Macroeconomic Policy Fundamentals Chapter 13
Discussion Topics <ul><li>Characteristics of money </li></ul><ul><li>Federal Reserve System </li></ul><ul><li>Changing the...
Functions of Money <ul><li>Medium of exchange  – facilitates payment to others for goods and services  </li></ul><ul><li>U...
Functions of the Fed <ul><li>Supply the economy with paper currency </li></ul><ul><li>Supervise member banks </li></ul><ul...
Page 246 Location of the 12 District Federal Reserve Banks
The Fed’s Policy Tools <ul><li>Reserve requirements  – depository institutions are required to maintain a specific fractio...
Page 247 Role of the Board of Governors of the Federal Reserve System
Page 247 Role of the Board of Governors of the Federal Reserve System
Page 247 Role of the Board of Governors of the Federal Reserve System
Page 247 Key role played by the Federal Open Market Committee or FOMC
Recent Fed Rate Actions
Page 247 Role of the 12 District Federal Reserve Banks located throughout the country
Determinants of the Money Supply
Page 253 Existing money supply curve.  Note it is perpendicular to the quantity axis, implying it is unaffected by the int...
Page 253 Expansionary monetary policy actions will shift the MS curve to the right over a  period of 12 months or so.
Page 253 Contractionary monetary  policy actions, on the other hand, will shift the money supply curve to  left over a sim...
Page 251 Suppose a depositor in Bank Ag sells $1 million in government securities to the Fed.  He then deposits the procee...
Change in the Money Supply We can skip tracing deposits through the economy by using the following money supply (M S ) equ...
Change in the Money Supply Using the example in Table 13.3 of the $1 million deposit on page 307 and 20% reserve requireme...
Page 251 Change in money supply Change in loan volume Initial infusion + =
Impacts of Policy Tools Expansionary actions: Effects of action: Fed buys securities  Total reserves increase Fed lowers t...
Impacts of Policy Tools Expansionary actions: Effects of action: Fed buys securities  Total reserves increase Fed lowers t...
Determinants of the Money Demand
Demand for Money <ul><li>Transactions demand for money  – carry cash to pay for normal expenditures </li></ul><ul><li>Prec...
Page 255 The money demand curve  is given by equation (16.5): M D  = c –d(R) + e(NI) where R is the rate of  interest and ...
Page 255 M D  = c –d(R) + e(NI) Increase in income increases demand  for money
Page 255 Money market interest rate given by intersection of demand and supply
Page 255 M S * 0.06 Expansionary monetary policy lowers interest rates
Page 255 M S * 0.14 Contractionary monetary policy raises interest rates
Page 256 The full effects of this change could take 12 months or more to register in bank deposits
Page 256 A change in the money supply will alter the equilibrium interest rate in the money market
Page 256 We know from Chapter 12 that a change in interest  rates will lead to movement along the planned investment funct...
Page 256 We also know from Chapter 12 that increased investment expenditures, a component of GDP, increases the demand for...
Eliminating Recessionary and Inflationary Gaps
Page 257 What is the  magnitude of the recessionary gap?
Page 257 What is the  magnitude of the recessionary gap? It is Y FE  – Y 1
Page 257 The use of expansionary monetary policy actions to push aggregate demand from AD 1  to AD 3  increases real GDP f...
Page 257 Inflation rate (P 3  – P 0 )  ÷ P 0 Recessionary gap of Y FE  – Y 1  is partially closed to Y FE  – Y 3
Page 257 The further use of  expansionary monetary  policy to push aggregate demand from AD 3  to AD 4   increases real GD...
Page 257 Inflation rate (P 4  – P 3 )  ÷ P 3 Recessionary gap fully closed
Page 257 The use of expansionary monetary policy to attain Y POT  by shifting aggregate demand to AD 5  will increase the ...
Microeconomic Interest Rate Implications
Interest Rate Impacts on a 10-Year $150K Business Loan Page 259 Interest rate Annual  total PI payment Annual interest pay...
Interest Rate Impacts on a 20- Year $100K Home Mortgage Page 259 Interest  rate Monthly total PI payment Monthly interest ...
What is Fiscal Policy? <ul><li>Taxation by federal, state and local governments </li></ul><ul><li>Government spending by f...
States Without Income Tax Eight states do not have a state income tax
State and Local Taxes <ul><li>Alaska, thanks to oil reserves, has the lowest tax burden </li></ul><ul><li>Maine registered...
Our focus is on fiscal policy at the federal level….
Page 262 Rising spending and tax cuts to spur the economy brought back budget deficits
Page 262 Individuals and not businesses pay the  Bulk of federal taxes.
Page 263 A strong economy and controlled spending led to the first budget surplus in more than 20 years… The effects of th...
Recent Trends in Deficit <ul><li>Typically the economy runs a budget deficit at the federal level </li></ul><ul><li>1998-2...
