Blog Assignment on Unit Four Videos

First Video : http://www.youtube.com/watch?v=YLsrkvHo_HA&feature=results_video&playnext=1&list=PL2CB281D126F65E26

• Commodity money are goods that have other purposes that allow for trade, representative money are thinks like the gold system that backs the money, and then there is fiat money, which is money that is accept because the government says it is money. These are the types of money. The functions of money are to act as medium of exchange, to store value, and to be a unit of account. By being a unit of account, it allows us to judge what something is worth in terms of value or quantity.

Second Video : http://www.youtube.com/watch?v=gzFdeM6lUno&feature=bf_prev&list=PL2CB281D126F65E26&lf=results_video

• In the money market, in terms of money, the price paid for or to get money is the interest rate, which is the y-axis on the money market graph. On the x-axis, it is the quantity of money. Demand for money will always slow down, because when prices are increased, the quantity of demand will decrease meaning the interest rate will decrease, allowing for people to borrow more. The supply of money will always be vertical, because it doesn't vary upon interest rate, it is fixed and set by the Fed. The Fed will always want to stabilize interest rate because if it is unstable, then they cannot predict the level of investment or consumer spending that will help manipulate AD to give us the kind of economy we want.

Third Video : http://www.youtube.com/watch?v=XJFrPI8lLzQ&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

• What the Fed does to manipulate money supply is either increase or decrease required reserves, discount rate, or the buying or selling of bonds and securities. Required reserves is the percentage of total bank deposit that the bank has to hold on to. Discount rate is the rate at which banks can borrow money from the Fed overnight. The buying and selling of bonds affects the money supply, because if the government buys bonds, the public gets the money and thereby this increases the money supply. On the other hand, if the government sells bonds, the public will buy it and so the Fed keeps the money, causing the money supply to decrease.

Fourth Video : http://www.youtube.com/watch?v=rdM44CC0ELY&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

• Loanable Funds is the money available in the banking system for the people to borrow from. if the interest rate is down then there is more demand in the money, whereas if it is increased, the demand for money would be lower. The supply of loanable funds comes from the amount of money the people have in their bank, which is dependent on savings. Even though in the AD/AS graph, savings is a leakage, in LF, savings is good because the more money people save, the more money banks have to loan out, thereby increasing the money supply.

Fifth Video : http://www.youtube.com/watch?v=1tUC59pz95I&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

• In the money creation process, banks create money by making loans from their excess reserves. The less that's in the required reserves there are, the more excess reserves there will be. Because there is more excess reserves, more money can be lent out to people. By lending out more money, the money supply would increase. If banks keep a portion of their excess reserves, it would reduce the total amount in the money supply

Sixth Video : https://www.youtube.com/watch?v=k37Y6BKcpsY&index=8&list=PL2CB281D126F65E26

• There is a connection between the money market, loanable funds market, and the AD/AS graph. Let's say the government is experiencing a deficit. In order to fix it, they decide to borrow more money. In doing so, the demand for money is increased in the money market graph as well as the demand for loanable funds in the loanable funds graph. Aggregate demand would increase in the AD/AS graph. Each market experiences an increase from the demand side. The change in the supply of money implies a change in prices. The Fisher Effect tells us that if there is an increase in interest rate, then the price level would go up as well.

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 ↑

Crowding Out

What is Crowding Out ?

• A critique and flaw of Keynesian policies that are applied to fight a recession
• expansionary policy

Why does it happen ?

• The policy of cutting taxes and raising spending will create a budget deficit

So ?

• The budget deficit must be funded and to do this Congress orders the sale of U.S. bonds
• NOT a Monetary Policy tool used by the Fed

This money comes from ?

• Mostly from U.S. citizens, companies, and investment firms

Therefore ?

• Money that could be spent on consumption or used for private savings is now being used to buy bonds

On the Money Market ?

• This will cause the money demand curve to shift outward
• this is a Fiscal event

On the Loanable Funds Market ?

• This will cause the supply curve to shift inward because we are not saving money privately anymore
• It can also cause the demand curve to shift outward because the private and public demand for money increases

On both graphs ?

