The document is a slide presentation on monetary policy and the economy. It provides an overview of the tools available to central banks, specifically the Federal Reserve, to influence monetary conditions and the macroeconomy. It discusses three main tools: open market operations (OMO), required reserve ratios, and discount rates. It uses aggregate demand-aggregate supply (AD-AS) models to illustrate how the Fed can use OMO to expand or contract the money supply in order to close recessionary or inflationary gaps. The presentation also discusses challenges like stagflation and the tradeoffs central banks may face in choosing between priorities like employment and price stability.
The Federal Reserve uses three main tools to implement monetary policy: open market operations, the reserve ratio, and the discount rate. Open market operations, which involve buying and selling Treasury securities, are the most important tool as they directly change the amount of bank reserves and money supply. The Fed conducts expansionary policy by buying Treasury securities to increase bank reserves and money supply, while contractionary policy involves selling securities to decrease reserves and money supply. The reserve ratio and discount rate can also expand or contract the money supply but are used less due to their greater impact.
The Phillips curve describes an inverse relationship between unemployment and inflation, such that lower unemployment is associated with higher inflation. While observed to be stable in the short-run, it does not hold in the long-run. The document discusses the origins of the Phillips curve from William Phillips' 1958 paper and subsequent modifications by economists like Friedman and Phelps who argued it does not reflect long-run economic realities. It also examines shifts to the Phillips curve from supply shocks and how the relationship between unemployment and inflation is now understood with incorporation of inflation expectations.
This chapter discusses debates around stabilization policy. It considers whether policy should be active or passive in response to economic fluctuations, and whether policy should be set by rule or allow discretion. Arguments for active policy include reducing economic hardship, while arguments for passive policy cite lags in policy effects. Rules are argued to increase credibility and avoid time inconsistency, while discretion allows flexibility. Overall there is no clear consensus from history on the best approach.
R.G. Hawtrey viewed business cycles as purely monetary phenomena caused by fluctuations in bank credit and money supply. He argued that expansions are caused when banks lower interest rates and expand credit, stimulating borrowing by traders. This leads to increased production, income, spending and demand in a self-reinforcing cycle. Contractions occur when banks tighten credit due to depleted reserves, raising rates and curbing borrowing. This causes falling demand, income, production, prices and profits in a deflationary spiral. Hawtrey saw uncontrolled credit as the root cause of instability, and argued that controlling credit would regulate economic fluctuations.
This document summarizes key concepts from Chapter 8 of an economics textbook on economic growth. It discusses how to incorporate technological progress into the Solow growth model by including a variable for labor efficiency that grows exogenously over time. It then reviews empirical evidence on growth, including balanced growth, conditional convergence between countries, and the relationship between factor accumulation and production efficiency. Finally, it examines policy issues such as evaluating a country's saving rate and how to increase savings and allocate investment between different types of capital.
This document discusses policy lags, the crowding-out effect, and how monetary and fiscal policy tools can impact inflation and real output in the short-run. It defines inside lags as the time for policymakers to recognize the need for and implement policy changes, and outside lags as the time for an economy to respond to policy. Crowding-out refers to how increased government borrowing to finance deficits can increase interest rates and crowd-out private borrowing and investment. The document uses aggregate demand and supply models to illustrate these concepts and how monetary policy actions like changing the money supply can lessen or reinforce the crowding-out effect of fiscal policy.
The document outlines 10 principles of economics: 1) People face tradeoffs when making decisions; 2) The cost of something is what you give up to get it; 3) Rational people think at the margin by comparing marginal costs and benefits; 4) People respond to incentives. Trade can make everyone better off and markets are generally a good way to organize economic activity, though governments can improve outcomes during market failures. A country's productivity determines its standard of living. Inflation results from too much money printing by the government, and there is a short-run tradeoff between inflation and unemployment.
INFLATION ITS TYPES, CAUSES, CONSEQUENCES AND MEASURES. PRABHJOT KAUR
Inflation is defined as a sustained increase in the price level or fall in the value of money. It occurs when the level of currency exceeds production. The value of money depreciates with inflation. There are different types of inflation including open, suppressed, galloping, creeping, and hyper inflation. Factors that can cause inflation include an increase in money supply, disposable income, deficit financing, and changes to agricultural and industrial growth. Ways to control inflation include monetary policies like credit control and demonetization, fiscal policies like reducing spending and increasing taxes and savings, and other measures to increase production and implement price controls.
The Federal Reserve uses three main tools to implement monetary policy: open market operations, the reserve ratio, and the discount rate. Open market operations, which involve buying and selling Treasury securities, are the most important tool as they directly change the amount of bank reserves and money supply. The Fed conducts expansionary policy by buying Treasury securities to increase bank reserves and money supply, while contractionary policy involves selling securities to decrease reserves and money supply. The reserve ratio and discount rate can also expand or contract the money supply but are used less due to their greater impact.
The Phillips curve describes an inverse relationship between unemployment and inflation, such that lower unemployment is associated with higher inflation. While observed to be stable in the short-run, it does not hold in the long-run. The document discusses the origins of the Phillips curve from William Phillips' 1958 paper and subsequent modifications by economists like Friedman and Phelps who argued it does not reflect long-run economic realities. It also examines shifts to the Phillips curve from supply shocks and how the relationship between unemployment and inflation is now understood with incorporation of inflation expectations.
This chapter discusses debates around stabilization policy. It considers whether policy should be active or passive in response to economic fluctuations, and whether policy should be set by rule or allow discretion. Arguments for active policy include reducing economic hardship, while arguments for passive policy cite lags in policy effects. Rules are argued to increase credibility and avoid time inconsistency, while discretion allows flexibility. Overall there is no clear consensus from history on the best approach.
R.G. Hawtrey viewed business cycles as purely monetary phenomena caused by fluctuations in bank credit and money supply. He argued that expansions are caused when banks lower interest rates and expand credit, stimulating borrowing by traders. This leads to increased production, income, spending and demand in a self-reinforcing cycle. Contractions occur when banks tighten credit due to depleted reserves, raising rates and curbing borrowing. This causes falling demand, income, production, prices and profits in a deflationary spiral. Hawtrey saw uncontrolled credit as the root cause of instability, and argued that controlling credit would regulate economic fluctuations.
This document summarizes key concepts from Chapter 8 of an economics textbook on economic growth. It discusses how to incorporate technological progress into the Solow growth model by including a variable for labor efficiency that grows exogenously over time. It then reviews empirical evidence on growth, including balanced growth, conditional convergence between countries, and the relationship between factor accumulation and production efficiency. Finally, it examines policy issues such as evaluating a country's saving rate and how to increase savings and allocate investment between different types of capital.
