Unit 6 notes

Economic Growth Defined

• Sustained increase in Real GDP over time
• Sustained increase in Real GDP per capita over time

Why Grow?

• Growth leads to greater prosperity for society
• Lessens the burden of scarcity
• Increases the general level of well-being

Conditions for Growth

• Rule of Law
• Sound Legal and Economic Institutions
• Economic Freedom
• Respect for Private Property
• Political & Economic Stability
• Low Inflationary Expectations
• Willingness to sacrifice current consumption in order to grow
• Saving
• Trade

Physical Capital

• Tools, machinery, factories, infrastructure
• Physical Capital is the product of Investment
• Investment is sensitive to interest rates and expected rates of return
• If takes capital to make capital
• Capital must be maintained

Technology & Productivity

• Research and development, innovation and invention yield increases in available technology
• More technology in the hands of workers increases productivity
• Productivity is output per worker
• More Productivity = Economic Growth

Human Capital

• People are a country’s most important resource. Therefore human capital must be developed
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean Water
• Stable Food Supply
• Access to technology

Hindrances to Growth

• Economic and Political Instability
• high inflationary expectation
• Absence of the rule of law
• Diminished Private Property Rights
• Negative Incentives
• the welfare state
• Lack of Savings
• Excess current consumption
• Failure to maintain existing capital
• Crowding Out of Investment
• government deficits & debt increasing long term interest rates
• Increased income inequality -> Populist policies
• Restrictions on Free International Trade

Absolute vs. Comparative advantage

Absolute Advantage 

• Individual
• exists when a person can produce more of a certain good/service than someone else in the same amount of time
• National
• exists when a country can produce more of a good/service than another country can in the same time period

Comparative Advantage

• Individual/National: exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation
• Input Problems
• where the country who can produce a set amount of something by using the least amount of resources, land, or time has the absolute advantage
• chosen item / forgone item
• Output Problems
• who can produce the product the best
• what is given up / what is produced

Foreign Exchange Market

Buying and selling of currency

• In order to purchase souvenirs in France, first necessary for Americans to sell (supply) their dollars and buy (demand) Euros
• Exchange rate (e) is determined in the foreign currency markets and is the price of a currency
• Change the demand on one currency graph, change the supply on the other currency graph
• Move the lines on the two currency graphs in the same direction and you will have the correct answer
• If D increases on one graph, S increases on the other

Changes in Exchange Rates

• Exchange rates (e) are a function of the supply and demand for currency
• increase in supply of currency will make it cheaper to buy one unit of that currency
• decrease in supply of currency will make it more expensive to buy one unit of that currency
• increase in demand for a currency will make it more expensive to buy one unit of that currency
• decrease in demand for a currency will make it cheaper to buy one unit of that currency

1. Appreciation of a currency occurs when the exchange rate of that currency increases
2. Depreciation of a currency occurs when the exchange rate of that currency decreases

Purchasing Power Parity

• When the currency rates are set by international markets, changes will be based on the actual purchasing power of the currencies
• Ex.: If the US dollar to the European euro rate is 1.5 to 1, then each $1.50 will buy 1 euro. However, if an item in the US costs $1.50 and then costs more or less than 1 euro, the parity is lost. Markets will adjust quickly in floating rate or pressure for change will occur in fixed rates
• What is the need for exchanging currencies?
• Sell exports, buy immports
• Invest in other countries stocks and bonds
• build factory or store in other markets
• speculate on currency values
• hold currencies in bank acct. for future exports, imports and business loans
• to control excessive imbalances

