Finals
studyguide
equation:Ireal interestrate
i5
inflation rate
Approximation:i
Fisher
w
=
interest
precise:i 5
=
5
+
+
rate
(r.51)
+
Working
bank
with
Asset -items
own
Liability-debt
Networth
-
Asset
Required
Excess
bybank,
owed
excess
by
asset
Deposits
(obligation)
Networth
-
Total
value.
of
Liabilitybank capital
over
Liability +
reserve:
possession
bank
=
reserve
sheets:
balance
-
reserve
nor
-
required
-
required
reserve
ratio
reserve
Moneymultiplier:Your
Potential DepositCreation:Moneymultiplier
·
Excess
reserve
Gresham's
Medium
law
(The function
Exchange:Money
of
money):
of
acts
as
intermediary
an
between
buyer
the
store of value
Conflict:Medium
exchange
of
us
"Moneythatcannotfulfill
as
medium
and seller.
value
store
of
well
the
function
store of value
of
is
exchange"
of
Ex. Coin debasement:Actofdecreasing the amounto fprecious metal
coin
continuing
while
to
circulate at
law:"An
artificiallyovervalued
undervalued
tend to drivean
money
outofcirculation"
money
"Bad moneydrives out
good
money"
in
face value.
"Overvalued coin"
Gresham's
preferred
artificially
a
Demand for
and
money
simple Monetarystimulus
the
model.
Demand for money(keynes):
Medium
-
-
exchange
of
Precautionarymotives
in
-
unforeseen
case
unemployment,
Speculative
-
*
Motive (store
Monetarypolicy (Limited
Changing
1.
Changing
2.
reserve
of
such
as
sickness,
exchange)
value)
of
regime):The
use
interestrates to affectthe
of
the
required
reserve
ratio (ror)
macroeconomy.
the amount
changes, thus changing
moneymultiplier. (Rarelyused)
discountrate:Interestrate changed bythe central bank on
that banks
gives
can
lead
the
loans
it
other commercial banks.
to
·Attempt
3.
(Medium
etc
requirement:Bychanging
reserve
contingencies,
of
to
Open market operation:the
change
the
Federal fund rate.
federal open marketcommittee (FOMC) makes the
decision
regarding these open marketoperations.
to decrease interestrates
open marketoperation:Attempt
FORC purchase bonds -> Money
to bank ->
moneysupply- interestrate +
Expansionary
given
constructionaryopen
FOMC sells
interestrate"
->
->
bonds given to banks
GDPU
Monetarystimulus:
1)
central bank
employs policytools
lending
2)
Bank
3)
Money supplyincrease
increases
4) Interestrate decrease
5)
low
6) More
interestrate
->
GDPR
marketoperation:Attemptto
bonds
more
planned investment
investment
->
more
jobs.
->
in
increase
exchange
interest
rates
for money
->
moneysupply of
Ample
Bank
·
Federal
reserve
keeps
regime
excess
the
reduced
reserves
regardless
reserves
the
or
to
anyreserve
requirements.
of
0%
on
3/26/20
and there'scurrentlyno
plans
to
reinstate it.
changes
in
supply
The tools used
on
reserves
of
are
doesn'timpactmoneysupplyor nominal interestrates.
administered interestrates:changing
the
discountrate
or
the interest
paid
reserves
1) Federal
reserves
lower its
2) As interest rates fall,
3) Increased
4) Economic
administered
interestrates
planned investment
increases
planned investment fuels macroeconomic growth through the multiplier
growth creates more jobs and pushes unemploymentrate down.
process
Moral Hazard and
* "Moral hazard" refers to
a
financial risk
due
to
"You take the risk,
the
a
subprime Mortgage
situation where
being protected
someone
from
a
crisis
partylacks
any potential
the
incentive
consequences
else deals with the consequences.
to
guard
Ex.
insurance
against
Role
of financial
MBS
(Mortgage
derivatives
bucked
subprime
in
security):investment products
of home loans
that
obligation):
a
similar to bonds. Each
MBS
in
boughtfrom
periodic payments
receives
a
bundle
the
bank
of
similar
coupon payments
complex structured
loans
MBS consists
real estate debts
and other
issued them. Investors
to bond
CDO (collateralized debt
crisis.
and other
product that
finance
assets
sold to
and
is
backed bya
pool
institutional investors,
of
typically
bytranches
CDS(credit default
swap):a financial derivative that allows
their
an
investor to snap
or
offset
credit risk with thatofanother investor. To swap the risk of
default, the lender buys
to reimburse
them
ifthe
a
CDS
borrower
from
another investor
defaults.
who
agrees
significant
of market
Market power:
Equity:Markets
you
can
However,
negative
one
company
will
lead
to
are
blind to
afford it.
price
fairness. Don't
control
externality:transaction
public goods:How difficult
Nominal
is
ganges
assessement.
adjusted
for
short
term
is
reduces
that
power,
itto
the
result,
selfishness
their
results
care
what
want it for, justthat
you
ceiling
efficiency
imposes
don'tget
inflation. Nominal
of
much
too
Solution:price control, price
Generally
Real GDP
has
disappointing
When
outand
work
sociallydisappointing
produce
can
doesn't
the invisible hand
failure:proves
deny
cost
included
someone
in
while
economy
decision
access
does not. Also
party.
making.
3rd
a
on
can
real GDP
theydon'tpay.
if
be used
is
a
to calculate are
more
accurate
Classical theories of
deficits
·Deficitand the
Gov't
interest rate
which
crowding
demand
the
deficit increases
for creditin the marketfor
loanable funds
interestrates
increases
effect
out
due
rates
interest
Higher
to
demand for
increase
credits
reduces
investments.
private
supply
~gout
Interst
planned
inr
planned
a
int
We
keynesian
Full
Youngadsout
Qof
deficits
theories of
out
crowding
unlikelyin
is
deep
depends
multiplier effects
The benefit
and almostn o
crowding-out
on
of
both
crowding
out
during
to
boostfuture
higher
"animal spirits"
and
interest rates
gout spending
higher you'tspendings
of
investment due
can
of
recession
Private investment
·Positive
economic slack.
cases
·economymayexperience partial
·
you'l
interest rates. The
profitexpectation
outweigh
can
and
resulting
lead
to
the
increase
a
losses
output
in
"crowding
private
in
private
in" of
investment.
Endogenous
money
·Higher gon't spending
hired
and
workers.
real
shortage
crowding
These
create
new
workers
spend
jobs
which
puts
more
therefore
and
money
moneyin
raises
the
hands
aggregated
of
demands
GDP
Higher agy
borrowing
·Effective
can
demand
boosts
rises
moneysupply
investor
to
expectation
keepup
with
future
of
higher
profits
demand for
loans
loanable funds.
of
out
is
thus
unlikelyduring
times
economic slacks.
of
and
so
encourages
there
no
is