Unit 7

Purchasing Power Parity

When the currency rates are set by the International markets changes will be based on the actual purchasing power of the currency.

For example if the US dollar to the European Euro is a $1.5 to one than each one dollar and fifty cents will buy one euro.
However if an item in the US costs a dollar fifty then cost more or less than one euro the parody is lost. Markets will adjust quickly inflating rates or pressure fix rates.

Why do we exchange currneeycies?
1. Invest in other countries. Stocks and bonds.
2. Sell exports and buy imports.
3. Build factories or stores in other markets
4. Hold currencies in bank accounts for futures imports emports or business loans
5. Speculate on currency values
6. Control imbalances.

Unit 7

Foreign Exchange Market

- The foreign currency holdings of the United States Federal Reserve System
- When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments
- when there is a balance of payments deficit the fed depleted it's reserves of foreign currency and credits the balance payments
- The official  Reserves zero out the balance of payments

Active v. Passive official reserves
- The United States is passive in its use of official Reserves. It's doesn't not seek it manipulate the dollar exchange rate
- The people's republic of China is active in it's use of official reserves. It's actively buys and sells dollars in order to maintain a steady exchange rate with the United States.

Unit 6

Official Reserves

- The foreign currency holdings of the United States Federal Reserve System
- When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments
- when there is a balance of payments deficit the fed depleted it's reserves of foreign currency and credits the balance payments
- The official  Reserves zero out the balance of payments

Active v. Passive official reserves 

- The United States is passive in its use of official Reserves. It's doesn't not seek it manipulate the dollar exchange rate
- The people's republic of China is active in it's use of official reserves. It's actively buys and sells dollars in order to maintain a steady exchange rate with the United States.

Unit 6

Balance of Payments

Is a measure of money inflows and outflows between the United States and the rest of the world. (ROW)
- Inflows are referred to as CREDITS
- Outflows are referred to as DEBIT

The balance of Payments is divided into 3 accounts
- Current Account
- Capital/Finance
- Official reserves

Double Entry Bookkeeping
- Every transaction in the balance of Payments is recorded twice in accordance with standard accounting practice.
    Ex US manufacturer John exports $50 million worth of farm equipment to Ireland.
     - a credit of 50 million to the current account
    
Current Account
- Balance of trade or net exports
        Exports of goods and services - import of goods and services

        Exports create a credit to the balance of Payments

        Imports create a debit to the balance to the balance of Payments

Net Foreign Income
- Income earned by US owned assets - income paid to foreign held U.S. assets
Ex. Interest payments on US owned Brazilian bonds minus interest payments on German ownered US Treasury bonds

Net Transfers (tend to be one sided)
Ex. Mexican migrant workers workers send money to family in Mexico.

Capital/ Financial account
- the balance of capital ownership
- includes the purchase of both real and financial assets
- direct investment in the United States is a credit to the capital account

Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account.
Ex. The intel factory

- Purchase of foreign financial aasets represents a debit to the capital account.
Ex. Warren buffet buys stocks in Petrochina.

- Purchase of domestic Fianacal assrts by foreigners represents a credit to the capital account.

Relationship between current and capital account.
- the current account and capital account should zero eachother out. 

Unit 5

Supply Side

Is the belief that the AS curve will determine levels of inflation unemployment and economic growth. To increase the economy the AS curve should shift to the right which will always benefit the company first.

Focus on marginal tax rates (which are the amount paid on the last dollar earned or on each additional dollar earned)
By reducing the marginal tax rate supply siders believe that you will encourage more people to work longer and forgo leisure time for entra income. Support that help GDP growth by arguing thay the high tax rate and current system of transfer payments provide disincentives to work, invest, innovat, and undertake entrepreneurial ventures.

Reagonnomics

-Lowered the margial tax rate to get the US out of a recession.

Lafer curve it is a trade-off between tax rates and government revenue. Used to support supply side argument.

3 criticisms of Lafer Curve

- Research suggests that the impact of tax rates on incentives to work, save and invest are small
- tax cuts increase demand which can fuel inflation and cause demand to exceed supply
- where the economy is actually located on the curve is difficult to determine 

Unit 5 Notes

Phillips Curve: 

Represents the relationship between unemployment and inflation. The trade of between inflation and unemployment only occurs in the short run.

Two points 

- Short run- inverse relationship between inflation and unemployment. When inflation increase unemployment goes down. Relevance to Okun's law. Since wages are sticky inflation changes move the points on the SRPC. If inflation persists and expected rate of inflation rise then the entire SRPC moves upwars causing inflation. If inflation expectation drop due to technology or economic growth then the SRPC will move downward.
AS shocks (rapid increase in resource cost) can cause higher rates of unemployment.

- Long run- occurs at the natural rate of unemployment. (4-5 percent) If the natural rate of unemployment the vertical line changes. Represented by vertical line. No trade off between unemployment and inflation in the long run. Meaning economy produces at full employment level. LRPC will only shift if the LRAS curve shifts.