Unit 7 notes

Balance of Payments
Measure of money inflows and outflows between the U.S. And rest of the works (ROW)
inflow = credit
outflows = debits
3 Acct balance is divided into
Current Acct
Capital Acct
Official Reserves
Double Entry Bookkeeping: every transaction in the balance of payments is recorded twice in accordance w/standard accounting practice.
Balance of Trade
Export of goods/service - imports of goods/services
Export create credit to balance of payments
Imports create debit to balance of payments
Net Foreign income
Income earned by US owned foreign assets - income paid to foreign held US assets.
Ex. interest payments to US owned Brazilian bonds - interest payment on German owned US treasury bonds.
Net transfer (tend to be unilateral)
Foreign aid > a debit to the current acct
Ex. Mexican migrant workers send money to family in mexico.
Capital/Financial accounts
Includes the purchase of both real and financial assets
Direct investment in US is a credit to capital account
Ex. Toyota factory in San Antonio
Direct invest by US firms/individual in a foreign country are debit to the capital account.
Ex. Intel factory in San Jose, Costa Rica
Purchase of foreign financial assets represent a debit to capital account.
The current account & capital account should zero each to her out.
If current account has a negative balance (deficit) then the capital account has a positive balance (surplus)
Official Reserve
foreign currency holding 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.
Active vs. Passive
the US is passive in its use of official reserves because our exchange rate stays the same
the people's republic of china is active in its use of official reserves.
Actively buys and sells dollar in order to maintain a steady exchange with the US

Unit 5 notes

Short Run AS

• Time is too short for wages to adjust to the price level 
• Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor decisions and wage demands accordingly. 
• Nominal Wages: Amt. of money received per hour, day, or year
• Adjusted for inflation
• Sticky Wage: Nominal wage level set according to an initial price level and it does not vary.
• Will be stuck in the short run for a while

Price level	Wage level	Employment level	Implications
Keynesian: Fixed	Fixed	Flexible	Output depends on changes in employment
Intermediate: flexible	Fixed	Flexible	Output depends on change in price level and employment
Classical: flexible	Fixed	Fixed	Output depends on a change in price level

Long Run AS

• It has flexible wages and price levels
• off set each other
• Time is long enough for wages to adjust to price level
• if we have growth, capital stock gain and change in technology.

Phillips Curve

• Represents the relationship between inflation and unemployment. 
• Trade off between inflation and unemployment only occurs in the short run.

Long Run

• The long run curve occurs at the natural rate of unemployment
• represented by a vertical line
• there is no trade off in the long run, meaning the economy produces at full employment level
• Long run Philips Curve shift only if LRAS shifts
• At the natural rate of unemployment: structural, seasonal and frictional unemployment exist
• fewer worker benefits create lower natural rates
• Shift PPC outwards, LRPC will shift, otherwise it is vertical and stable

Short run

• Inverse relationship between inflation & unemployment.
• High inflation means lower employment
• Relevance to okun's law
• Since wages are sticky
• inflation changes
• moves the points on SRPC
• If inflation persist and expected rate of inflation rises, then the entire SRPC moves upward due to stagflation.  
• If inflation drop due to new technology or economic growth then SRPC moves downward
• Aggregate supply shock cause both rate of inflation & unemployment to inc. 
• Supply shock
• rapid and significant inc. in resource cost.

• Misery index
• combination of inflation & unemployment in any given year. 
• Single digit misery is good.
• LRPC: exist natural rate of unemployment, structural changes in the economy affect unemployment and shift LRPC

• Stagflation: when inflation/unemployment increase simultaneously

1. During 1946-1964 (baby boom)
2. Women's movement
3. Civil rights movement
4. Vietnam War ends
5. Oil embargo 1973 & 1979

• Disinflation: reduction in inflation rate from year to year. 
• occurs when AD declines.
• Deflation: general drop in the price level.

Supply Side Economics

• Belief that as AS curve determine level of inflation, unemployment, & econ growth.  
• To increase economy,  the AS curve will have to shift to the right which will have to benefit the economy first.
• Supply Side Economics focus more on marginal tax rate.
• marginal tax rate = amount paid on last dollar earned or additional dollar earned
• Lower taxes are incentives for businesses to invest in our economy. 
• Lowered taxes are incentives to increase savings & therefore create lower interest rates which will increase business investment.

Supply Side Economists support policies that promote GDP growth by arguing high marginal tax rate along with the current system of transfer payments, such as welfare and unemployment provide disincentives to work, invest and undertake entrepreneurial ventures.

• Referred to as Reaganomics
• Lower marginal tax rate to get U.S. out of a recession >  deficit. 
• Trade off between tax rates & govt. revenue is used to support supply side argument.  
• As tax rates increase from zero, tax revenue increase from zero to some maximum level and then declines.

