis
How does business determine the benefits?
-expected rate of return
How does business count the cost?
-interest costs
How does business determine the amount of investment they undertake?
-compare expected rate of return to interest cost
+if expected >interest cost, then invest
+if expected return < interest costs, then do not invest
Real Interest Rate (r%) Vs. Nominal Interest Rate (i%)
Whats the difference?
- nominal is the observable rate of interest. real subtracts out inflation (π%) an is only known as post factor.
r%= real interest rates
i%= nominal interest rates
π%= inflation rates
EQUATION: r% = i% - π%
What determines the cost of an investment decision?
- the real interest rate (r%)
Investment Demand Curve (ID)
What is the shape of investment demand curve?
-downward sloping
Why?
- when interest rates are high fewer investments are profitable; when interest rates are low, more investments are profitable.
Shifts in Investment Demand (ID)
-cost of production
+lower costs shift ID ---->
+higher costs shift ID <----
-business taxes
+lower business taxes shift ID ---->
+higher business taxes shift ID <---
- technological change
+new technology shifts ID --->
+lack of technological change shifts ID <---
-stock of capital
+if economy is low on capital, ID --->
+if economy has much capital, ID <---
-expectations
+positive expectations shift ID --->
+negative expectations shift ID <---
-money spent or expenditures on:
+New Plants factories)
+ Capital equipment (machinery)
+Technology hardware and software)
+New homes
+inventories goods sold by procedures)
Expected Rates of Return
How does business make investment decisions?
- cost/benefit analysis
How does business determine the benefits?
-expected rate of return
How does business count the cost?
-interest costs
How does business determine the amount of investment they undertake?
-compare expected rate of return to interest cost
+if expected >interest cost, then invest
+if expected return < interest costs, then do not invest
Real Interest Rate (r%) Vs. Nominal Interest Rate (i%)
Whats the difference?
- nominal is the observable rate of interest. real subtracts out inflation (π%) an is only known as post factor.
r%= real interest rates
i%= nominal interest rates
π%= inflation rates
EQUATION: r% = i% - π%
What determines the cost of an investment decision?
- the real interest rate (r%)
Investment Demand Curve (ID)
What is the shape of investment demand curve?
-downward sloping
Why?
- when interest rates are high fewer investments are profitable; when interest rates are low, more investments are profitable.
Shifts in Investment Demand (ID)
-cost of production
+lower costs shift ID ---->
+higher costs shift ID <----
-business taxes
+lower business taxes shift ID ---->
+higher business taxes shift ID <---
- technological change
+new technology shifts ID --->
+lack of technological change shifts ID <---
-stock of capital
+if economy is low on capital, ID --->
+if economy has much capital, ID <---
-expectations
+positive expectations shift ID --->
+negative expectations shift ID <---
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