This document contains information about macroeconomics topics including monetary policy tools, inflation, unemployment, and stagflation. It discusses how central banks can use tools like the reserve ratio, discount rate, open market operations, and excess reserves rate to either increase or decrease the money supply to address problems like recession, inflation, or stagflation. It also covers transmission mechanisms in the economy like uncertainty and irreversible investments that can amplify the effects of economic changes.

2. Lecture 15
Macroeconomics

3. Opening
Prayer

4. Quiz Master

7. 1979 2022 Change
Percentage
Change
Price $399.99 $74.00 -$325.99 -81.5%
Hourly
Income
$3.69 $14.50 $10.81 293.0%
Time
Price
108.40 5.10 -103.29 -95.3%

8. 1979 2022
21.25x

10. Microwave 2022:
108.4 hours
5.1 hours
Time decreased by 95.3%
21.25
Microwave 1979:

11. Oven:
Microwave:
28 minutes
1 minute 15 seconds
Time decreased by 95.5%
22.4 for 1

12. Oven:
Microwave:
28 cents
0.41 cents
Energy decreased by 98.5%
68.3 to 1

13. Microwave -95.3%
Heating Time -95.5%
Electricity -98.5%
Burrito-nomics

14. Quiz
1.What are the four monetary tools?
2. How do you use the tools if the problem is in
fl
ation?
3. How do you use the tools if the problem is
unemployment?
4. How do you use the tools if the problem is stag
fl
ation?

15. Money Supply Tools
Excess
Reserves
Rate
Open
Market
Operations
Discount
Rate
Reserve
Ratio

16. Central Bank
Recession
Unemployment
In
fl
ation

17. AD
Real GDP Growth Rate
In
fl
ation
Rate
π
LRAS
SRAS
Recession
In
fl
ation

18. Reserve Ratio
Fraction of deposits
that must be held in
reserve

19. Reserve Ratio
RR = 1÷ MM
Money Multiplier
MM = 1÷ RR

21. Discount Rate
Rate the FED
charges member
banks

22. Discount Rate
Currently 0.25%
Average 4.45%
(1950 - 2021)

24. Discount Rate
In
fl
uences other
rates

25. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Time to Maturity
Interest
Rate FED Changes
Discount
Rate
Other Rates
Follow

26. Open Market
Operations
Buying and Selling
Financial
Instruments

28. Banks
now have more
cash to loan
Central Bank
Public Banks
Increase Money Supply?
Buy bonds for cash

29. Banks
now have less
cash to loan
Central Bank
Public Banks
Decrease Money Supply?
Sell bonds for cash

30. What do banks do with
extra money?
Excess Reserves
The FED will pay them
interest

31. Excess Reserves Interest
If the rate is high enough
you will leave it in the
bank.
Sets a
fl
oor

33. Problem
Recession
Shift AD to Right
In
fl
ation
Shift AD to Left
Tools
Increase
Money Supply
Decrease
Money Supply
Reserve Ratio Lower Raise
Discount Rate Lower Raise
Open Market
Operations
Buy Bonds
from the Banks
Sell Bonds
to the Banks
Excess Reserves
Interest Rate
Lower Raise

34. Disin
fl
ation
Slower growth in in
fl
ation rate
8% to 3%
De
fl
ation
Negative in
fl
ation
8% to -3%

35. Illiquid
No cash
Net worth to pay debt, but can’t
sell quick and without loss
Insolvent
No cash
No net worth to pay debt

36. Illiquid
Assets are frozen

37. Quantitive Easing
Buying lots of other
fi
nancial
instruments.
Lots of illiquid assets

38. Lender of Last
Resort
Bailouts

39. Problem
Money
Supply
AD
Shift
Reserve
Ratio
Discount
Rate
Open
Market
Operations
Excess
Reserve
Rate
In
fl
ation
Unemployment
Stag
fl
ation
Left Increase Increase
Sell
Bonds Increase
Right Decrease Decrease Decrease
Buy
Bonds
Increase
Decrease

40. Chapter 14
Transmission and
Ampli
fi
cation

41. Little things
can cause big
things

43. Life is not linear
Good
Bad

44. Transmission and Ampli
fi
cations
Intertemporal Substitution
Uncertainty and Irreversible Investments
Labor Adjustment Costs
Time Bunching
Collateral Damage

45. Uncertainty and Irreversible
Investments
Bad news creates uncertainty
uncertainty makes you wait
Sunk Costs
Cannot reverse

47. Labor Adjustment Costs
Structural Unemployment
What to do?
Wait
Move
Retraining Costs

48. Time Bunching
Everything at once
Together
Cities are economic clusters
Seasons