3 criticism of the Laffer Curve:

1. Research suggests that impact of tax rates on incentives to work, invest, & to save are small.
2. Tax cut also increase demands which can fuel inflation & cause demand to exceed supply.
3. Where economy actually located on the curve is get to be determined.

Unit 4

Money is any assets to purchase any good or service

3 uses:

• Medium of exchange
• Unit of account: how to compare prices
• Store value: how money can be stored

3 types of money:

• Commodity money
• Has money within itself
• Salt
• Olive oil
• Gold
• Representative money
• Represents something of value
• An IOU
• Fiat money
• It is money because the government said so
• Paper currency
• Coins

6 characteristics of money

• Durability
• Portability
• Divisibility
• Uniformity
• Limited supply
• Acceptability

Money supply is the total value of financial assests available in the US economy

M1	M2
Liquid assets = east to convert to cash Cash Paper currency Coins Checkable deposits or Demand Deposits Travelers checks	M1 money + savings acct or money market account

Purpose of financial institutions

• Store money
• Save money
• Loan money
• most loan for credit cards/mortgages

4 ways to save money

• Savings
• Checkable accounts
• Money market account
• Certificate of deposit (CD)

Loans

• Banks operate on a fractional reserve system
• Which is where they keep a fraction of funds and loan out the rest

Interest rates

• Principle amount of money borrowed
• Interest: price paid for use of borrowed money
• Simple interest: paid on the principle
• Compound: paid on the principle + accumulated interest

Types of financial institutions

• Commercial banks
• Savings and loans
• Mutual savings banks
• Credit unions
• Finance companies

Investments

• Redirecting resources you'd use now for the future
• financial assets: claims on property or income of borrowers
• financial intermediary: institution that channels funds from savers to borrowers
• Purpose of these
1. Sharing risk, by diversification: spread investment to reduce risk
2. Providing information
3. Liquidity returns: amount investors receive above and beyond the sum of money invested

Bonds you OWN -- Stocks you LOAN

Bonds: loans or IOUs that represent debt that govt. or corporations must repay to an investor; a relatively low risk investment

• Coupon rate: interest rate the issuer pays the bond holder
• Maturity: time which payment to bond holder is due
• Par value: amount an investor pays to purchase an bond and that would be paid to investor at maturity
• Yield: annual rate of returns on a bond if bond is held to maturity

Time value of money

1. Is a dollar today worth more than tomorrow?
• Yes, because inflation topp. cost
• This is the reason for charging and paying interest

• Let V = future value of money
• P = present value of $
• r = real interest rate (nominal - inflation rate)
• n = years
• k = # of times interest is credited per year
• Simple interest formula: V = (1 + r) ^n * p
• Compound interest rate: V = (1 + r/k)^nk * p

FUNCTIONS OF THE FED

• issue paper currency
• set reserve requirements and hold reserves of banks
• lend money to bank and charge interest
• they are a check clearing service for banks
• act as personal bank for government
• supervise member banks
• control money supply in the economy

• Types of multiple deposit expansion: 
• Type 1: calculate initial change in excess reserves: amount single bank can loan form initial deposit
• Type 2: calculate change in loans in banking system. 
• Type 3: calculate change in money supply.
• Type 4: calculate change in demand deposit

How banks work

Assets	Liabilities + equities
Reserves Required reserves (RR): % required by FED to keep on hand to meet demand Excess Reserves (ER): % reserves over & above amt needed to satisfy minimum reserve ratio set by the FED	Demand Deposits ($ put in banks)
Loans to firms, consumers and other banks (earns to interest)	Checkable Deposits (CD's)
Bank property- if bank fails, you can liquidate the building/property	Loans from Federal Reserve & other banks
Loans to government-- treasury securities	Shareholders equity - to set up a bank, you must invest your own money in it to have a stake in the bank success or failure

• Creating a bank:
• transaction #4
• depositing reserves in a FED. reserve banks
• required reserves
• reserve ratio

Reserve ratio = commercial bank required reserve / commercial bank checkable deposit

• Reserve requirements
• Excess reserves
• Actual reserves - required reserves
• Required reserves
• checkable deposits * reserve ratio

Key principle:

• A single bank can create money (through loans) by the amount of excess reserves
• Banking system as a while can create money by a multiple (deposit on money multiplier) of the initial excess reserves.