This document discusses policy lags, the crowding-out effect, and how monetary and fiscal policy tools can impact inflation and real output in the short-run. It defines inside lags as the time for policymakers to recognize the need for and implement policy changes, and outside lags as the time for an economy to respond to policy. Crowding-out refers to how increased government borrowing to finance deficits can increase interest rates and crowd-out private borrowing and investment. The document uses aggregate demand and supply models to illustrate these concepts and how monetary policy actions like changing the money supply can lessen or reinforce the crowding-out effect of fiscal policy.
The document outlines 10 principles of economics: 1) People face tradeoffs when making decisions; 2) The cost of something is what you give up to get it; 3) Rational people think at the margin by comparing marginal costs and benefits; 4) People respond to incentives. Trade can make everyone better off and markets are generally a good way to organize economic activity, though governments can improve outcomes during market failures. A country's productivity determines its standard of living. Inflation results from too much money printing by the government, and there is a short-run tradeoff between inflation and unemployment.
INFLATION ITS TYPES, CAUSES, CONSEQUENCES AND MEASURES. PRABHJOT KAUR
Inflation is defined as a sustained increase in the price level or fall in the value of money. It occurs when the level of currency exceeds production. The value of money depreciates with inflation. There are different types of inflation including open, suppressed, galloping, creeping, and hyper inflation. Factors that can cause inflation include an increase in money supply, disposable income, deficit financing, and changes to agricultural and industrial growth. Ways to control inflation include monetary policies like credit control and demonetization, fiscal policies like reducing spending and increasing taxes and savings, and other measures to increase production and implement price controls.
Chapter 7 - inflation ,unemployment and underemployment for BBAginish9841502661
This document defines various types of inflation including low inflation, galloping inflation, and hyperinflation. It also discusses different measures used to calculate inflation rates such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Finally, it outlines several causes of inflation including demand-pull factors related to increases in the money supply according to the Quantity Theory of Money, and cost-push factors like increases in wages or costs of raw materials.
The document discusses stagflation that occurred in the late 1970s to early 1980s. Stagflation is defined as high inflation combined with high unemployment and economic recession. It was caused by external shocks like increased oil prices which raised production costs. Central banks faced a policy dilemma of whether to prioritize fighting inflation or recession. The Bank of Canada chose to target inflation, gradually reducing money supply growth and accepting short-term higher unemployment. This slowed inflation over time, though it caused economic turmoil initially. The Bank of Canada now uses an inflation target of 2% to guide monetary policy decisions.
The document discusses the Phillips curve, which shows the relationship between unemployment and inflation. It describes how Alban Phillips first observed an inverse relationship between wage growth and unemployment rates in Britain. Many economists then concluded there is a negative short-run relationship between unemployment and inflation rates, known as the short-run Phillips curve. However, changes in expected inflation rates can shift this curve. In the long run, policies aimed at reducing unemployment below the natural rate of unemployment lead to accelerating inflation.
The document discusses interest rates and bond yields. It covers two main theories of how interest rates are determined: the loanable funds theory and liquidity preference theory. The loanable funds theory states that interest rates are determined by the supply and demand of loanable funds in the market. The liquidity preference theory argues that interest rates are determined by the supply of money and demand to hold money. The document also discusses how various economic factors can influence interest rate movements. It defines bond yields and the yield to maturity calculation.
New Keynesian economics evolved in response to new classical critiques of Keynesian macroeconomics. It incorporates Keynesian ideas like sticky prices and wages to explain short-run economic fluctuations. A key difference from new classical economics is the assumption that prices and wages adjust slowly rather than quickly clearing markets. This allows for involuntary unemployment and a role for monetary policy. A new synthesis has emerged merging tools from both new classical and new Keynesian models.
The document discusses technological progress in economic growth models. It introduces an endogenous growth model where the rate of technological progress is determined within the model rather than assumed constant. It also discusses policies that can promote economic growth, such as increasing the savings rate, allocating investment efficiently among different types of capital, and encouraging innovation. Empirical evidence generally confirms predictions of the Solow growth model.
Inflation and Deflation- Indian contextSujay Kumar
The document provides an overview of inflation and deflation, including:
- Types of inflation such as demand-pull, cost-push, and structural inflation. Cost-push inflation can arise from wage increases, profit increases, or increases in raw material prices.
- Measures to control inflation including monetary measures like increasing bank rates, cash reserve ratios, and open market operations, and fiscal measures like reducing government spending and increasing taxes.
- Deflation is defined as a general decline in prices. Types of deflation include debt deflation, money supply deflation, bank credit deflation, and confiscatory deflation.
- Measures to control deflation focus on increasing consumption and investment through
The document summarizes the law of variable proportions, also known as the law of diminishing returns. It states that as a variable input (like labor) is increased while fixed inputs (like land and capital) are held constant, marginal and average product will initially increase, then diminish and eventually become negative. There are three stages: 1) increasing returns, 2) diminishing returns, and 3) negative returns. Causes of each stage are explained. A table and graph are provided to illustrate the three stages of the law of variable proportions.
This document discusses various concepts related to inflation including:
- Inflation is defined as a persistent rise in the general price level of goods and services. It is measured using price indexes like the CPI and WPI.
- There are different types of inflation based on rates like moderate, galloping, and hyperinflation. Additionally, inflation can be open or repressed based on government reaction.
- Inflation has causes like excess money supply, deficit financing, population growth, and high import prices. It can be demand-pull or cost-push.
Related concepts discussed include deflation, disinflation, reflation, stagflation, and recession.
This document discusses inflation in the Indian economy. It defines inflation as a rise in the general price level and a fall in the purchasing power of money. There are two main types of inflation - demand-pull inflation, which occurs when demand exceeds supply, and cost-push inflation, which is caused by increased production costs. The consequences of inflation include uncertainty, reduced savings and investment, and income redistribution. To control inflation, the government uses fiscal measures like taxes, monetary measures like interest rates, and general measures like wage and price controls. Empirical data shows India's inflation rate was 5.96% in March 2013 according to the wholesale price index.
This document summarizes monetary policy tools used by the Federal Reserve to influence economic activity. It discusses three main tools: reserve requirements, the discount rate, and open market operations. Changing these tools can implement either an expansionary/easy money policy to increase spending and reduce unemployment, or a restrictive/tight money policy to reduce spending and inflation. The document also discusses how fiscal deficits can impact monetary policy through crowding out and monetizing the debt.
