1 / 35

Money Market

FED buys bonds from the public Draw graph showing effect on interest rate. What happens to value of $ in foreign exchange market?. Sm2. Sm1. i. Money Market. i1. i2. Dm. Q1. Q. Q2.

makara
Download Presentation

Money Market

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. FED buys bonds from the publicDraw graph showing effect on interest rate. What happens to value of $ in foreign exchange market?

  2. Sm2 Sm1 i Money Market i1 i2 Dm Q1 Q Q2

  3. Draw graph showing effect on the interest rate from increased saving in the U.S. What happens to nation’s capital stock?

  4. Loanable Funds Market i SLF1 SLF2 i1 i2 DLF Q1 Q Q2

  5. Effect on P and GDP when $ depreciates

  6. ASLR AS P AD/AS P2 P1 AD2 AD1 GDP Qf Q2

  7. FED sells bonds. Draw graph showing effect on interest rate. What happens to the value of the $ in the foreign exchange market?

  8. Sm2 i Sm1 Money Market i2 i1 Dm Q Q2 Q1

  9. Government & FED do nothing in response to short-run recession

  10. ASSR1 ASLR P AD/AS ASSR2 P1 P2 AD GDP Q1 Qf

  11. Effect on interest rate when government runs a budget deficit

  12. Loanable Funds Market SLF i i2 i1 DLF2 DLF1 Q1 Q Q2

  13. Value of U.S. $ and Japanese yen when U.S. interest rates increase. What happens to American imports and exports?

  14. Foreign Exchange Market P ($) P (Yen) SYen1 S$ SYen2 P2 P1 P1 D$2 P2 DYen D$1 Q1 Q2 Q Q1 Q Q2 Yen Dollars

  15. Effect on P, GDP when $ appreciates

  16. ASLR AS P AD/AS P1 P2 AD1 AD2 GDP Qf Q2

  17. Effect on AD of FED’s bond sales during inflation

  18. ASLR AS P AD/AS P1 AD1 P2 AD2 GDP Qf Q1

  19. Government and FED do nothing in response to short-run inflation

  20. ASSR2 ASSR1 ASLR P AD/AS P2 P1 AD GDP Qf Q1

  21. Effect on AS and SRPC when price of oil increases dramatically

  22. Inflation rate P AS2 AS1 P2 P1 SRPC2 AD SRPC1 GDP2 GDP1 GDP Unemployment rate P goes up Unemployment rises

  23. Expansionary fiscal policy during a recession

  24. ASLR AS P AD/AS P2 P1 AD2 AD1 GDP Q1 Qf

  25. Effect on ASLR and LRPC when U.S. capital stock increases

  26. Effect on AS P Inflation ASLR1 LRPC1 LRPC2 ASLR2 NRU2 Unem. Qf1 Qf2 NRU1 GDP

  27. The FED and Monetary policy • Always affects the money market • Money market has vertical supply curve • Increase in money supply lowers interest rates – increases investment and consumption and AD • Lower interest rates cause $ to depreciate – exports increase, imports decrease • Decrease in money supply has opposite effect

  28. Loanable funds market • S affected by savings; D affected by increased budget deficit (increasing G or decreasing taxes) • Upward sloping S curve • Increase in budget deficit raises interest rates (decreases I and C – crowding out) • Increase in savings lowers interest rates • Changes in income affect BOTH savings and consumption in the same direction

  29. Short run vs. long run • If unemployment rises in the short run, wages fall • Falling wages increases AS (shifts to right) • If unemployment falls in the short run, wages rise • Rising wages decreases AS (shifts to left) • Long run equilibrium is at the NRU

  30. Phillips Curves • Inflation on y axis; unemployment on x • Short run slopes downward • SRPC moves only when AS moves; if AD moves, there is movement along the SRPC • If AS shifts left, SRPC shifts right; if AS shifts right, SRPC shifts left • LRPC is vertical at the NRU • LRPC moves when NRU changes (when LRAS moves) • If LRAS shifts left, LRPC shifts right

  31. Capital Flows • Money coming into a country increases D for that currency and increases S of other currency • Increasing D for a currency causes it to appreciate; increasing S for a currency causes it to depreciate • Higher interest rates in a country increases D for its currency b/c it increases the D for that country’s financial assets • A higher P in a country decreases D for its currency b/c people will buy another country’s goods instead • Interest rates and value of $ move in same direction!

  32. Comparative Advantage socks 50 • Swaziland can produce 40 socks or 10 balloons using the same # of resources that Finland can use to produce 50 socks or 50 balloons Finland • Which country has the absolute advantage in each product? • Which country has the comparative advantage in each product? • What are Finland’s opportunity costs for the 2 goods? Swaziland? • If 2 pairs of socks are traded for 1 balloon, how will each country benefit? 40 Swaziland 10 50 balloons

  33. Comparative Advantage Jet packs 50 • Djibouti can produce 50 jet packs or 10 time machines using the same # of resources that Botswana uses to produce 30 jet packs or 60 time machines Djibouti • Which country has the absolute advantage in each product? • Which country has the comparative advantage in each product? • What are Djibouti’s opportunity costs for the 2 goods? Botswana’s? • If 4 jet packs are traded for 1 time machine, how will each country benefit? 30 Botswana 10 60 time machines

  34. Money Creation • Deposits into banks are not new $. • Checkable deposits increase by the same amount that reserves increase • Loans determined by excess reserves • Required reserves = CHECKABLE DEPOSITS x required reserve ratio!!!!! • Increase in # of loans or deposits = 1st LOAN x monetary multiplier • When the FED buys bonds, that is NEW MONEY! Is included in any increase in the money supply!

  35. Graphs to know! • AD/AS, including LRAS – know how AS moves as the economy “approaches long run equilibrium” • Money market vs. loanable funds market • Phillips Curve • Foreign exchange market

More Related