Macro 17

2. Lecture 16
Macroeconomics

3. Exam 2
Friday and Saturday
Saturday before 12:00
noon
Testing Center
Chapters 10-16

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

5. Discount Rate
Rate the FED charges
member banks

6. Open Market
Operations
Buying and Selling
Financial Instruments

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

8. Excess Reserves Interest
If the rate is high enough
you will leave it in the
bank.
Sets a floor

9. 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

10. Illiquid
Assets are frozen

11. Quantitive Easing
Buying lots of other
financial instruments.
Lots of illiquid assets

12. Lender of Last Resort
Bailouts

13. Problem
Recession
Shift AD to
Right
Inflation
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

14. Central Banks
Independent
Political
Pressure
Accountable
Who do they
answer to?

15. Exam 2
Unemployment
Finance
Interest Rates
MV = PYr
AD-AS Model
Monetary Tools

16. Unemployment
Labor Force Participation Rate
Labor Force ÷ Adults
Unemployment Rate
Unemployed ÷ Labor Force
# %
Employed
+ Unemployed
= Labor Force 100%

17. Finance
Factor = (1+r)n
Rate = Interest Rate
N = number of years
FutureValue = PresentValue x Factor
PresentValue = FutureValue ÷ Factor

18. Interest Rates
Nominal Rate = Real Rate + Inflation Rate
Any rate can be zero or negative

19. Quantity Theory of Money
MV = PYr
%∆M = %∆P

20. AD-AS Model
Inflation and GDP
Three curves
Events
Which Curve
Which Direction
Effects - Short Term and Long
Term

21. AD
Real GDP Growth Rate
Inflation
Rate
π
LRAS
SRAS

22. Negative Positive
Shift Left Shift Right
Aggregate
Supply
Curve
Bad weather Good weather
Higher oil price Lower Oil Price
Tech slump Tech boom
Higher business taxes or
regulations
Lower business taxes or regulation
War, Earthquake, Pandemic Smooth production
Aggregate
Demand
Curve
Slower Money Supply Growth Faster money Supply Growth
Fear Confidence
Reduced Wealth Increased Wealth
Higher Personal Taxes Lower Personal Taxes
Lower Government Spending Higher Government Spending
Decreased Export Growth Increased Export Growth
Increased Import Growth Decreased Import Growth

23. Monetary Tools
Reserve Ratio
Discount Rate
Open Market Operations
Excess Reserve Rate
How to Use?

24. Problem
Recession
Shift AD to
Right
Inflation
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