• The nominal and real interest rates will increase

Therefore on the Investment D graph

• The increase in nominal and real interest rates will cause Ig to decrease

Is this counterproductive ?

• Yes

Then why do it ?

• Fiscal Policy supporters ( Keynesians )insist that gains in Consumption and Government Spending will outweigh any losses in future Gross Private Investment

Why ?

• Consumption and Government Spending are greater than Gross Private Investment and they are short run improvements
• Gross Private Investment is long run and Keynesians don't worry about that
• In the long run, we are all dead

Anymore ?

• This is summarized on the Aggregate Model
• AD will move outward due to the increase in Consumption and Government Spending and then "maybe" move inward due to a loss of Gross Private Investments , but not as much as the increase
• Economy Improves

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 of bonds)
• more borrowing = more demand for LF ( → )
• less borrowing = less demand for LF ( ← )
• ex : government deficit spending = more borrowing = more LF
•        less investment demand = less borrowing = less demand LF

Change in Supply of Loanable Funds :

• supply of LF = savings ( ex : demand for bonds )
• more savings = more supply of LF ( → )
• less savings = less supply of LF ( ← )
• ex : 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

Federal Fund and Prime Rate

- interest rate that commercial banks charge other commercial banks for overnight loans

Two Options :

1. discount rate , borrow from the government
2. borrow from neighboring bank ( sister bank )
• federal fund rate

Primate Rate

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

• good credit, good interest
• bad credit, higher interest
• ideal : 0 - 4 %

Policy Summary and Countercyclical Options

Recession :

An efficient "full employment" economy will probably have

• an annual unemployment rate of 4 - 5 %
• an annual inflation rate of 2 - 3 %

If the economy goes into a recession

• the real GDP will decrease for at least 6 months
• the unemployment rate will go up to 6 % or more
• the inflation rate will go to 2 % or less

If Congress enacts Keynesian Fiscal Policy to attempt to slow or stop the recession, then

• the policy will try to improve C or G ( parts of AD )
• Congress will cut federal taxes
• Congress will increase jobs and spending programs
• the federal budget will create a deficit
• due to changes in Money Demand, interest rates will increase
• ( crowding out might occur, but Keynesians don't care )

If the Federal Reserve employs Monetary Policy options to slow or stop the recession, then

• the policy will target improvement in Ig ( part of AD )
• the FED will target a lower federal fund rate
• the FED can lower the discount rate
• the FED can buy bonds ( Open Market Operations )
• the FED can ( theoretically ) lower the reserve requirement, but probably won't because it is too complex for the banks
• the FED policies will lower the interest rates through changes in the Money Supply
• these options should increase Ig

Inflation :

If the economy suffers from too much demand-pull inflation then

• the unemployment rate will go to 4 % or less
• the inflation rate will go to 4 % or more

If Congress enacts Keynesian Fiscal Policies to attempt to slow or stop the inflation problems,

• the policy will try to decrease  C or G ( parts of AD )
• Congress will increase federal taxes
• Congress will decrease jobs and spending programs
• the federal budget will create a surplus
• due to changes in Money Demand, interest rate will decrease

If the Federal Reserve employs Monetary Policy options to slow or stop the inflation problems, then

• the policy will target decreases in Ig ( part of AD )
• the FED will target a higher federal fund rate
• the FED can increase the discount rate
• the FED can sell bonds ( Open Market Operations )
• the FED can ( theoretically ) raise the reserve requirement, but probably won't because it is too complex for the banks
• These FED policies will increase the interest rates through changes in the Money Supply
• These options should decrease Ig

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

Scenarios to use for help :

FED Actions and Their Effects

1. Sold treasury securities on the open market
• Bank reserves would decrease
• Money supply would decrease
2. Bought treasury securities on the open market
3. Bank reserves would increase
4. Money supply would increase
5. Raised discount rate
• Bank reserves would decrease
• Money supply would decrease
6. Lowered discount rate
• Bank reserves would increase
• Money supply would increase
7. Raised reserve requirement
• Bank reserves would decrease
• Money supply would decrease
8. Lowered reserve requirement
• Bank reserves would increase
• Money Supply would increase