Misery index is the combination of unemployment and inflation in any given year. Single digit memory is good. (4-5 percent)

Unit 4 Notes

Unit 4 Blog Video Summaries

1. The most primitive type of money nowadays is known as Commodity Money, Representative Money, and Fiat Money.  Each of these types of money serves as a different method of payment. Commodity (goods that serve different purposes), Representative (gold, silver), Fiat (money that is legal tender, must be accepted from transactions, backed by Gov.). There are three main functions of money which are known as medium of exchange, store of value, and unit of account. The main function of money considered nowadays is medium of exchange.

 

2. The Money Market Graph’s Label of Axis’s are Vertical (i-interest rate) and Horizontal (Quantity of Money). Demand of Money on the graph is sloping downwards because when the price is high the quantity demand is low and vice versa. Supply of Money is on the middle of your graph, in between the DM. The supply of money is set by the FED. 

  

3. The FED’s two major tools of policy are known as Expansionary and Contractionary. The FED controls the RR either as vault cash or on reserve with a Fed branch. If the Fed wants to increase the money supply they decrease the RR, which increases ER. The FOMC (Federal Open Market Committee) makes decisions on Open Market transactions. 

4. Loanable Funds (money that is available in the market for people to borrow) gets tied with the Money Market. Label of Axis’s are Vertical (i-interest rate) and Horizontal (Quantity of Loanable Funds). The demand of loanable funds is downwards sloping because when the interest rate is lower people demand more money and vice versa. The supply of  loanable funds comes from the amount of money people have in banks which depends on savings.

5. In the Money Creation Process banks make money by creating loans. The money multiplier formula is  one divided by reserve requirement. We can get from $500 loan to a $2500 increase through the process of Multiple Deposit Expansion. If any banks in a question have excess reserves your total will be reduced.

6. Most of Government's deficit is due to its owning of the United States population. This video basically summarizes the relation between the various markets such as Money market, Loanable Funds, and AD-AS graphs. Fisher Effect states that the inflation and interest rate have to be the same.

Unit 4 Banks

Creating a Bank

- A single bank can create money through loans by the amount of excess reserves
- The banking system as a whole can create money by a multiple deposition money multiplier of the initial excess reserves. 

 How banks work

Assets

Liabilities and Equity

demand deposits: money put into bank 

timed deposits (CD's)  

loans from: Federal Reserve and banks

shareholder's equity: (to set up a bank must invest own money in to to have a stake in the banks success or failure)

Factors that weaken the effectiveness of the deposit multiplier

1. If banks fail to loan out all of their excess reserves
2. If bank customers take their loans in cash rather than in new checking account deposits it creates a currency or cash drain.

Unit 4 Functions of the FED

Unit 4 Money Market

 

The money market graph allows us to essentially compare the money supply of the economy to the money demanded. The money demanded is the most liquid forms of money. Essentially, it’s the cold hard cash–the dollar bills and the silver in our pockets. The money market graph allows us to evaluate the effects of money demand and money supply and their relation to the nominal interest rates of an economy.

Unit 4 Loanable Funds Market

Loanable Funds Market

- The market where savers and borrowers exchange funds at the real rate of interest
- The demand for loanable funds or borrowing comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds.
- The supply of loanable funds or saving comes

 

Changes in the demand for loanable funds

- Remeber that demand for loanable funds equals borrowing
- More borrowing equals more demand for loanable funds
- Less borrowing equals less demand for loanable funds
Examples, government deficit spending equals more borrowing equals more demand for loanable funds
Less investment

Changes in the supply of loanable funds

- Remember that supply of loanable funds equals saving

Unit 4 Fiscal Policy

Fiscal Policy

- Changes in the expenditures or tax revenues of the federal government.

2 tools of fiscal policy

1. Taxes - gov can increase or decrease taxes
2. Spending - gov can increase or decrease spending

Deficits, Surpluses, Debt

- Balanced budget
  Revenues equals expenditures
- Budget deficit
  Revenues is less than expenditures
- Budget Surplus
  Revenues is greater than expenditures
- Government Debt
- Government must borrow money when it runs a budget deficit
- Government borrows money from individuals, corporations, financial institutions, foreign entities, foreign governments.

Two options in Fiscal policy

- Discretionary fiscal policy
  Expansionary fiscal policy
  Contractioanry fiscal policy

Discretionary v. Automatic fiscal policies

Discretionary is increasing or decreasing  gov spending and or taxes in order to return to the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem
Automatic unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation.
Contractionary vs. Expansionary fiscal policy

Contractionary fiscal policy- policy designed to decrease aggregate demand
   - Strategy for controlling inflation

 Expansionary fiscal policy

 

Policy designed to increase aggregate demand
    - Strategy for Increasing GDP, combats a recession, reduces unemployment
Expansionary increases government spending and decrease taxes
Contractionary decrease government spending and increase taxes
Automatic or built in stabilizers is anything that increases the governments budget deficit during a recession and increases it's budget surplus during inflation without requiring explicit action by

Transfer payments

1. Welfare checks
2. Food Stamps
3. Unemployment checks
4. Corporate dividends
5. Social security
6. Veteran's security

Progressive tax system
   Average tax rate rises with GDP

Proportional tax system
   Average tax rate remains constant as GDP changes

Regressive Tax system
   Average tax rate falls with GDP