Econ

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Money-commodity money, Fiat. Money supply=currency in hands of public+other assetsas means of payment (demand deposits, traverler's checks, savings accounts, time deposits, mutual funds) M1=currency in hands of public+traverler's checks+demand deposits+other checkable deposits CU+CD M2= M1+savings account+small time deposits(M3= M2+Large term deposits(not insured)+institutional money market mutual funds+long term repos(repurchaseagreements, gov't securities)+Long term euro dollar deposits. Balance Sheet Assets= Cash in vault 1mil. Balance at Fed 5 mil.=reserves6mil. Bonds 10 mil. Loans 50 mil. Buildings 20 mil. Total Assets=86 mil. Liabilities=60mil. Savings deposits 10mil. Total Liab=70 mil Net worth= TA-TL=16 mil. Money sup= CU+[1/RRR]*(reserves) RRR=% of demand deposits Fed requires banks to hold as cash RRR=10% (.10)(60m)=6.0 RRRDD=res. DD=[1/RRR] (reserves) 1/RRR is demand deposit multiplier Probs. time lag+exact control over change depends on banks lending IF RRR dec, Ms would inc Chang in Ms=1/rrr(change in reserves) Money sup.=CU+DD or CU+[1/RRR]*(reserves) IF RRR inc Money sup dec. If RRR dec money inc. How Fed changes Money sup. 1 RRR 2. Buy sell bonds (Open market operations) How Fed dec Money sup-open market sales, inc RRR, inc the discount rate If taxes cut-Fed make open market sales to lower Ms 3. Discount Rate=rate at which banks can borrow from Fed. If discount rt. inc. banks's cost of funds inc., they borrow less =Money sup dec. If RRR=.2 and gov't buys 10 mil in bonds Ms inc by 50 mil Money Demand= Income +, Prices +, Interest rate inc Money demand dec. Equilibrium=Md=Ms EX. Ms=500 Md=530-300r r=.10 Fed inc Ms=Ms>Md excess supply of money=excess demand for bonds If Fed sells Bonds=Ms dec, int rate inc. price of bonds dec. Bank reserves dec. If money kept out of bank=Ms dec since DD dec Money demand curve shift right- if GDP,income, or the price level increases. IF Int rate is higher than equil.= excess supply of moneyand demand for bonds, price bonds inc., int rate dec. IF Int rate is lower than equil=Excess demand for money and supply of bonds, price bonds dec, int rt inc If FED buys bonds=Ms inc, Excess of money and demand for bonds, price bonds inc, int rt dec. real GDP inc Initial[Ms dec, r inc, I dec, a dec, Y dec] response[Md dec, r dec, I inc, a inc, Y inc] end result Y dec r inc r=Auto Stabilizer Initial[T dec, a inc, AE inc, Y ic] response[Md inc, r inc, I dec, a dec, Y dec] End result= Y inc, r inc I dec, and a is ambiguous. T dec=(G-T) deficit. Auto Stabilizers=taxes (income), transferpayments, prices, imports, foward looking behavior Aggregate demand curve-tells the equilibrium real GDP at any price level. P-Y reletionship when goods and money market are in Equil. INC in Ms-AD shifts right DEC in Ms shift AD left AD shifts rightward-gov't purchases, investment, autonomous, or net expeort inc. or taxes dec. AD shifts Leftward-gov't purchases, investment, autonomous, or net exports dec, or when taxes inc. If price inc.=inc in Md interest rate inc., and Equil GDP dec. If prices dec=decrease in money supply, interest rate dec, Equil GDP inc. Aggregate Supply-P-Y reletionship when input(factor) markets are in Equil. As total output Increases-Greater amounts of inputs may be needed to produce a unit of out put, Price of non labor input rises, Nominal wage rises. in short run, inc in real GDP, by causing unit cost to inc, price inc OIL-higher oil prices AS shift up WEATHER-Good=shift down, bad=shift up TECHNOLOGY-improvments=AS shift down Basic Pricing Model-(1+% markup over cost)(marginal cost) if % markup =0 perfect= competition Gov't Purchases inc-Fiscal policy-AE inc, Y inc, Md inc, r inc, P inc, AD inc, P inc LR: If Yun, wages dec, P inc, AS shift down return to Yfe Stagflation-high unemployment and high inflation (result of negitive supply shocks) Demand Shocks-caused by spending shocks or by change in monetary policy G INC, GDP inc, Unit cost inc, P inc, Md inc, Int. rt inc, a and Ip dec, =Gdp inc, but less cause P inc Ms INC, r dec, a and Ip inc, GDP inc, Unit cost inc, P inc, Md inc, r inc, a and Ip dec, GDP dec.=GDP inc but by less cause of P inc Positive demand shock-shift AD right, inc, both real

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