1. The document discusses using the IS-LM model to analyze the effects of shocks, fiscal policy, and monetary policy. It provides examples of analyzing different policy changes using the IS-LM diagram.
2. It then discusses how the IS-LM model can be used to derive the aggregate demand curve and analyze short-run and long-run effects of shocks. Price level adjustments move the economy from short-run to long-run equilibrium.
3. The document contains an example analyzing the 2001 US recession using the IS-LM framework, examining the effects of stock market decline, 9/11, accounting scandals, and fiscal and monetary policy responses.
The document discusses the business cycle and its key stages and features. It defines the business cycle as the fluctuations in economic activity around its long-term trend, involving periods of growth and periods of decline. The main stages are identified as boom, recession, slump, and recovery. Other key points covered include the periodicity and self-reinforcing nature of business cycles as well as different theories that attempt to explain the causes of the cycle such as monetary, fiscal policy, innovation, and overproduction theories.
The Harrod-Domar model theorizes that a country's economic growth rate is defined by its savings level and capital output ratio. It was developed in the 1930s-40s by British economist Roy Harrod and Russian economist Evsey Domar. The model shows that increased savings leads to increased investment, production, and capital, fueling economic growth. However, it makes unrealistic assumptions and does not account for factors like development versus just growth. The Solow-Swan model later improved on it by including capital intensity variations.
This chapter discusses the relationship between money, inflation, and prices according to the quantity theory of money. It introduces key concepts such as the money supply, monetary policy, the quantity equation, velocity of money, and how the money supply and inflation are connected. The quantity theory predicts a direct relationship between the growth of the money supply and the inflation rate in the long run.
Fiscal policy uses government spending and tax collection to influence macroeconomic conditions like unemployment, inflation, and interest rates. There are two types of fiscal policy: expansionary and contractionary. Expansionary policy involves increasing spending or lowering taxes to boost aggregate demand during recessions. Contractionary policy does the opposite by raising taxes or lowering spending to reduce inflationary pressures in overheating economies. However, fiscal policy can disproportionately impact some groups over others.
This document discusses Phillip's curve and the natural rate of unemployment. It notes that in the short run, there is an inverse relationship between unemployment and inflation depicted by Phillip's curve. However, in the long run Phillip's curve becomes vertical as inflation increases due to rising expectations. The natural rate of unemployment (NAIRU) is the rate below which inflation rises, as workers demand higher wages. The document argues the NAIRU theory suggests governments should not try to lower unemployment through demand policies, as that would only cause inflation. However, the NAIRU concept is criticized for lacking empirical evidence and for being against Keynesian demand management.
This document summarizes and compares classical and Keynesian economics. Classical economics is centered around self-regulating markets that operate at full employment, while Keynesian economics recognizes markets do not always self-adjust and the economy can operate below full employment. Key differences include classical economics believing free markets are always stable versus Keynesian thinking they are unstable. The document also outlines Keynesian principles like markets clearing slowly and government intervention being desirable to stabilize the business cycle through fiscal and monetary policies.
Tobin's q theory suggests that the ratio of a firm's market value to replacement cost of capital (q) indicates whether a firm should invest. If q>1, the market values capital more than its cost, so firms should invest. However, investment does not immediately adjust to changes in q, as it takes time to plan, acquire assets, and install capital. While stock prices may accurately value firms relative to each other, overall market levels can depart from fundamentals through bubbles. Surveys find that firms cite expected demand, profitability, and availability of internal funds as more important determinants of investment than q or cost of capital.
The document discusses factors that affect productivity and economic growth, using examples from different regions. It examines how physical capital, human capital, technology, and their combination contribute to productivity. The aggregate production function and growth accounting are introduced to quantify these relationships. Examples from South Korea, Latin America, and Africa illustrate how political stability, education, investment, and other policies impact long-term growth rates. While Africa faces challenges, some nations have achieved increases in productivity and GDP.
This document discusses measures of the money supply (M1 and M2) and how banks create money through the money multiplier effect. It explains that the money supply expands as banks make loans from their excess reserves. The money multiplier is equal to 1 divided by the required reserve ratio, so in this example the money multiplier is 10. When the Fed conducts open market operations by buying bonds, it increases bank reserves and allows the money supply to expand through additional lending. The Fed uses tools like open market operations, reserve requirements, and interest rates to influence the money supply and control monetary policy.
The document provides an overview of the money supply and the Federal Reserve System in the United States. It defines different measures of money including M1, M2 and discusses how banks create money through fractional reserve banking. It then explains the role of the Federal Reserve in controlling the money supply through tools like required reserve ratios, open market operations, and interest rates.
Chapter 7 - inflation ,unemployment and underemployment for BBAginish9841502661
This document defines various types of inflation including low inflation, galloping inflation, and hyperinflation. It also discusses different measures used to calculate inflation rates such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Finally, it outlines several causes of inflation including demand-pull factors related to increases in the money supply according to the Quantity Theory of Money, and cost-push factors like increases in wages or costs of raw materials.
The document discusses stagflation that occurred in the late 1970s to early 1980s. Stagflation is defined as high inflation combined with high unemployment and economic recession. It was caused by external shocks like increased oil prices which raised production costs. Central banks faced a policy dilemma of whether to prioritize fighting inflation or recession. The Bank of Canada chose to target inflation, gradually reducing money supply growth and accepting short-term higher unemployment. This slowed inflation over time, though it caused economic turmoil initially. The Bank of Canada now uses an inflation target of 2% to guide monetary policy decisions.
The document discusses the Phillips curve, which shows the relationship between unemployment and inflation. It describes how Alban Phillips first observed an inverse relationship between wage growth and unemployment rates in Britain. Many economists then concluded there is a negative short-run relationship between unemployment and inflation rates, known as the short-run Phillips curve. However, changes in expected inflation rates can shift this curve. In the long run, policies aimed at reducing unemployment below the natural rate of unemployment lead to accelerating inflation.
The document discusses interest rates and bond yields. It covers two main theories of how interest rates are determined: the loanable funds theory and liquidity preference theory. The loanable funds theory states that interest rates are determined by the supply and demand of loanable funds in the market. The liquidity preference theory argues that interest rates are determined by the supply of money and demand to hold money. The document also discusses how various economic factors can influence interest rate movements. It defines bond yields and the yield to maturity calculation.
New Keynesian economics evolved in response to new classical critiques of Keynesian macroeconomics. It incorporates Keynesian ideas like sticky prices and wages to explain short-run economic fluctuations. A key difference from new classical economics is the assumption that prices and wages adjust slowly rather than quickly clearing markets. This allows for involuntary unemployment and a role for monetary policy. A new synthesis has emerged merging tools from both new classical and new Keynesian models.