Debt and the Deficit National debt T  = National debt T-1  + Deficit T
Page 264 The growth in federal debt has grown rapidly over the last 25 years…
Page 265 While the national debt grew as  deficit spending dominated the Last 30 years, debt as a percent of GDP stayed wi...
Federal government spending on Agriculture programs is the fourth highest on this list of total federal spending.
Fiscal Policy Options <ul><li>Automatic fiscal policy instruments:   take effect without explicit action by policymakers (...
Impacts of Policy Tools Expansionary actions: Effects of action: Cut taxes   Increase disposable income Increase governmen...
Impacts of Policy Tools Expansionary actions: Effects of action: Cut taxes   Increase disposable income Increase governmen...
Page 266 A federal budget deficit requires the U.S. Treasury to issue more government securities to balance sources and us...
Page 266 An increase in the sale of government securities reduces the pool of private capital available to finance investm...
Page 266 We know from Chapter  12 that higher interest  rates depresses investment expenditures…
Page 270 The use of expansionary fiscal policy actions to push aggregate demand from AD 1  to AD 3  increases real GDP fro...
Page 270 The use of expansionary fiscal policy to push demand from AD 3  to AD 4  increases real GDP from Y 3  to Y FE (fu...
Page 270 The use of expansionary fiscal policy to attain Y POT  by shifting aggregate demand to AD 5  will  Increase the g...
Monetary Policy Summary <ul><li>Functions of money and the role of the Federal Reserve System in the economy </li></ul><ul...
Fiscal Policy Summary <ul><li>Difference between discretionary and automatic fiscal policy tools </li></ul><ul><li>Expansi...
Chapter 14 focuses on the key consequences of   business fluctuations ….
Upcoming SlideShare
Loading in...5
×

Agri 2312 chapter 13 macroeconomic policy fundamentals

932

Published on

AGRICULTURAL ECONOMICS

Published in: Economy & Finance, Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
932
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
30
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Agri 2312 chapter 13 macroeconomic policy fundamentals

  1. 1. Macroeconomic Policy Fundamentals Chapter 13
  2. 2. Discussion Topics <ul><li>Characteristics of money </li></ul><ul><li>Federal Reserve System </li></ul><ul><li>Changing the money supply </li></ul><ul><li>Money market equilibrium </li></ul><ul><li>Effects of monetary policy on economy </li></ul><ul><li>The federal budget deficit </li></ul><ul><li>The national debt </li></ul><ul><li>Fiscal policy options </li></ul>
  3. 3. Functions of Money <ul><li>Medium of exchange – facilitates payment to others for goods and services </li></ul><ul><li>Unit of accounting – assessing profitability of businesses, household budgets and aggregate variables like GDP </li></ul><ul><li>Store of value – money is a liquid asset which has value in investment portfolios and cash flow decisions of businesses and households </li></ul>Page 244
  4. 4. Functions of the Fed <ul><li>Supply the economy with paper currency </li></ul><ul><li>Supervise member banks </li></ul><ul><li>Provide check collection and clearing services </li></ul><ul><li>Maintain the reserve balances of depository institutions </li></ul><ul><li>Lend to depository institutions </li></ul><ul><li>Act at the federal government’s banker and fiscal agent </li></ul><ul><li>Regulate the money supply </li></ul>Page 246-247
  5. 5. Page 246 Location of the 12 District Federal Reserve Banks
  6. 6. The Fed’s Policy Tools <ul><li>Reserve requirements – depository institutions are required to maintain a specific fraction of their customers’ deposits as reserves. </li></ul><ul><li>Discount rate – rate depository institutions pay when they borrow from the Fed </li></ul><ul><li>Open market operations – Fed can buy or sell government securities to alter the money supply </li></ul>Page 248-249
  7. 7. Page 247 Role of the Board of Governors of the Federal Reserve System
  8. 8. Page 247 Role of the Board of Governors of the Federal Reserve System
  9. 9. Page 247 Role of the Board of Governors of the Federal Reserve System
  10. 10. Page 247 Key role played by the Federal Open Market Committee or FOMC
  11. 11. Recent Fed Rate Actions
  12. 12. Page 247 Role of the 12 District Federal Reserve Banks located throughout the country
  13. 13. Determinants of the Money Supply
  14. 14. Page 253 Existing money supply curve. Note it is perpendicular to the quantity axis, implying it is unaffected by the interest rate.
  15. 15. Page 253 Expansionary monetary policy actions will shift the MS curve to the right over a period of 12 months or so.
  16. 16. Page 253 Contractionary monetary policy actions, on the other hand, will shift the money supply curve to left over a similar time period.
