Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Pensions crisis wikipedia , lookup
Business cycle wikipedia , lookup
Real bills doctrine wikipedia , lookup
Early 1980s recession wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Fractional-reserve banking wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Monetary policy wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Quantitative easing wikipedia , lookup
Interest rate wikipedia , lookup
Macroeconomic Policy Fundamentals Chapter 13 Discussion Topics Characteristics of money Federal Reserve System Changing the money supply Money market equilibrium Effects of monetary policy on economy The federal budget deficit The national debt Fiscal policy options Functions of Money Medium of exchange – facilitates payment to others for goods and services Unit of accounting – assessing profitability of businesses, household budgets and aggregate variables like GDP Store of value – money is a liquid asset which has value in investment portfolios and cash flow decisions of businesses and households Page 244 Functions of the Fed 1. 2. 3. 4. Supply the economy with paper currency Supervise member banks Provide check collection and clearing services Maintain the reserve balances of depository institutions 5. Lend to depository institutions 6. Act as the federal government’s banker and fiscal agent 7. Regulate the money supply Page 247 Location of the 12 District Federal Reserve Banks Page 246 The Fed’s Policy Tools Reserve requirements – depository institutions are required to maintain a specific fraction of their customers’ deposits as reserves. banks must hold as vault cash or on deposit at a Federal Reserve Bank. As of June 2004, the reserve requirement was 10% on transaction deposits, and there were zero reserves required for time/savings deposits Currently play limited role in money creation in US Page 248 The Fed’s Policy Tools Discount rate – rate depository institutions pay when they borrow from the Fed They borrow from Fed if they want to increase loans but does not have any excess reserves at the moment Also to meet reserve requirements Federal Funds Market - interbank market trafficking in reserves; banks with excess reserves can lend to banks that are short on 24 hour basis. Page 249 The Fed’s Policy Tools Open market operations – Fed can buy or sell government securities to alter the money supply (used most frequently) Federal Open Market Committee (FOMC) directs the operations Directive to sell results in decrease in reserves at depository institutions because deposits are withdrawn to pay for the securities Page 249 Role of the Board of Governors of the Federal Reserve System Page 247 Role of the Board of Governors of the Federal Reserve System Page 247 Role of the Board of Governors of the Federal Reserve System Page 247 Key role played by the Federal Open Market Committee or FOMC Page 247 Role of the 12 District Federal Reserve Banks located throughout the country Page 247 Determinants of the Money Supply Existing money supply curve. Note it is perpendicular to the quantity axis, implying it is unaffected by the interest rate. Page 253 Expansionary monetary policy actions will shift the MS curve to the right over a period of 12 months or so. Page 253 Contractionary monetary policy actions, on the other hand, will shift the money supply curve to left over a similar time period. Page 253 Suppose a depositor in Bank Ag sells $1 million in government securities to the Fed. He then deposits the proceeds from the sale in his bank. If the fractional reserve requirement ratio is 20 percent, Bank Ag will have excess reserves of $800,000. It can increase the volume of its loans by $800,000. Suppose the proceeds of these loans are deposited in Bank B. Follow the trail to the Total line. From this example, we can make generalizations About the extent to which the money supply will increase when reserves are Increased. Page 307 Change in the Money Supply We can skip tracing deposits through the economy by using the following money supply (MS) equation: MS = (1.0 ÷ RR) × TR = MM × TR where TR represents total reserves and RR is the reserve requirement ratio. The expression with the brackets is known as the money multiplier (MM). We can restate this equation in terms of the change in the money supply as follows: MS = (1.0 ÷ RR) × TR = MM × TR Page 252 Change in the Money Supply Using the example in Table 13.3 of the $1 million deposit on page 307 and 20% reserve requirements ratio, we see that the change in the money supply is: MS = (1.0 ÷ .20) x TR = 5.0 x $1 million = $5 million This results in a change in loans of loans = MS - TR = $5 million - $1 million = $4 million See bottom line in Table 13.3 Page 252 Change in money supply Change in = loan volume Initial + infusion Page 251 Impacts of Policy Tools Expansionary actions: Fed buys securities Fed lowers the discount rate Fed lowers required reserve ratio Bernanke Effects of action: Total reserves increase Total reserves increase Money multiplier increases Page 253 Impacts of Policy Tools Expansionary actions: Fed buys securities Fed lowers the discount rate Fed lowers required reserve ratio Effects of action: Inc Ms Total reserves increase Total reserves increase Money multiplier increases Contractionary actions: Fed sells securities Fed raises the discount rate Fed raises required reserve ratio Effects of action: Dec Ms Total reserves decrease Total reserves decrease Money multiplier decreases Page 253 Determinants of the Money Demand Demand for Money: Why we hold cash? Transactions demand for money – carry cash to pay for normal expenditures Precautionary demand for money – carry cash to cover unexpected expenditures Speculative demand for money – hold cash as an