Newest Assignments and Dates (If assignment is online it shall be stated below)

  • 03-17-2008 - 03-21-2008 -Spring Break (FREEDOM)
  • 03-21-2008 -Art History Outline and images
  • Still during spring break: Read Lord of the Flies for techniques/devices, 3 allusions due.

Tuesday, December 4, 2007

Econ -Unit 4- Chap 15 Notes

Monetary Policy:


  • Consolidated Balance Sheet of the Federal Reserve Banks
    • Assets
      • Two main assets are securities and loans to commercial banks
        • Securities:
          • Government bonds consists largely of Treasury bill, treasury notes, and treasury bonds issued by the gov
            • Part of public debt
          • Mainly bought and sold to influence size of commercial bank reserves and create money by lending
        • Loans to Commercial Banks
          • Commercial banks borrow from FED
            • IOUs are assets to FED because they are claims against the commercial banks
            • To the banks they are liabilities since they have to be repaid
            • Increase revenues
    • Liabilities
      • Reserves of Commercial Banks:
        • Fed requires commercial banks to hold reserves against checkable deposits
        • In FRB they are listed as a liability on the Fed's balance sheet
      • Treasury Deposits:
        • US Treasury keeps deposits in the FRB and draws checks on them to pay obligations
          • Assets to Treasury; liability on Fed's balance sheet
          • Treausry creates and replenishes these deposits by depositing tax reciepts and money borrows from the public
      • Federal Reserve Notes Outstanding
        • When money is circulating outside the FRB it constitutes claims against the assets of the FRB
          • Liability to Feds
  • Tools of Monetary Policy
    • Fed influences money-creating abilities of the commercial banking system
      • Open-Market Operations:
        • Bond markets
        • The Fed's open-market operation consist of the buying of government bonds from, or selling of government bonds to commercial banks and the general public
      • Buying Securities
        • If the Fed decides to have FRB buy bonds from commercial banks or the public the reserves will increase
          • *From Commercial Banks*
            • The commercial banks give up part of their holdings of securities to the FRB
            • FRB increase the reserves of the commercial banks by the amount of the purchase
          • *From the Public*
            • Give up securities to the FRB and gets in payment a check drawn by the FRB on themselves
            • Deposits the check in its account with the Wahoo bank
            • Wahoo sends check against the FRB to a FRB for collection. Wahoo therefore has a increase in reserves
      • Selling Securities
        • Reserves decrease when FRB sells bonds
          • *To Commercial Banks*
            • FRB give up securities that banks acquire
            • Banks pay for those securities by drawing checks against their deposits. The Fed collects those check by reducing the banks reserves
          • *To the Public*
            • FRB sells bond to company, who pay with a check drawn on the Wahoo bank
            • FRB clear this check against the Wahoo bank, reducing Wahoo's reserves
            • Wahoo return canceled check to company reducing company's checkable deposit
    • The Reserve Ratio
      • Fed can manipulate reserve ratio to influence the ability of commercial banks to lend
        • Raising the Reserve Ratio
          • If reserve ratio increase:
            • Increase the amount of required reserves banks must keep
            • Banks lose excess reserves, diminishing ability to create money by lending or they find their reserves deficient and are forced to contract checkable deposits and the money supply
        • Lowering the Reserve Ratio:
          • If the reserve ratio decreased:
            • Bank's lending ability would increase and the banking system's money-creating potential would expand
              • Lowering reserve ratio transforms required reserves into excess reserves and enhances the ability of banks to create new money by lending
            • A change in the reserve ratio affects money creating by:
              • Changing the amount of excess reserves
              • Changing the size of the monetary multiplier
                • Raising the reserve ratio forces banks to reduce the amount of checkable deposits they create through lending
    • The Discount Rate
      • FUNCTION OF CENTRAL BANK: " Lender of last resort"
        • Makes loans to commercial banks
        • FRB changes interest on loans, they charge at the discount rate
        • FRB increase the reserves of the borrowing commercial bank
          • Borrowing from the FRB by commercial banks increase the reserves of the commercial banks and enhances their ability to extend credit
      • Fed has the power to set the discount rate at which banks borrow
      • Fed may raise the discount rate when it wants to restrict the money supply
    • Easy Money and Tight Money
      • How to increase the excess reserves
        • Buy Securities:
          • Purchasing securities in the open market, the Fed can increase commercial bank reserves. When the checks are cleared against it, the commercial banks discover that they have more reserves
        • Lower the Reserve Ratio:
          • Lowering the reserve ratio changes the required reserves into excess reserves and increases monetary multiplier
        • Lower the Discount Rate:
          • Lowering the rate entices commercial banks to borrow more reserves from the Fed
      • These actions are called easy money policy
        • Makes loans less expensive and more available
      • How to reduce AD by limiting the supply of money:
        • Sell Securities:
          • Selling bonds in the market can reduce commercial bank reserves
        • Increase the Reserve Ratio:
          • An increase will strip commercial banks of their excess reserves and decrease the size of the monetary multiplier
        • Raise the Discount Rate:
          • A boost in the rate will discourage commercial banks from borrowing from FRB in order to build up their reserves
      • Actions are called a tight money policy
        • Objective is to tighten the supply of money to reduce spending
    • Relative Importance
      • Buying and selling securities in the open market is the most important of all
        • Has advantage of flexibility
        • Impact is prompt
        • Changing the reserve requirement is less important
