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Unit-4 Macro Review

Review of various topics including money supply, bank accounting, and fiscal and monetary policy. Learn about the Federal Reserve, government debt, and the effects of too much money or debt. Explore the concepts of money market and crowding out. Understand different types of monetary policy and the quantity theory of money. Access practice questions and free response exercises.

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Unit-4 Macro Review

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  1. Review Day #2: Tuesday May 3rd Unit-4 Macro Review Money, Money Supply, Bank Accounting, & Fiscal and Monetary Policy

  2. Loanable Funds = Gov’t Fed vs. Government • The Federal Reserve creates money • By buying bonds in open market operations • Too much money can lead to inflation • The Government creates debt • By borrowing money for deficit spending • Too much debt can lead to crowding out Money Market = Fed

  3. Money Market Illustrates Fed’s Monetary Policy MS is is fixed by Fed MD = Desire to “hold money” [transaction demand) Fed buys/sell bonds to shift MS => this changes short term interest rates (federal funds rate) MD rarely shifts Use for Gov’t Debt questions Model of Saver& Borrowers Supply = National Savings Demand= Investment (I) (borrowers for capital goods => leads to innovation Crowding Out: Gov’t borrows too much => real interest rates rise = Business Investment falls (I ↓)

  4. Currently 1.0% Currently 0.25% target MS2 MS1 Nominal Interest Rate Price Level LRAS1 SRAS1 i2 ----------- -------------- P2 i1 --------------- MD AD1 AD2 Real GDP Qty of $ 2 Types of Monetary Policy Expansionary Contractionary Contractionary Policy => Sell Bonds, ↑ discount rate & ↑ reserve requirement ------------------ P1 E1 Affects AD -------------- Y1 Y* MS ↓ => ↑ interest rate => C↓ & I ↓ => AD ↓

  5. Types of Money Commodity money Fiat money MONEY (Std. of value) Measuring Money Supply M1 - most liquid (cash, checking deposits, travelers checks, etc…) M2- slightly less liquid (M1 + savings acct., money markets,…) M3 = least liquid (M2 + large time deposits (over $100,000) )

  6. Example: $100 Deposit 10% Reserve Ratio 1st Bank Balance Sheet This loan causes money creation Excess Reservescan be lent out by bank Fractional Reserve Banking System Banks Create Money by lending .

  7. Money Multiplier = 1/R Money Supply Change = Money Multiplier X 1st Loan 10 * $90 = $900 increase Money Supply Reserve Requirement = 10% Money Multiplier = 1/10% = 10

  8. Quantity Theory of Money Monetarists economists believe that money is neutral! That is changes in Money Supply (MS) have no affect on real GDP in long run Qty Theory of Money Equation Velocity of money is relatively constant Real GDP is fixed in short run ↑ MS only will ↑Price Level

  9. Review • Practice Questions • Practice Free Response

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