The document discusses technological progress in economic growth models. It introduces an endogenous growth model where the rate of technological progress is determined within the model rather than assumed constant. It also discusses policies that can promote economic growth, such as increasing the savings rate, allocating investment efficiently among different types of capital, and encouraging innovation. Empirical evidence generally confirms predictions of the Solow growth model.
Inflation and Deflation- Indian contextSujay Kumar
The document provides an overview of inflation and deflation, including:
- Types of inflation such as demand-pull, cost-push, and structural inflation. Cost-push inflation can arise from wage increases, profit increases, or increases in raw material prices.
- Measures to control inflation including monetary measures like increasing bank rates, cash reserve ratios, and open market operations, and fiscal measures like reducing government spending and increasing taxes.
- Deflation is defined as a general decline in prices. Types of deflation include debt deflation, money supply deflation, bank credit deflation, and confiscatory deflation.
- Measures to control deflation focus on increasing consumption and investment through
The document summarizes the law of variable proportions, also known as the law of diminishing returns. It states that as a variable input (like labor) is increased while fixed inputs (like land and capital) are held constant, marginal and average product will initially increase, then diminish and eventually become negative. There are three stages: 1) increasing returns, 2) diminishing returns, and 3) negative returns. Causes of each stage are explained. A table and graph are provided to illustrate the three stages of the law of variable proportions.
This document discusses various concepts related to inflation including:
- Inflation is defined as a persistent rise in the general price level of goods and services. It is measured using price indexes like the CPI and WPI.
- There are different types of inflation based on rates like moderate, galloping, and hyperinflation. Additionally, inflation can be open or repressed based on government reaction.
- Inflation has causes like excess money supply, deficit financing, population growth, and high import prices. It can be demand-pull or cost-push.
Related concepts discussed include deflation, disinflation, reflation, stagflation, and recession.
This document discusses inflation in the Indian economy. It defines inflation as a rise in the general price level and a fall in the purchasing power of money. There are two main types of inflation - demand-pull inflation, which occurs when demand exceeds supply, and cost-push inflation, which is caused by increased production costs. The consequences of inflation include uncertainty, reduced savings and investment, and income redistribution. To control inflation, the government uses fiscal measures like taxes, monetary measures like interest rates, and general measures like wage and price controls. Empirical data shows India's inflation rate was 5.96% in March 2013 according to the wholesale price index.
This document summarizes monetary policy tools used by the Federal Reserve to influence economic activity. It discusses three main tools: reserve requirements, the discount rate, and open market operations. Changing these tools can implement either an expansionary/easy money policy to increase spending and reduce unemployment, or a restrictive/tight money policy to reduce spending and inflation. The document also discusses how fiscal deficits can impact monetary policy through crowding out and monetizing the debt.
1. The document discusses using the IS-LM model to analyze the effects of shocks, fiscal policy, and monetary policy. It provides examples of analyzing different policy changes using the IS-LM diagram.
2. It then discusses how the IS-LM model can be used to derive the aggregate demand curve and analyze short-run and long-run effects of shocks. Price level adjustments move the economy from short-run to long-run equilibrium.
3. The document contains an example analyzing the 2001 US recession using the IS-LM framework, examining the effects of stock market decline, 9/11, accounting scandals, and fiscal and monetary policy responses.
The document discusses the business cycle and its key stages and features. It defines the business cycle as the fluctuations in economic activity around its long-term trend, involving periods of growth and periods of decline. The main stages are identified as boom, recession, slump, and recovery. Other key points covered include the periodicity and self-reinforcing nature of business cycles as well as different theories that attempt to explain the causes of the cycle such as monetary, fiscal policy, innovation, and overproduction theories.
The Harrod-Domar model theorizes that a country's economic growth rate is defined by its savings level and capital output ratio. It was developed in the 1930s-40s by British economist Roy Harrod and Russian economist Evsey Domar. The model shows that increased savings leads to increased investment, production, and capital, fueling economic growth. However, it makes unrealistic assumptions and does not account for factors like development versus just growth. The Solow-Swan model later improved on it by including capital intensity variations.
This chapter discusses the relationship between money, inflation, and prices according to the quantity theory of money. It introduces key concepts such as the money supply, monetary policy, the quantity equation, velocity of money, and how the money supply and inflation are connected. The quantity theory predicts a direct relationship between the growth of the money supply and the inflation rate in the long run.
Fiscal policy uses government spending and tax collection to influence macroeconomic conditions like unemployment, inflation, and interest rates. There are two types of fiscal policy: expansionary and contractionary. Expansionary policy involves increasing spending or lowering taxes to boost aggregate demand during recessions. Contractionary policy does the opposite by raising taxes or lowering spending to reduce inflationary pressures in overheating economies. However, fiscal policy can disproportionately impact some groups over others.
This document discusses Phillip's curve and the natural rate of unemployment. It notes that in the short run, there is an inverse relationship between unemployment and inflation depicted by Phillip's curve. However, in the long run Phillip's curve becomes vertical as inflation increases due to rising expectations. The natural rate of unemployment (NAIRU) is the rate below which inflation rises, as workers demand higher wages. The document argues the NAIRU theory suggests governments should not try to lower unemployment through demand policies, as that would only cause inflation. However, the NAIRU concept is criticized for lacking empirical evidence and for being against Keynesian demand management.
This document summarizes and compares classical and Keynesian economics. Classical economics is centered around self-regulating markets that operate at full employment, while Keynesian economics recognizes markets do not always self-adjust and the economy can operate below full employment. Key differences include classical economics believing free markets are always stable versus Keynesian thinking they are unstable. The document also outlines Keynesian principles like markets clearing slowly and government intervention being desirable to stabilize the business cycle through fiscal and monetary policies.
Tobin's q theory suggests that the ratio of a firm's market value to replacement cost of capital (q) indicates whether a firm should invest. If q>1, the market values capital more than its cost, so firms should invest. However, investment does not immediately adjust to changes in q, as it takes time to plan, acquire assets, and install capital. While stock prices may accurately value firms relative to each other, overall market levels can depart from fundamentals through bubbles. Surveys find that firms cite expected demand, profitability, and availability of internal funds as more important determinants of investment than q or cost of capital.