  17. 17. Page 251 Suppose a depositor in Bank Ag sells $1 million in government securities to the Fed. He then deposits the proceeds from the sale in his bank. If the fractional reserve requirement ratio is 20 percent, Bank Ag can increase the volume of its loans by $800,000. Suppose the proceeds of these loans are deposited in Bank B. Follow the trail to the Total line.
  18. 18. Change in the Money Supply We can skip tracing deposits through the economy by using the following money supply (M S ) equation: M S = (1.0 ÷ RR) × TR = MM × TR where TR represents total reserves and RR is the reserve requirement ratio. The expression with the brackets is known as the money multiplier . We can restate this equation in terms of the change in the money supply as follows:  M S = (1.0 ÷ RR) ×  TR = MM ×  TR Page 252-253
  19. 19. Change in the Money Supply Using the example in Table 13.3 of the $1 million deposit on page 307 and 20% reserve requirements ratio, we see that the change in the money supply is:  M S = (1.0 ÷ .20) x  TR = 5.0 x $1 million = $5 million This results in a change in loans of  loans =  MS -  TR = $5 million - $1 million = $4 million See bottom line in Table 13.3 Page 251-253
  20. 20. Page 251 Change in money supply Change in loan volume Initial infusion + =
  21. 21. Impacts of Policy Tools Expansionary actions: Effects of action: Fed buys securities Total reserves increase Fed lowers the discount rate Total reserves increase Fed lowers required reserve ratio Money multiplier increases Page 253 Bernanke
  22. 22. Impacts of Policy Tools Expansionary actions: Effects of action: Fed buys securities Total reserves increase Fed lowers the discount rate Total reserves increase Fed lowers required reserve ratio Money multiplier increases Contractionary actions: Effects of action: Fed sells securities Total reserves decrease Fed raises the discount rate Total reserves decrease Fed raises required reserve ratio Money multiplier decreases Page 253 Bernanke
  23. 23. Determinants of the Money Demand
  24. 24. Demand for Money <ul><li>Transactions demand for money – carry cash to pay for normal expenditures </li></ul><ul><li>Precautionary demand for money – carry cash to cover unexpected expenditures </li></ul><ul><li>Speculative demand for money – hold cash as an asset in investment portfolios since the value of cash does not decline during periods of falling asset prices. </li></ul>Page 254
  25. 25. Page 255 The money demand curve is given by equation (16.5): M D = c –d(R) + e(NI) where R is the rate of interest and NI is national income. The coefficient d is the slope of the curve and e represents  M D ÷  NI.
  26. 26. Page 255 M D = c –d(R) + e(NI) Increase in income increases demand for money
  27. 27. Page 255 Money market interest rate given by intersection of demand and supply
  28. 28. Page 255 M S * 0.06 Expansionary monetary policy lowers interest rates
  29. 29. Page 255 M S * 0.14 Contractionary monetary policy raises interest rates
  30. 30. Page 256 The full effects of this change could take 12 months or more to register in bank deposits
  31. 31. Page 256 A change in the money supply will alter the equilibrium interest rate in the money market
  32. 32. Page 256 We know from Chapter 12 that a change in interest rates will lead to movement along the planned investment function….increasing or decreasing new investment
  33. 33. Page 256 We also know from Chapter 12 that increased investment expenditures, a component of GDP, increases the demand for labor, lowers unemployment and thus fuels further growth in national income…
  34. 34. Eliminating Recessionary and Inflationary Gaps
  35. 35. Page 257 What is the magnitude of the recessionary gap?
  36. 36. Page 257 What is the magnitude of the recessionary gap? It is Y FE – Y 1
  37. 37. Page 257 The use of expansionary monetary policy actions to push aggregate demand from AD 1 to AD 3 increases real GDP from Y 1 to Y 3 while only increasing the general price level to P 3 .
  38. 38. Page 257 Inflation rate (P 3 – P 0 ) ÷ P 0 Recessionary gap of Y FE – Y 1 is partially closed to Y FE – Y 3
  39. 39. Page 257 The further use of expansionary monetary policy to push aggregate demand from AD 3 to AD 4 increases real GDP from Y 3 to Y FE (full employment GDP), but increases the general price level to P 4 .
  40. 40. Page 257 Inflation rate (P 4 – P 3 ) ÷ P 3 Recessionary gap fully closed
  41. 41. Page 257 The use of expansionary monetary policy to attain Y POT by shifting aggregate demand to AD 5 will increase the general price level to P 5 . Inflation rate (P 5 – P 4 ) ÷ P 4 Inflationary gap created…..
