Monetary Policy Video

Video Responses

Video 1
There are three types of money. Those types are commodity money, representative money, and fiat money. Commodity money are the things that also work as if it is money. Representative money is not the the real currency but it represents the same amount of value of the actual currency. A drawback of representative money is when the value of the metal changes, then the value of the currency is affected. Fiat money is the value of money the government says the money is worth.

Video 2
To graph the money market, you have to make sure the axes are labeled correctly. The Y-axis is the interest rate and the X-axis is the quantity of money. Demand of money is downward sloping, this shows the prices and money are inversely related. Supply of money is vertical because it doesn't change based on the interest rate. It is fixed and set by the Fed. Quantity equilibrium and the interest rate must be labeled also.

Video 3
 There are things the Fed does to increase money supply (expansionary or easy money) and decrease money supply (contractionary or tight money). The Fed has three choices they can use to obtain their goal.  They can change the required reserves, discount rate, and the OMO, which is buy or sell bonds, Open Markets Operations. Reducing or increasing the required reserves and discount rate are reasons for the banks to react to the the change, and does not promise a change in the money supply.

Video 4
 The loanable fund market is labeled and is connected to the money market.  Identical to the money market the interest rate goes to the y-axis and quantity goes to the x-axis, but converted to loanable funds. The supply of loanable funds in this case is upward slopping depending on savings for banks to be able to loan out.  The demand for more increase demand of loans thus increasing the interest rate, but i can as well decrease the supply of loanable funds.

Video 5
Banks make loans to create money. To find the monetary multiplier you take 1 and divide it by the reserve ratio. One of the Fed's tools for monetary policy is the ability to adjust the reserve requirement. The Reserve requirement tells how much money will be availiable for the public.

Fiscal Policy

Fiscal policy is the change in the expenditures or tax revenues of the federal government. Two tools of fiscal policy are Taxes & Spending.

• Deficits, Surpluses, & Debt
• Balanced budget ( Revenues = Expenditure)
• Deficit budget ( Revenues > Expenditures )
• Surplus budget ( Revenues < Expenditures )
• Government debt ( Sum of all deficits - sum of all surpluses)
• Government must borrow money when it runs a budget deficit, from
• Individuals
• Corporations
• Financial institutions
• Foreign entities or foreign countries

Fiscal policy option

• Discretionary fiscal policy (action)
• Expansionary fiscal policy (Think deficit) Designed to increase aggregate demand. Strategy for increasing GDP, combatting a recession, and unemployment. Recession countered with Increase government spending, & decrease taxes.
• Contractionary fiscal policy ( Think surplus) Designed to decrease aggregate demand. Strategy for controlling inflation, countered with increasing taxes, & decreasing government spending.
• Non-Discretionary fiscal policy (No action)

Discretionary vs Automatic fiscal policies

• Discretionary, increasing or decreasing government spending & lower taxes in order to return to economy to full employment. Involves policy makers doing fiscal policy in response to an economical problem.
• Automatic unemployment compensation & marginal tax rates are examples of automatic policies, that help mitigate the effects of recession as well as inflation. They take place without policy makers having to respond to current economic problems. Anything that increase the government budget deficit during a recession & increase its budget surplus during inflation without requiring explicit action by policy markers.

Non-Discretionary fiscal policy (Automatic stabilizer)

• Transfer payments
• Welfare checks 
• Food Stamps
• Unemployment checks
• Corporate dividend
• Social security 
• Veterans benefits
• Progressive income taxes

Progressive tax system

• Average tax rate (tax revenue / GDP ) rises with GDP
• Proportional tax system
• Average tax rate remains constant as GDP changes

Regressive tax system

• Average tax rate falls with GDP

Disposable Income

With disposable income (DI) theres 2 choices households have, either consume (spend money on goods & services) or save (not spending money)

