Review outline

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Ch. 8: Money and inflation
• Money
– Definition
– Types
– Functions
• Gresham’s law &
bimetallic standard
• History of banking
• Fractional reserve
banking and the
creation of money
• History and structure of
the Fed
• Fed tools for controlling
the money supply
– Discount rate
– Reserve ratio
– Open market operations
• Components of the
money supply
– Monetary base,
reserves, M1, M2
Ch. 8: Money and inflation
• Balance sheet entries for
– Open market operation
– Change in reserve ratio
– Change in public cash
holdings
• Equation of exchange
– Quantity theory of money
• Link between inflation
and money supply growth
• Money market and
determination of interest
rates
– Factors affecting money
supply /demand
– Bond market when interest
rates are above or below
equililbrium.
Financial markets
• Present and future value
• Bond prices and interest
rates
– One year bond
– Zero coupon bond
• Determinants of bond
yields
– Risk
– Term
– Liquidity
• Stock market
– Fundamental value of stock
– Stock metrics
• PE ratio
• Beta
– Factors influencing stock
prices
– Efficient markets
hypothesis
• Futures markets and price
expectations.
Ch. 9: Exchange rates and the balance
of payments
• Supply/demand model and
determinants of exchange
rates
– Interest rates,
imports/exports, expected
asset returns, inflation,
expected future exchange
rates, etc.
• Interest rate parity
– Conditions required for parity
– Arbitrage opportunities
when parity doesn’t hold
– Implications for exchange rate
movements when interest
rates aren’t equal
• Purchasing power parity
– Conditions required for parity
– Arbitrage opportunities when
parity doesn’t hold
– Implications for movements
in exchange rates based on
inflation differentials
Ch. 9: Exchange rates and the balance
of payments
• (X-M=(S-I) + (Tn-G )
• X-M as indicator of a country’s
status as internat’l borrower
or lender.
• Factors affecting a country’s
status as borrower or lender
• Debtor/creditor versus
borrower/lender
• Balance of payments accounts
– Capital, current, official
settlements
– Debits vs credits in accounts
– Implications of surplus or
deficit in each account
• Exchange rate regimes
–
–
–
–
Flexible
Fixed
Crawling peg
How central banks can
manipulate exchange rates and
implications for official
settlements account and trade
flows
Ch. 10: AD and AS
• Determinants of long run
AS
– Labor market
– Production function
• Determinants of short run
AS
– Nominal wages sticky in
short run
– Effect of a movement
along SRAS on prices, real
wages and employment
– LRAS
• Determinants of AD
– C+I+G+(X-M)
– Why AD is downward
sloping.
– Fiscal policy (taxes or
spending)
– Expectations about
inflation, future income
– Exchange rates
Ch 10 AD and AS
• Implications of
inflation/recessionary
gap for
– Real wages relative to
equilibrium
– Employment relative to
equlibrium
– Unemployment relative
to natural rate
– Real GDP relative to
potential
• Short run and long run
effects of a change in
AD.
• Keynesians versus
others on merits of
policy interventions to
stabilize economy.
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