Step 29: Unit 5

Short run aggregate supply 

•          Time is too short for wages to adjust to the price level 
•          Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor supply decisions and wage demands accordingly 
•          Fixed contract, no pay increase

3 Ranges

•          Horizontal/Keynesian
•          Intermediate
•          Vertical/classical 

Wages

·         Nominal wage

o   amount of money received per hour per day or per year

·         Sticky wages

o   Where the nominal wage level is set according to an initial price level, and it does not vary

Levels

·         Keynesian

o   Price level is fixed

o   Wage level is fixed

o   Unemployment level is flexible

o   (Output depends on changes in employment)

·         Intermediate

o   Price level is flexible

o   Wage level is fixed

o   Employment level is flexible

o   (Output depends upon changes in price level and employment) 

·         Classical

o   Price level is flexible

o   Wage level is foxed

o   Employment level is fixed

o   (Output depends on changes in price level) 

Long run aggregate supply

•          Flexible wage and price level 
•          They offset each other
•          Shifts are connected to the PPC graph
•          Time is long enough for wages to adjust to the price level
•          Growth in some format, technological change, capital stock gains (shifts) 

Demand pull inflation

•          Pulling something towards you
•          AD will increase

Cost push inflation

•          Pushing something away
•          Decrease production 

Recession

•          Not going to be spending
•          AD is decreasing 

Economic growth

•          Prices are going to be going up
•          AD is decreasing

Unit 4 Economiks

Blog Assignment 3/29

Part 1 There are three types of money: commodity, representative, and fiat. Commodity money are backed by commodities that function as money. Representative money isn’t used anymore because the value of the money fluctuates. Fiat money is backed by the word of the government that it is money. It doesn’t represent anything. There are three functions of money: as a medium (substance through which things pass) of exchange – money is used for exchanges when buying things; as a store of value - when you put it away, it will hopefully still have its value; save it; and as a unit of account- price => worth (quality) 
Part 3 Why Demand for money slopes down: when price is high quantity for money is low, quantity is fixed, because it’s set by Fed. If you increase demand for money, you put an upward pressure for interest rates. To stabilize interest rate, increase supply of money.
Part 4 An expansionary (easy money) policy is meant to increase money supply. Reserve requirements-percentage of banks’ total deposits that they must hold onto. They could lower the rr. Contractionary policy is the opposite of expansionary. It is meant to decrease the money supply. You would raise the rr in a tight money policy.
Part 7 Loanable funds are money that is available in the banking system for people to borrow. Supply of loanable funds comes from the amount of money that people have in banks- depended on savings. If people have the incentive to save more, increase supply of LF. When the government is demanding a great deal of money, it’s decreasing the national supply of funds, jacking up the interest rate.
Part 8

Banks create money by making loans. When banks loan, they use the monetary multiplier. The monetary multiplier is =1/rr. Maximum potential money creation in a banking system can be figured out by multiplying the amount of excess reserves in a bank by the monetary multiplier. Maximum potential money creation assumes that the bank has excess reserves to lend out.

Part 9 When the government running a deficit: they borrow money from Americans. Demand for money if increased=> increase interest rate. Increase aggregate demand, increase pl, increase gdp. Change in supply of money= change of price. Fisher effect-interest rate & pl is equivalent.

Step 28: Countercyclical Fiscal Policies (End of Unit 4)

Countercyclical Fiscal Policy

Fighting a Recession :

• Policy Name = Expansionary
• Taxes = cut, decreased, lowered
• Government Spending = increase
• Budget Result = deficit

Aggregate Model :

• C should = increase
• G should = increase
• AD should = increase

Money Market :

• DM will = increase
• i should = increase
• ( Ig on Aggregate Model will ) = go down

Loanable Funds Market :

• The budget issue will cause
• SLF = decrease
• DLF = increase

Fighting a Inflation :

• Policy Name = Contractionary
• Taxes = increase
• Government Spending = decrease
• Budget Result = surplus

Aggregate Model :

• C should = decrease
• G should = decrease
• AD should = decrease

Money Market :

• DM will = decrease
• i should = decrease
• ( Ig on Aggregate Model will ) = go up

Loanable Funds Market :

• The budget issue will cause
• SLF = increase
• DLF = decrease

Monetary Policy ( Recession ) :

- The Fed will :

1. buy bonds ← MS ↑ ( bank reserves will ↑ as  well )
2. lower discount rate
3. lower required reserves
4. lower federal fund rate

• MS ↑
• i ↓
• Ig ↑
• AD ↑
• GDP ↑

International Trade :

- Fiscal Policy :

• D$ ↑
• $ appreciate
• Export ↓
• Net Export ↓
• AD ↓
• GDP ↓

- Monetary Policy ( continuing from the Recession section above ) :

• D$ ↓
• $ depreciate
• Export ↑
• Net Export ↑
• AD ↑
• GDP ↑

Step 27: Rated stuff right here

Federal Fund

• opposite of bank reserves & money supply

Prime Rate

• interest rate that is given to a bank's most credit worthy customers

Loanable Funds Market

• market where savers and borrowers exchange funds (QLF) at real rate of interest (r%)
• demand for loanable funds, or borrowing, comes from households, firms, the government, and foreign sector
• demand for loanable funds is in fact the supply of bonds
• supply of loanable funds, or savings, comes from households, firms, the government, and foreign sectors
• supply of loanable funds is also demand for bonds

Change in Demand for Loanable Funds

• demand for loanable funds equals more borrowing 
• supplying bonds
• more borrowing = more demand for LF ( → )
• less borrowing = less demand for LF ( ← )
• i.e.
• government deficit spending = more borrowing = more LF
• less investment demand = less borrowing = less demand LF

Change in Supply of Loanable Funds

• supply of LF = saving
• demand for bonds
• more saving = more supply of LF ( → )
• less saving = less supply of LF ( ← )
• i.e.
• government budget surplus = more saving = more supply of LF ( SLF → r % ↓ )
• decrease in consumers MPS = less savings = less supply LF ( SLF ← r % ↑ )
• Loanable Funds Market determines real interest rate
• ∆ in real interest will affect Ig
• when the government does fiscal policy, it will affect the LF Market
• ∆ in savings/borrowing creates a ∆ in → r % ∆
• LF Market relates savings and borrowing

Step 26: Tools of Monetary Policy

Tools of Monetary Policy

Fiscal Policy

• controlled by Congress and the President
• tax created by spending

Monetary Policy

• controlled by the FED and the federal reserve bank
• Open Market Operation
• Discount Rate
• Federal Fund Rate
• Reserve Requirement

Monetary Policies

• Open Market Operations (OMO)

• to buy or sell securities (bonds)
• Expansionary (recession, "easy money")
• buy bonds
• money supply would increase
• Contractionary (inflation, "tight money")
• sell bonds
• money supply would decrease

• Discount Rate

• interest rate that the FED charges banks for taking out loans
• Expansionary
• decrease in interest rate
• Contractionary
• increase in interest rate

• Reserve Requirement

• percentage or amount the bank has to hold and keep in reserve
• Expansionary
• decrease in required reserves
• Contractionary
• increase in required reserves

• Bank Reserves & Money Supply have a direct relationship.

Step 25: Three, no, FOUR types of Multiple Deposit Expansion

Type 1: Calculate initial change in excess reserves

-aka:the amount a single bank can loan from initial deposits

Type 2: Calculate change in loans in the banking system (money multiplier)

Type 3: Calculate change in the money supply

-sometimes Types 2 and 3 will have the same results-i.e. no FED involvement

Type 4: Calculate change in demand deposits