DI is income after taxes or net income. DI = Gross income - Taxes

Consumption (household spending) The ability to consume is constrained by

• The amount of DI
• The propensity to save

Do households consume if DI=0

• Autonomous consumption
•  Dissaving

        APC= C/DI = %DI that is spent

Savings (household not spending) The ability to save is constrained by

• The amount of DI
• The propensity to consume

Do households save if DI = 0

• No

       APS= S/DI = %DI that is not spent

APC & APS 

• APC + APS = 1
• 1- APC = APS
• 1- APS = APC
• APC > 1 therefore Dissaving
• APS therefore Dissaving

MPC & MPS

• Marginal propensity to consume (MPC)
• ∆ C / ∆ DI
• % of every extra dollar earned that is spent
• Marginal propensity to save (MPS)
• ∆ S / ∆ DI
• % of every dollar earned that is saved
• MPC + MPS = 1
• 1 - MPC = MPS
• 1 - MPS = MPC

The spending multiplier effect 

• An initial change in spending (C, Ig, G, Xn) causes a large change in aggregate spending or aggregate demand
• Multiplier = ∆ in AD / ∆ in spending
• Why does this happen? Expenditures and income flow continuously which sets of a spending increase in the economy.

The spending multiplier

• Can be calculated from the MPC or MPS
• Multiplier = 1 / 1 - MPC or 1 / MPS
• Positive when there is increase in spending Negative when there is a decrease

The tax multiplier

• When government taxes, the multiplier works in reverse
• Why? Because now money is leaving the circular flow 
• Tax multiplier (Its negative) = - MPC / 1 - MPC  or - MPC / MPS
• If there is a tax cut, then the multiplier is positive, because there is now more money in the circular flow.

Three Schools of Economics

Three schools of economy ( Classical, Keynesian, Monetary)

Points of Classical school

•  Investment (Injection)
• AS determines output
• Market works by it self (No government intervention)
• Savings increase with interest rate
• AS=AD at full employment equilibrium
• In the LR the economy will balance at full employment (economy close to or at full employment)
• Believe in the trickle down effect ( this is were you help the rich first and everyone else latter)
• Prices and wages are flexible downward

Points of Keynesian school

• Competition is flawed (AD is key not AS)
• Demand creates its own supply
• Savers and investors save for different reasons
• Saving are inverse to interest rate
• Leaks cost constant recessions and savings cause recessions
• Ratchet effects and sticky wages block state law
• Price/wages are inflexible downward
• No mechanism capable of guaranteeing full employment
• The economy is not close to or at full employment
• Government intervention (expansionary & contractionary policies (Fiscal policy) 

Points of Monetary school

• Fine tuning is needed, congress can't time the policy options (voters wont allow it)
• Contractionary option
• Easy and tight money 
• Change the required reserves if needed
• Buy & sell bonds in open market
• Change in interest rate for the discount rate & federal fund rate

Investment Demand Curve (ID)

The investment demand curve is downward sloping. This is because when interest rates are high, fewer investments are profitable; when interest rate are low, more investments are profitable.

Shifts in Investment Demand

• Cost of production
• Lower cost  Shift ---->
• Higher cost Shift <---
• Business Taxes
• Lower business taxes Shift --->
• Higher business taxes Shift <---
• Technological ∆
• New technology Shift--->
• Lack of technological changes Shift <---
• Stock of capital
• If an economy is low on capital Shift --->
• If an economy has much capital Shift <---
• Expectations
• Positive expectations Shift --->
• Negative expectations Shift <---

Interest Rate and Investment Demand

• Investment
• Money spent or expenditures
• New plants (factories)
• Capital equipment
• Technology
• New Homes
• Inventories (goods sold by producers)
• Expected Rates of Return
• How does business make investment desicisions?
• Cost/Benefit
• How does business determine the benefits?
• Expected Rate of Return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost
• If expected return > interest cost, then invest
• If expected return < interest cost, don't invest
• Real (r%) v. Nominal (i%)
• Difference
• Nominal is the observable rate of interest. Real subtracts out inflation and is only known ex post facto.
• How do you compute the real interest rate (r%)/

• r% = i% -