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 GDP and price in short run. Negative Demand curve-shift AD curve left, decrease both real GDP and price level in SR. When output is above full employment, the wage rate will rise, shifting AS upward POSITIVE demand shock-P inc, Y inc {long run adjustment=Y>fe, wage inc, unit cost inc, P inc, Y dec y = yfe When Md is a positive function of income-the dec of tax will raise the equil interst rate In the long run monetary policy can change the rate of inflation If FED buys $2000 in bonds from bond dealer who deposits in bank, reserves, dd, TA, TL all inc by 2000 US demand for money Inc, if investors became concerned about increased riskiness of stocks If actual int rate is below equil int rate, Price of bonds will decrease In Short run purchase of bonds-will lower int rate, increase spending, increase output If price of oil inc- AS will inc due to decline in wages, returning economy to full employment. short run decrease in gov't purchases-decrease real GDP because of multiplier effect. declinde will be lessened by decrease in the price level and the interest rate.

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