Chapter 8
- Aggregate output (y)
- The total quantity of goods and services produced in an economy
- Aggregate income (y)
- The total income received by all factors of production in a given period
- consumption = MPC (y) + intercept
- Marginal Propensity to Consume
- fraction of income that is consumed
- Marginal Propensity to Save
- MPC + MPS = 1
- Planned investment
- Those additions to capital stock and inventory that are planned by firms
- if (y) < consumption + investment, planned investment > actual investment
- (y) output, needs to increase
- Interest rates and planned investment are negatively correlated
- Actual investment
- The actual amount of investment that takes place, it includes items such as unplanned changes in inventories
- if (y) > consumption + investment, actual investment > planned investment
- (y) output, needs to lower to equalize with demand
- Planned aggregate expenditure
- The total amount the economy plans to spend in a given period. Equal to consumption plus planned investment
- Investment Multiplier
- The expected return for every dollar invested by a firm
- 1 / MPS
- Change in Y = IM * Change in investment spending
- Change in Y = GM * Change in government spending
- Change in Y = TM * Change in taxation
- Gm - Government Multiplier
- Tm - Tax multiplier
- Yd - disposable income
- income after taxes
- ( Y - T )
- Y = C + I + G
- S = I
- C = a + bYd
- S = a + bYd
- Balanced Budget Multiplier = Gm + Tm = 1
Chapter 10
An Overview of Money
- Commodity Money
- Has intrinsic value like gold, silver, crops like corn or wheat
- Fiat or token money
- Items designated as money that are intrinsically worthless
- Stamped with legal tender is what makes it worth something
- Legal tender
- Money that a government has required to be accepted in settlement of debts
- M1 or Transactions money
- Money that can be directly used for transactions
- M1 = Cash outside banks + demand deposits + traveler’s checks + other checkable deposits
- M2 or broad money
- M1 plus savings accounts, monkey market accounts, and other near monies.
- M2 = M1 + savings account + money market accounts + other near monies
- The only time M2 changes is when expenses are made, movement between checking and savings does not change M2, only changes M1.
- When there is a recession
- Increase the money supply in order to lower the interest rates.
- Lowering interest rates increases consumption and investment which stimulates the economy
- When there is inflation
- Retract the money supply in order to increase the interest rates.
- 4 Tools used by FED to control money supply
- g = required reserve ratio
- Percentage that banks must keep with the federal reserve
- When g raises, bank must keep more money with federal reserve, causing the Money supply to go down, thusly the interest rate goes up.
- g ^ = Less MS = ^ interest rates
- Discount Rate
- Rate that banks borrow from the FED
- DR ^ = Less MS = ^ interest rates
- DR down = ^ MS = lower interest rates
- Kept higher than the FFR because it looks bad optically when the banks have to borrow from the government in order to make their payments
- Federal Funds Rate (FFR) key interest rate
- The overnight rate at which banks borrow from each other
- if FFR goes up, so does mortgage rate, car loans, student loans etc. Because the banks are having to pay more for their liquidity
- FFR ^ = Less MS = ^ interest rates
- Open market operations
- FED Buy bonds = ^ MS = lower interest rates
- FED Sells bonds = lower MS = ^ rates
- R = gD
- R = require Reserves
- g = required reserves ratio
- D = deposits
- Money Multiplier = 1/g
- Excess Reserves = Actual Reserves - R
- Loans = Excess Reserves * Money Multiplier
- Total MS in bank = Initial Deposit * Money Multiplier
Chapter 11
- Money Demand
- Money you hold in M1 for transaction purchases.
- Opportunity cost of money you hold is the interest rate
- uses X axis to determine level of Md
- Movement along the Md curve is caused by a change in MS
- Shift of the Md curve is caused by a change in Y (aggregate output/income) or PL ( Price Level) in the same direction
- rise in aggregate output, ^ in Md
- fall in PL, lower of Md
- shift of the money demand curve
- MS = Deposit * MM
- for multiple banks loans = deposit - R
- Fed actions affect MS, which affect Md
- Injection = Investment
- Leakage = Savings function ex. -100 + 0.25Y