asset in investment portfolios since the value of cash does not decline during periods of falling asset prices. Page 254 The money demand curve is given by equation (13.5): MD = c –d(R) + e(NI) where R is the rate of interest and NI is national income. The coefficient d is the slope of the curve and e represents MD÷ NI. Page 255 Increase in income increases demand for money MD = c –d(R) + e(NI) Page 255 Money market interest rate given by intersection of demand and supply Reflects the opp cost of holding money rather than income-earning asset. Page 255 M S* 0.06 Expansionary monetary policy lowers interest rates Page 255 M S* 0.14 Contractionary monetary policy raises interest rates Page 255 The full effects of this change could take 12 months or more to register in bank deposits Page 256 A change in the money supply will alter the equilibrium interest rate in the money market Page 256 We know from Chapter 12 that a change in interest rates will lead to movement along the planned investment function….increasing or decreasing new investment Page 256 We also know from Chapter 12 that increased investment expenditures, a component of GDP, increases the demand for labor, lowers unemployment and thus fuels further growth in national income (increases AD) Page 256 Eliminating Recessionary and Inflationary Gaps What is the magnitude of the recessionary gap? Page 257 What is the magnitude of the recessionary gap? It is YFE – Y1 Page 257 The use of expansionary monetary policy actions to push aggregate demand from AD1 to AD3 increases real GDP from Y1 to Y3 while only increasing the general price level to P3. Page 257 Inflation rate (P3 – P0) ÷P0 Recessionary gap of YFE – Y1 is partially closed to YFE – Y3 Page 257 The further use of expansionary monetary policy to push aggregate demand from AD3 to AD4 increases real GDP from Y3 to YFE (full employment GDP), but increases the general price level to P4. Page 257 Inflation rate (P4 – P3) ÷P3 Somewhat inflationary But does not swamp growth Recessionary gap fully closed Page 257 The use of expansionary monetary policy to attain YPOT by shifting aggregate demand to AD5 will increase the general price level to P5. Inflation rate (P5 – P4) ÷P4 Would cause inflation Inflationary gap created…..use contractionary monetary policy Page 313 Microeconomic Interest Rate Implications • Contractionary monetary policies that drive up interest rates will depress investment expenditures by businesses and households • Expansionary monetary policies that lower interest rates will stimulate investment expenditures in the economy Interest Rate Impacts on a 10Year $150K Business Loan Interest rate Annual total PI payment Annual interest payment Total interest payment 8 percent $22,354.69 $7,354.69 $73,546.90 14 percent 28,757.67 13,757.67 137,576.88 20 percent 35,782.44 20,782.44 207,824.40 Page 259 Interest Rate Impacts on a 20Year $100K Home Mortgage Interest rate Monthly total PI payment Monthly interest payment Total interest payment 8 percent $848.78 $432.08 $103,707.46 12 percent 1,115.73 699.06 167,773.46 Page 259 What is Fiscal Policy? Taxation by federal, state and local governments Government spending by federal state and local governments Budget deficit and the national debt Page 259 Fiscal Policy Options Automatic fiscal policy instruments: take effect without explicit action by policymakers (e.g., progressive tax rates; unemployment compensation –built in stabilizers) Discretionary fiscal policy instruments: require explicit actions by the president or Congress (e.g., passing a tax cut law; increase government spending authorized by Congress) Page 266 Impacts of Policy Tools Expansionary actions: Cut taxes Increase government spending Effects of action: Increase disposable income Increase aggregate demand Congress & Obama Page 269 Impacts of Policy Tools Expansionary actions: Cut taxes Increase government spending Effects of action: Increase disposable income Increase aggregate demand Contractionary actions: Increase taxes Cut government spending Effects of action: Decrease disposable income Decrease aggregate demand Congress & Obama Page 269 A federal budget deficit requires the U.S. Treasury to issue more government securities to balance sources and uses of funds… An increase in the sale of government securities reduces the pool of private capital available to finance investment expenditures, raising interest rates… We know from Chapter 12 that higher interest rates depresses investment expenditures… The use of expansionary fiscal policy actions to push aggregate demand from AD1 to AD3 increases real GDP from Y1 to Y3 while only increasing the general price level to P3. Inflation rate (P3 – P0) ÷P0 Recessionary gap partially closed Page 270 The use of expansionary fiscal policy to push demand from AD3 to AD4 increases real GDP from Y3 to YFE (full employment GDP), But increases the general price level to P4. Inflation rate (P4 – P3) ÷P3 Recessionary gap closed…. Page 270 The use of expansionary fiscal policy to attain YPOT by shifting aggregate demand to AD5 will Increase the general price level to P5. Inflation rate (P5 – P4) ÷P4 Inflationary gap created…. Page 270 Monetary Policy Summary Functions of money and the role of the Federal Reserve System in the economy The money multiplier and the growth of the money supply Tools of monetary policy Demand for money and money market equilibrium Policy linkages and timing of full effects Elimination of recessionary and inflationary gaps. Fiscal Policy Summary Difference between discretionary and automatic fiscal policy tools Expansionary and contractionary fiscal policy actions Application to eliminating recessionary and inflationary gaps Budget deficits, national debt and concept of “crowding out”