The document discusses factors that affect productivity and economic growth, using examples from different regions. It examines how physical capital, human capital, technology, and their combination contribute to productivity. The aggregate production function and growth accounting are introduced to quantify these relationships. Examples from South Korea, Latin America, and Africa illustrate how political stability, education, investment, and other policies impact long-term growth rates. While Africa faces challenges, some nations have achieved increases in productivity and GDP.
This document discusses measures of the money supply (M1 and M2) and how banks create money through the money multiplier effect. It explains that the money supply expands as banks make loans from their excess reserves. The money multiplier is equal to 1 divided by the required reserve ratio, so in this example the money multiplier is 10. When the Fed conducts open market operations by buying bonds, it increases bank reserves and allows the money supply to expand through additional lending. The Fed uses tools like open market operations, reserve requirements, and interest rates to influence the money supply and control monetary policy.
The document provides an overview of the money supply and the Federal Reserve System in the United States. It defines different measures of money including M1, M2 and discusses how banks create money through fractional reserve banking. It then explains the role of the Federal Reserve in controlling the money supply through tools like required reserve ratios, open market operations, and interest rates.
There are three main types of microscopes: compound light, stereo, and electron. Compound light microscopes use two lenses to focus light to produce a 2D magnified image. Stereo microscopes provide a 3D view of larger specimens. Electron microscopes use electron beams rather than light for magnification, allowing for much higher magnifications. Scanning electron microscopes provide 3D images while transmission electron microscopes give 2D views.
The document discusses beliefs about creation and the nature of God. It describes how the Trinity of God the Father, Son, and Holy Spirit worked together in creation from the beginning according to Genesis. God created man and woman in His image to have dominion over the earth. Finally, it encourages the reader to think about God as the Creator and to pray to Him.
An imperfectly competitive labor market exists when there is a single large employer, or monopsonist, such as a factory that dominates employment in a company town. As the sole buyer of labor, a monopsonist can exploit workers by paying wages below what the marginal revenue product of labor would be in a competitive market. Unions attempt to counteract monopsony power and increase wages by organizing large numbers of workers to increase their collective bargaining power against employers. When unions are able to represent most or all workers in a field, they can negotiate wages closer to the competitive level by effectively making the labor supply curve more inelastic.
This document discusses different types of musical ensembles including chamber music groups, orchestras, concert bands, jazz bands, and rock bands. It provides examples of instrumentation and compositions for different sized chamber groups from duos to octets. It also describes the sections and roles of instruments in a symphony orchestra. Basic concert etiquette for both performers and audiences is outlined. Readings and video assignments are listed to supplement the information provided.
The Classical Era occurred between 1750-1825 and was characterized by emulating the ideals of Classical Greece in architecture, literature, and the arts. A new classical style developed with clearer divisions, brighter contrasts, and simplicity over complexity. Important historical events during this time included the American and French Revolutions. Scientific discoveries expanded through figures like Watts, Franklin, Jenner, and Priestley. In music, homophonic texture was common, forms like sonata allegro developed, and composers included Mozart and Haydn. Haydn was an influential Austrian composer known as the "Father of the Symphony" and "Father of the String Quartet." He helped develop musical forms and enriched all genres he worked in.
Drama is a form of storytelling meant to be performed in front of an audience. There are two main types: tragedies, which show the downfall of a heroic character, and comedies, which typically have lighter conflicts and happy endings. A playwright writes out the script, including dialogue between characters and stage directions. Productions require directors, actors, designers and crew to bring the written play to life through staging, sets, costumes, lighting and more. The audience experiences the drama differently than just reading it and adds to the performance through their reactions.
Wages and Employment in Perfect CompetitionLumen Learning
This document analyzes wages and employment in a perfectly competitive labor market. It discusses key concepts such as marginal revenue product (MRP), which represents the demand for labor, and marginal factor cost (MFC), which represents the supply of labor. The document uses these concepts to determine the optimal number of employees a firm should hire by comparing MRP and MFC - hiring employees as long as MRP exceeds MFC. It also discusses how factors like changes in productivity, prices of other resources, and demand for the good produced can impact demand for labor over time.
Chem 2 - The Second Law of Thermodynamics: Entropy and Heat IVLumen Learning
The document discusses entropy and the Second Law of Thermodynamics. It explains that entropy increases with increasing temperature as heat is added to a system and the number of accessible energy states increases. It provides examples of how entropy increases for phase transitions like melting (fusion) and vaporization, as molecules gain more freedom of movement and positions when changing phases from solid to liquid to gas. The entropy change is positive for these spontaneous phase transitions as disorder and accessible states increase.
Cbc the argumentative research paper overviewLumen Learning
This document provides instructions for writing a 10-12 page argumentative research paper for a business degree program. It outlines the requirements, including selecting a debatable business-related topic, supporting arguments with research from approved databases rather than general websites, and following an MLA format. The document explains how to develop a thesis statement, write an outline with topic sentences, incorporate facts and citations into each paragraph, and conclude with a summary. It also offers tips on structuring the paper and properly citing sources to avoid plagiarism.
The document summarizes the scientific method, which is a logical and organized process used by scientists to investigate phenomena and acquire new knowledge. It involves five basic steps: 1) making an observation, 2) developing a hypothesis, 3) conducting an experiment to test the hypothesis, 4) analyzing the results, and 5) drawing a conclusion. An example is provided of using this method to investigate which conditions cause Alka-Seltzer tablets to dissolve the fastest. Key aspects of experiments are also defined, such as variables, controls, and the difference between a hypothesis and a scientific theory.
The Baroque Era lasted from 1600 to 1750. It was a period of religious wars in Europe, scientific discoveries, and the exploration of the New World. Music of the time was meant to arouse passions and was ornate and heavily ornamented. Important composers included Bach, Handel, and Vivaldi. Johann Sebastian Bach (1685-1750) was one of the most famous composers of the Baroque era. He was born into a musical family and demonstrated exceptional musical talent from a young age. Bach held several church music director positions and composed works for orchestra, choir, and solo instruments, helping establish common practice tonality. His compositions, including the Brandenburg Concertos and The Well-Tempered Clavier,
Chem 2 - Intermolecular Forces & Phases of Matter I Lumen Learning
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The document outlines the key stages in a typical design project process: 1) defining the problem and client brief, 2) researching specifications and possible solutions, 3) evaluating ideas and synthesizing them, 4) creating prototypes, 5) refining the prototypes, 6) realizing the final design, and 7) evaluating the final product and design process. It provides a structured workflow for managing a design project from start to finish.