          • Fed uses sparingly
          • Can accomplish goals easier through open-market operations
          • Has huge effect on bank profits
  • Monetary Policy, Real GDP, and the Price Level
    • Money policy
      • Cause-Effect Chain
        • See fig 15.2
          • Money Market:
            • Transactions demand is directly related to the nominal GDP
          • Investment:
            • Curve shows relationship between the interest rate and the amount of investment spending
            • Changes in the interest rate mainly affect the investment component of total spending, although they also affect spending on durable consumer goods
            • Changes in the interest rate may affect investment spending by changing the relative attractiveness of purchases of capital equipment versus purchases of bonds
            • Impact of changing interest rates is mainly on investment
              • Investment spending varies inversely with the interest rate
          • Equilibrium GDP
            • Investment spending is one of the determinants of AD
            • The greater investment spending the farther to the right lies the AD curve
      • Effects of an Easy Money Policy
        • To increase the money supply the FRB will take some combination of the following actions:
          • Buy gov. securities from banks and the public in the open market
          • Lower the legal reserve ratio
          • Lower discount rate
      • Effects of a Tight Money Policy
        • AD is excessive relative to the economy's full-employment level of a real output
        • FRB will direct FRB to undertake some combination of the following actions
          • Sell gov. securities to banks and the public in the open market
          • Increase the legal reserve ratio
          • Increase the discount rate
  • Monetary Policy in Action
    • Monetary policy has two key advantages over fiscal policy:
      • Speed and flexibility
      • Isolation from political pressure
    • Compared with fiscal it can be quickly altered
    • Focus on the Federal Fund Rate
      • Fed focuses monetary policy on altering the federal funds rate as needed to stabilize the economy
        • Interest rate the banks charge one another on overnight loans
        • Raise federal funds=tighter monetary policy
        • Lower federal funds=easier monetary policy
      • Prime interest rate is the benchmark rate that banks use as a reference point for a wide range of interest rates on loans to businesses and individuals
      • To increase the Federal fund interest rate the Fed sell bonds in the open market
      • Fed buys bonds from banks and the public when it wants to reduce the Federal funds rates
      • The money supply rises because the increased supply of excess reserves lead to more lending and thus greater creation of checkable-deposit money
    • Recent Monetary Policy
      • To counter potential inflation the Fed reduced reserves in the banking system to raise the interest rate
      • During the last quarter of 2000 the economy slowed and the Fed responded by cutting interest rates by a full percentage point in two increments in 2001
        • Economy went into recession
    • Problems and Complications
      • Limitations and faces real-world complication
        • Lags:
          • Monetary policy is hindered by recognition lag and an operational lag
        • Changes in Velocity:
          • Expenditures can be regarded as the money supply multiplied by the velocity of money
          • Velocity may move counter to changes in the money supply in come circumstances
            • May increase at the same time the Fed reduces the money supply to control inflation
            • AD and inflation may not be restrained by as much as the Fed wants
            • Velocity may decline at the same time the Fed takes measures to increase the money supply to combat recession
        • Cyclical Asymmetry
          • Monetary is highly effective in slowing expansions and controlling inflation, but less reliable in pushing the economy from a severe recession
          • Monetary policy may suffer from cyclical asymmetry
          • Tight money policy could deplete commercial banking to the point where banks would be forced to reduce the volume of loans
          • If commercial banks seek liquidity and are unwilling to lend, the effort of the Fed will be of little avail.
          • Severe recession may undermine business confidence that the investment demand curve is what shifts to the left and frustrates as easy money policy
    • "Artful Management" or "Inflation Targeting"?
      • Manage the money supply to avoid inflation on one hand and recession on the other
        • Emphasis on achieving multiple set of objectives:
          • Maintain price stability
          • Smooth business cycle
          • Maintain high levels of employment
          • Promote economic growth
            • Some think the 'artful' approach is unique to Greenspan and someone less insightful may not be as successful
            • Good to combine artful management with inflation targeting
              • Fed would undertake monetary policy to achieve goal
    • Monetary Policy and the International Economy
      • Linkages among the economies of the world complicate domestic fiscal policy
        • Net Export Effect:
          • US fiscal policy may increase domestic interest rate because the gov. competes with the private sector in getting loans
          • Higher interest rate causes the dollars to appreciate in the foreign market
            • Imports rise, exports fall
              • NET EXPORT EFFECT
          • Lower interest rate discourages the inflow of financial capital to the US
            • Demand for dollars in foreign exchange market falls
            • Dollar goes down in value
              • Expansionary monetary policy increases net exports and strengthens monetary policy
        • Macro Stability and the Trade Balance
          • US net exports should be zero
          • Easy money policy
            • The easy money policy is appropriate for the alleviation of unemployment anf sluggish growth, is compatible with the goal of correcting a balance-of-trade deficit
          • Tight money policy restrains inflation
            • Larger trade deficit
              • A tight money policy that is used to alleviate inflation conflicts with the goal of correcting a balance-of-trade deficit

1 comment:

Blogger said...

eToro is the most recommended forex trading platform for new and advanced traders.