  42. 42. Microeconomic Interest Rate Implications
  43. 43. Interest Rate Impacts on a 10-Year $150K Business Loan Page 259 Interest rate Annual total PI payment Annual interest payment Total interest payment 8 percent $22,354.69 $7,354.69 $73,546.90 14 percent 28,757.67 13,757.67 137,576.88 20 percent 35,782.44 20,782.44 207,824.40
  44. 44. Interest Rate Impacts on a 20- Year $100K Home Mortgage Page 259 Interest rate Monthly total PI payment Monthly interest payment Total interest payment 8 percent $848.78 $432.08 $103,707.46 12 percent 1,115.73 699.06 167,773.46
  45. 45. What is Fiscal Policy? <ul><li>Taxation by federal, state and local governments </li></ul><ul><li>Government spending by federal state and local governments </li></ul><ul><li>Budget deficit and the national debt </li></ul>Page 259
  46. 46. States Without Income Tax Eight states do not have a state income tax
  47. 47. State and Local Taxes <ul><li>Alaska, thanks to oil reserves, has the lowest tax burden </li></ul><ul><li>Maine registered the highest the highest state tax burden </li></ul><ul><li>Major sources are sales taxes and property taxes </li></ul>
  48. 48. Our focus is on fiscal policy at the federal level….
  49. 49. Page 262 Rising spending and tax cuts to spur the economy brought back budget deficits
  50. 50. Page 262 Individuals and not businesses pay the Bulk of federal taxes.
  51. 51. Page 263 A strong economy and controlled spending led to the first budget surplus in more than 20 years… The effects of the sub-prime lending defaults and subsequent financial crisis and deficit spending have led to record high deficits…
  52. 52. Recent Trends in Deficit <ul><li>Typically the economy runs a budget deficit at the federal level </li></ul><ul><li>1998-2001 were the exceptions in recent years </li></ul><ul><li>Fueled by 2008-09 financial crisis and huge deficit spending in bailouts, etc. </li></ul>
  53. 53. Debt and the Deficit National debt T = National debt T-1 + Deficit T
  54. 54. Page 264 The growth in federal debt has grown rapidly over the last 25 years…
  55. 55. Page 265 While the national debt grew as deficit spending dominated the Last 30 years, debt as a percent of GDP stayed within post-WW II experience…
  56. 56. Federal government spending on Agriculture programs is the fourth highest on this list of total federal spending.
  57. 57. Fiscal Policy Options <ul><li>Automatic fiscal policy instruments: take effect without explicit action by policymakers (e.g., progressive tax rates) </li></ul><ul><li>Discretionary fiscal policy instruments: require explicit actions by the president or Congress (e.g., passing a law) </li></ul>Page 266
  58. 58. Impacts of Policy Tools Expansionary actions: Effects of action: Cut taxes Increase disposable income Increase government spending Increase aggregate demand Congress & Obama Page 269
  59. 59. Impacts of Policy Tools Expansionary actions: Effects of action: Cut taxes Increase disposable income Increase government spending Increase aggregate demand Contractionary actions: Effects of action: Increase taxes Decrease disposable income Cut government spending Decrease aggregate demand Congress & Obama Page 269
  60. 60. Page 266 A federal budget deficit requires the U.S. Treasury to issue more government securities to balance sources and uses of funds…
  61. 61. Page 266 An increase in the sale of government securities reduces the pool of private capital available to finance investment expenditures, raising interest rates…
  62. 62. Page 266 We know from Chapter 12 that higher interest rates depresses investment expenditures…
  63. 63. Page 270 The use of expansionary fiscal policy actions to push aggregate demand from AD 1 to AD 3 increases real GDP from Y 1 to Y 3 while only increasing the general price level to P 3 . Inflation rate (P 3 – P 0 ) ÷ P 0 Recessionary gap partially closed
  64. 64. Page 270 The use of expansionary fiscal policy to push demand from AD 3 to AD 4 increases real GDP from Y 3 to Y FE (full employment GDP), But increases the general price level to P 4 . Inflation rate (P 4 – P 3 ) ÷ P 3 Recessionary gap closed….
  65. 65. Page 270 The use of expansionary fiscal policy to attain Y POT by shifting aggregate demand to AD 5 will Increase the general price level to P 5 . Inflation rate (P 5 – P 4 ) ÷ P 4 Inflationary gap created….
  66. 66. Monetary Policy Summary <ul><li>Functions of money and the role of the Federal Reserve System in the economy </li></ul><ul><li>The money multiplier and the growth of the money supply </li></ul><ul><li>Tools of monetary policy </li></ul><ul><li>Demand for money and money market equilibrium </li></ul><ul><li>Policy linkages and timing of full effects </li></ul><ul><li>Elimination of recessionary and inflationary gaps. </li></ul>
  67. 67. Fiscal Policy Summary <ul><li>Difference between discretionary and automatic fiscal policy tools </li></ul><ul><li>Expansionary and contractionary fiscal policy actions </li></ul><ul><li>Application to eliminating recessionary and inflationary gaps </li></ul><ul><li>Budget deficits, national debt and concept of “ crowding out ” </li></ul>
  68. 68. Chapter 14 focuses on the key consequences of business fluctuations ….
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×