Resources used for production such as labor, capital, land and entrepreneurial ability are scarce, forcing individuals and societies to make choices. This can be modeled using a production possibilities curve which shows the maximum combinations of two goods an economy can produce with its available resources. The steeper the curve, the higher the opportunity cost of producing one good over another as more of the second good must be given up. Over time a country's production possibilities curve may shift outward if its resources or technology increase, reducing scarcity.
This document provides conversion factors and example problems for dimensional analysis. It includes conversions between common units like inches and centimeters, as well as metric prefix conversions. Example problems show how to set up multiple-step conversions between unusual units like picometers to feet and gallons to cubic centimeters. Justifications are provided to check if answers seem reasonable based on relative unit sizes.
Fiscal policy uses changes in government spending and taxation to influence economic activity. It is a tool governments can use to address recessions or inflation. When the economy is in recession, expansionary fiscal policy like tax cuts or increased spending can boost aggregate demand. When the economy is overheating, contractionary fiscal policy such as tax increases or spending cuts can cool it down. However, fiscal policy is difficult to implement effectively in practice as politicians often fail to enact contractionary policy in good times. This has led to large budget deficits and government debt over time in many countries.
This document provides an overview of the aggregate demand-aggregate supply (AD-AS) model. It begins by explaining that the model will compare two variables: the price level and real GDP. It then develops the AD, short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves. The intersection of the AD and SRAS curves represents macroeconomic equilibrium for a given point in time. The document then analyzes how the economy would be affected by shifts in the AD curve due to a stock market boom, which increases aggregate demand and leads to higher prices and GDP, and a housing bust, which decreases aggregate demand and leads to lower prices and GDP.
Section 14Fernanda Matos De OliveiraPage 25 of 2513013.docxkenjordan97598
Section 14
Fernanda Matos De Oliveira
Page 25 of 25 1/30/13
*Quotes from The Lord of the Rings, or The Hobbit by JRR Tolkien. Nothing written in italics applies to the questions—it’s there just for Tolkien fun. Go forth and read!!!
Gandalf wishes the economy of Middle Earth to operate smoothly after he sails from the Grey Havens to the never-ending lands in the West. He gathers King Elessar of Gondor, King Eomer of Rohan, Thain Pippin Took of the Shire, King Thorin III Stonehelm of the Lonely Mountain, King Bard II of Dale, King Thranduil of Mirkwood, Gimli son of Gloin of Aglarond, Prince Faramir of Ithilien, Prince Imrahil of Dol Amroth, Treebeard of Fangorn Forest and other councilors and leaders of the various countries of Middle Earth to instruct them on fiscal policies designed to smooth out the business cycle.
Even as the first shadows were felt in Mirkwood there appeared in the west of Middle-earth the Istari, whom Men called the Wizards....[A]terwards it was said among the Elves that they were messengers sent by the Lords of the West to contest the power of Sauron, if he should rise again, and to move Elves and Men and all living things of good will to valiant deeds. In the likeness of Men they appeared, old but vigorous, and they changed little with the years, and aged but slowly, though great cares lay on them; great wisdom they had, and many powers of mind and hand.
a) Describe a budget deficit, a budget surplus and a balanced budget. Include relationship of tax revenues and government spending. What impact will each have on the market for loanable funds?
A budget deficit occurs when total expenditures exceed total revenues. A budget surplus, on the other hand, describes a situation where total revenues exceed total expenditures. Finally, a balanced budget is one where total expenditures are equal to total revenues. A budget deficit would imply that an economy would not be in a position to pay off its debts in case it is given a loan. A budget supply, on the other hand, would increase the probability of a country receiving loans. GO BACK TO HANDOUT #16 ON LOANABLE FUNDS TO STATE THE ROLE OF GOVERNMENT IN LOANABLE FUNDS IN EACH SITUATION.
b)
Describe and graph how an income tax affects potential GDP and aggregate supply. Indicate the income tax wedge. (2 graphs) How do taxes on expenditures affect the income tax wedge?
LOOK IN HANDOUT #24. YOU NEED TO SHOW THE WEDGE IN THE LABOR MARKET AND SHOW THE CONNECTION ON THE PRODUCTION FUNCTION (LIKE WE DID IN ECONOMIC GROWTH SECTION).
(
Price
)
(
AS
1
) (
AS
)
(
D
)
(
GDP
)
(
Income Tax wedge
)
(
AS
1
) (
AS
)
(
D
)
(
GDP
)
An increase in income tax reduces GDP and aggregate supply.
This is because an income tax translates to reducedexpenditures, which reduces aggregate supply and GDP.
Taxes on expenditures, on the other hand,reduce INCREASE the income tax wedge
c) Draw the Laffer curve. Show whe.
This document provides advice on finding and maintaining employment during an economic recession. It discusses understanding recessions and their causes, the competitive job market during hard times, emphasizing versatility in skills and qualifications, effective job hunting strategies, and tips for career progression even when opportunities are limited. The key messages are that recessions are a normal part of the economic cycle, employers seek well-rounded candidates with extra value to offer during downturns, and persistence, adaptability, and maintaining long-term goals are important for professional success in challenging economic conditions.
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
The document discusses concerns about future inflation given recent monetary and fiscal policy actions. It provides three key reasons to be wary of inflation:
1) Monetary policy - The Fed has increased the monetary base significantly and its exit strategy from quantitative easing may be difficult. This compromises its independence.
2) Fiscal policy - The US government faces large deficits and debt levels that could put pressure on the Fed to pursue inflationary policies.
3) Interaction of policies - The Fed's actions during the financial crisis reduced its independence, making it harder to maintain low, stable inflation as fiscal pressures rise. Close monitoring of inflation is prudent given these challenges to monetary policy.
This document discusses monetary policy and how the Federal Reserve uses it to manage the economy. It explains that the Fed uses open market operations, buying and selling U.S. treasury bonds, to increase or decrease the money supply. When the Fed buys bonds it injects money into the economy, lowering interest rates to stimulate investment and growth. When it sells bonds it removes money, raising rates but also slowing investment to prevent overheating. The goal is to keep rates and the economy stable over time using this tool to counter shifts in money demand from the private sector.
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- In paragraph 1 of the document, growth in the new economic normal is defined as subdued and unemployment remaining high according to Pimco's CEO. Finance will be costlier and investment weak.
- Paragraph 2 states that governments have entered several inner areas of capitalism due to the crisis, like banking and carmaking. The state may overstay its welcome. National budgets may feel fiscal strain like California.
- Paragraph 1 defines growth as subdued and unemployment remaining high. Finance is referred to as being affected by the crisis. Paragraph 2 mentions the fiscal pressure preventing California's development.