Factors that weaken effectiveness of deposit multiplier

1. If banks fail to loan out excess reserves
2. if banks customers take their loans in cash rather than i nnew checking acct deposit, creates a cash/ currency drain

Money market

• inverse between money demand and the interest rates
• money demanded is downward sloping
• money supply is vertical
• fed buy bonds then interest rate is low
• decrease money supply by selling bonds

Fiscal	FED
Congress & the President	The Fed (Fed revenue bank)
Tax and spend	OMO (open market operation)
	Discount rate
	Federal fund rate
	Reserve requirements

• Federal fund rate: the interest rate that commercial banks charge each other for overnight loans
• Will always be opposite of bank reserves & money supply
• Money & bank increase, this decreases
• Prime rate: interest rate banks charge to their most credit worthy customers
• if higher than 4%. not prime rate

Loanable funds market

• market where savers and borrowers exchange fund (Qlf) at the real rate of interest
• demand for loanable funds or borrowing comes from households, firms, government and the foreign sector
• the demand for loanable funds is infact the supply of bonds
• supply of loanable funds is also the demand for bonds

Changes in demand for loanable funds

• Demand for loanable funds = borrowing (i.e supply bond)
• more borrowing = more demand for loanable funds shifts to the right
• less borrowing = less demand for loanable funds shifts to the left
• Ex. Govt. deficit spending = more borrowing
• Less investment demand = less borrowing, ir decrease

Changes in supply

• Supply of loanable funds = saving
• more saving = mor supply of loanable funds, shift to the right
• less saving = less supply of loanable funds, shift to the left
• Ex. Govt. budget surplus = more saving = more supply of loanable funds
• Decrease in consumer MPS = less saving = less supply of loanable funds

March 29th Video Response

Video #1:
     This video sought to teach us the basics of the money market. Commodities are basically goods that serve a purpose and representative money represents the quantity of precious metal and fiat money does not represent anything but the promise from the government that the money does have value. The functions of money include becoming a medium of exchange, which basically means it is through money that exchanges happen, money as a store of value and being a unit of account. (p > worth (quality)).

Video #2:
     Though there is a difference in labels, money market graphs are very similar to supply and demand graphs in their concepts. When the price is high, the demanded is high, when the interest rate is low, people have an incentive to borrow more. The supply of money is fixed and set by the FED, and it doesn't move unless the FED does so. When you increase demand, more pressure is put on interest rates. Quantity stays the same because supply is vertical, nothing can impact it. If they'd like to bring interest rates down, they'd have to increase money supply.

Video #3:
     The FED has two types of Monetary policy: Expansionary policy (easy money) and Contractionary policy (tight money). Under easy money, required reserves decrease in an effort to increase spending to battle recession and under tight money, required reserves increase in an effort to decrease spending to battle inflation. Discount rate isn't used very often as even if they have the incentive, it isn't guaranteed banks will comply and accept what is given. To expand the money supply, the FED buys bonds (expansionary), by doing this, money supply increases. The contract the money supply, the FED sells bonds (contractionary) and in turn reduces money supply. The Federal Funds rate i the rate at which banks borrow from one another.  

Video #4:
    Loanable funds is basically money that is available in banks for people to borrow. The loanable funds graph follows the basics of the previous graphs, but in this case, quantity stands for quantity of loanable funds and supply is upward sloping. Supply is dependent on savings As you increase demand in both the money market graph and loanable funds graph, interest rates increase. During a deficit, the government demands money in order to spend it.

Video #5:
     A key point in the money creation process is that banks create money by making loans. In a banking system, you'd multiply your excess reserves by your money multiplier. To get the money multiplier, you'd write it as 1/RR, 1 over the reserve ratio. An assumption of no excess reserves would reduce your total amount. To get the initial increase, you'd multiply the loan by the money multiplier.

Video #6:
     The equation of exchange follows the formula of MV=PQ, where M is the amount of money in the economy and V is the velocity of the money, it is stable and relates to the GDP expenditures. P is the average price of goods and Q serves as the total quantity or volume, this ties in with GDP income. A change in money will cause a change in price, just as the supply and demand graphs. Ultimately they are all related and with the shift of one side, the other will shift in response.