This document provides an overview of key macroeconomic concepts including Gross Domestic Product (GDP) and the business cycle. It defines GDP as the total value of final goods and services produced within a country in a given year, which can be measured using either the expenditure approach or the income approach. It also explains how to use price indices to adjust nominal GDP values for inflation and obtain real GDP in order to make accurate comparisons over time. Finally, it outlines the four phases of the typical business cycle: peak, trough, recession, and expansion.
Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with over $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.
Global Macro-economics, Trends, Portfolio ImplicationsNikunj Sanghvi
My presentation to the Bombay Chartered Accountants' Society International Economic Study Circle on Global macro-economics, trends, portfolio implications
Aug 7th 2013
Mumbai, India
1. The Federal Reserve controls the money supply through tools like open market operations, adjusting the discount rate, and setting reserve requirements for banks.
2. Changing the money supply can influence interest rates and inflation. Increasing the money supply may lower interest rates in the short run but cause inflation in the long run, while decreasing the money supply may raise interest rates and potentially lead to deflation.
3. Discretionary income, or money people have left to spend or save after basic expenses, is an important factor in how monetary policy affects consumption. However, high consumer debt loads in the 1990s limited the impact of lower interest rates on spending.
The document summarizes the economic recessions in Japan and the United States. It discusses how Japan experienced a "lost decade" after its bubble economy collapsed in the early 1990s, bringing an end to its post-war growth. Despite monetary and fiscal stimulus, Japan struggled with deflation and a liquidity trap. The US also experienced recessions in the 2000s and late 2000s due to the dot-com bubble bursting and the subprime mortgage crisis.
Deliverable length 1,100 to 1,500 words. Please go in-depth.Tw.docxcargillfilberto
Deliverable length 1,100 to 1,500 words. Please go in-depth.
Two important policy goals of the government and the Fed are to keep unemployment and inflation low, while at the same time making sure that GDP is increasing at an average of 3% per year. It is important to have the right mix of policies and that all the variables be timed perfectly.
Government is fiscal Policy and Federal is Monetary Policy. Monetary Policy is the one that cares if inflation gets out of hand.
Part 1:
Assume that the country is in a period of high unemployment, interest rates are at almost zero,
inflation is about 2% per year
, and GDP growth is less than 2% per year.
Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same.
What is the first action you would take as the president? As the chairman of the Fed? Why?
What would be your subsequent steps?
Make sure you include both the positive and negative effects of your actions, and include the trade-offs or opportunity costs.
Include the following concepts in your discussion:
Demand and supply of money
- (This is a Fed issue)
Interest rates – (This is a Fed issue)
The Phillips curve
Taxation – (This is a Government issue)
Government spending – (This is a Government issue)
Wages – (This is a Fed issue)
Costs of inflation - (This is a Fed issue)
The multiplier and the tax multiplier – (This is a Government issue)
The idea of tax rebates to stimulate the economy – (This is a Government issue)
Part 2:
Assume that the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this affect any policy changes you discussed in Part 1?
Describe the concepts and measurement of Gross Domestic Product (GDP), unemployment, and inflation.
Explain what is meant by “business cycles” and “economic growth and describe the factors that contribute to each.
Demonstrate understanding of the relevance and impact of macroeconomics and how it impacts politics, the workplace, and people.
References required
.
The document provides an overview of macroeconomic policies and concepts including:
1) It discusses the business cycle and macroeconomic equilibrium and how disturbances can cause instability.
2) Keynes argued that government intervention is necessary to address inherent instability in free markets. Fiscal and monetary policies can be used to stimulate aggregate demand.
3) Supply-side policies aim to shift aggregate supply curves by incentivizing production. Both demand and supply factors influence macroeconomic outcomes like growth, unemployment and inflation.
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- Organisms are organized in a hierarchy from atoms to biosphere. The tree of life shows relationships between domains of life - bacteria, archaea, and eukarya. The scientific method involves making observations, hypotheses, experiments, theories, and conclusions to build knowledge.
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Monetary Policy and the Fed
1. Slide 1 of 31
Financial Markets and the Economy
"Give me control of a nation's money and I care
not who makes it's laws"
-Mayer Amschel Rothschild
2. Slide 2 of 31
In this module, we’ll continue to
explore monetary policy
In the previous module, we learned
that the Fed can manipulate the money
supply to manage the economy.
We now discuss that tool – Monetary Policy –
in more detail.
We’ll learn that the Fed has historically had
three tools at its disposal, though it primarily
only uses one (until very recently).
And we will explore how monetary policy can
be used in practice.
3. Slide 3 of 31
First – a quick review of
the AD-AS Model
We’ve learned that the AD-AS model
compares Prices and Real GDP.
We know that under ideal
circumstances – when all resources
are used – an economy can produced
its potential Real GDP.
LRAS
At that point, we see that economy’s
Long Run Aggregate Supply curve
(LRAS). Let’s suppose that amount is
$200 billion.
$200b
Put a different way, we can say this: if
this economy is at its natural rate of
unemployment (5%), it will produce
$200 billion in goods and services.
4. Slide 4 of 31
First – a quick review of the AD-
AS Model
We know its actual experience may be
different.
It will actually operate at the
intersection of the Aggregate Demand
(AD) curve and the Short Run
Aggregate Supply (SRAS) curve.
LRAS
Perhaps those curves appear as
follows.
$200b
If so, then macroeconomic equilibrium
assure us that the economy will tend to
this point.
AD1
SRAS1
At this point, prices will be P1 and Real
GDP will be $150b.
P1
$150b
5. Slide 5 of 31
This scenario illustrates a recession!
LRAS
$200b
AD1
SRAS1
P1
$150b
Here we see the economy is capable
of producing $200 billion in goods and
services – if it uses all its resources.
But it is instead only producing $150
billion in goods and services.
In that case, Real GDP is low and
unemployment is high – these are the
hallmarks of a recession.
But what can be done?!
“Recessionary Gap”
6. Slide 6 of 31
The Fed can use monetary policy to
correct for these imbalances
Open Market
Operations
(OMO) where
they purchase
and sell
government
bonds.
Reserve
Requirements –
set by the Board of
Governors – it is
the share of each
deposit that banks
must hold.
Discount Rate -
It is the interest
rate at which
banks may
borrow money
from the Federal
Reserve.
Let’s explore each of these in detail…
The Fed has historically had three tools at its disposal.
7. Slide 7 of 31
Tool #1: Open Market Operations (OMO)
This is the Fed’s primary policy tool.
This involves the purchase and sale of
U.S. treasury bonds.
The fed buys (or sells) millions of dollars in bonds
daily to “manage” the U.S. money supply.
8. Slide 8 of 31
How might Open Market
Operations unfold?
Suppose the Fed
identifies that a
recessionary gap is
occurring.
The Fed could respond
by buying bonds, thereby
injecting money into the
economy.
Lower interest rates
encourages investment
and lowers the dollar value.
Economic indicators serve to
inform that judgment. You
are not the only ones paying
attention to those
This is called Expansionary
monetary policy – it
increases the money supply
and causes interest rates to
fall.
Lower interest rates cause
investment to increase. The
weaker dollar causes net
exports to increase. Both push
AD higher.
9. Slide 9 of 31
Closing the “Recessionary Gap”
Having completed Open Market
Operations to expand the money
supply, AD is now at an intersection
with SRAS on top of the LRAS.
In theory, unemployment returns to
the natural rate (5%).
The recessionary gap has been
‘closed’.
But what about inflationary gaps?
10. Slide 10 of 31
This scenario illustrates inflation!
LRAS
$250b
AD1
SRAS1
P3
$200b
Here we see the economy is capable
of producing $200 billion in goods and
services – if it uses all its resources.
But it is instead producing $250 billion
in goods and services.
In that case, Real GDP is high and
unemployment is low– this economy
may be overheating.
But what can be done?!
“inflationary Gap”
11. Slide 11 of 31
How might Open Market Operations be
used to combat inflation?
Suppose the Fed identifies
that an inflationary gap is
occurring.
The Fed SELLS Bonds,
thereby removing money
from the economy.
Higher interest rates
discourages investment and
increases the dollar value.
High rates of output require
lo levels of unemployment.
Workers demand raises in
this environment and higher
costs are passed on to
consumers.
This is called contractionary
monetary policy – it
decreases the money supply
and causes interest rates to
rise.
Higher interest rates cause
investment to decrease. The
stronger dollar causes net
exports to fall. Both pull the AD
leftward.
12. Slide 12 of 31
Can we see historic observations of the
Fed’s behavior? You bet we can!
The supply of money
was increased to
accelerate the economy
in the early 1990s in
response to the 1991
recession.
Once reasonable RGDP growth was
realized, the money supply was
reduced to ensure that inflation did
not occur. The idea is to provide
enough money to manage growth
without inflation!
In response to the 9/11
attacks, the money supply
was quickly and drastically
increased to help absorb the
shock that the attacks might
have had on the economy.
Once it was realized that the
economic impact of 9/11
would not be as big as first
thought, the money supply
was quickly contained to
avoid inflation.
It is easy to see how concerned the
Fed was during the Financial
Crisis…look how rapidly they
expanded the money supply!
13. Slide 13 of 31
Policy goals can be
conflicting in some cases
LRAS
$150b
AD1
SRAS1
P2
$200b
Ideally, the Fed seeks full employment
and stable prices. Sometimes it must
choose between the two.
Take this case for example. Imagine
that the economy is operating at its
potential. GDP is at $200 billion and
the unemployment rate is 5%.
Then something happens…Oil prices
skyrocket and the SRAS curve shifts
left in response.
SRAS2
P3
This nasty combination is called
stagflation. Here we see that Real
GDP has fallen but prices are rising.
So what should be done?
14. Slide 14 of 31
A possible response to
stagflation
LRAS
$150b
AD1
SRAS1
P2
$200b
If facing stagflation, as is pictured here,
the Fed will observe a recessionary
gap that is accompanied by high
unemployment.
It could address that by buying bonds
(expansionary monetary policy) which
would return the economy to full
employment.
But that increases price even further.
SRAS2
P3
A policy reaction like that may risk
allowing the economy to slip into
hyperinflation.
AD2
P4
Note the recessionary gap
15. Slide 15 of 31
The response to stagflation
LRAS
$150b
AD1
SRAS1
P2
$200b
Here again, the Fed sees stagflation.
With it, the Fed will also observe
relatively higher prices, which will be
concerning.
It could address that by selling bonds
(Contractionary monetary policy) which
would stabilize prices.
But that would reduce Real GDP even
further driving unemployment higher.
SRAS2
P3
This policy may take a moderate
recession and make it more severe.
Note the increase in prices
AD2
$120b
16. Slide 16 of 31
What is the correct
response to stagflation?
Technically, there is not a good answer.
The Fed must choose between its
priority of full employment and stable
prices.
This happened to the U.S. in the late
1970s and the early 1980s.
The Fed Chairman then (Paul Volker)
chose to fight inflation first.
He reduced the money supply thereby
pushing interest rates significantly
higher.
Paul Volker, a 6’6”” man, vowed to
“break the back” of inflation.
17. Slide 17 of 31
LRAS
AD1
SRAS1
AD2
You give it a try…be the Fed Chairman!
Imagine that you are Chairman of the Fed
and you preside over the hypothetical
economy as depicted by this AD-AS Model..
The following year, you observe this change.
Which of the following do you most likely
conclude?
There is a
recessionary gap
There is an
inflationary gap
Unemployment is
rising
Prices are falling
(deflation)
AD has shifted to the right. In this economy, an inflationary gap has
developed, which would concern the Fed.
18. Slide 18 of 31
LRAS
AD1
SRAS1
AD2
You give it a try…be the Fed Chairman!
Imagine that you are Chairman of the Fed
and you preside over the hypothetical
economy as depicted by this AD-AS Model..
The following year, you observe this change.
Which of the following do you most likely
conclude?
The Fed should
buy bonds
The Fed should
sell bonds
The Fed should do
nothing.
All the above.
AD has shifted to the right leaving this economy at its potential. No
Monetary Policy action is necessary.
19. Slide 19 of 31
LRAS
AD1
SRAS1
You give it a try…be the Fed Chairman!
Imagine that you are Chairman of the Fed
and you preside over the hypothetical
economy as depicted by this AD-AS Model..
The following year, you observe this change.
Which of the following do you most likely
conclude?
Prices have fallen
(deflation)
Real GDP has
increased
The unemployment
rate is falling.
All the above.
SRAS has shifted to the right…perhaps oil prices fell or workers are more
productive. This lowers prices and increases Real GDP.
SRAS2
20. Slide 20 of 31
LRAS
AD1
SRAS1
You give it a try…be the Fed Chairman!
Imagine that you are Chairman of the Fed
and you preside over the hypothetical
economy as depicted by this AD-AS Model..
The following year, you observe this change.
Which of the following do you most likely
conclude?
Prices have
increased (inflation)
Real GDP has
increased
The unemployment
rate is falling.
This economy is in
recession.
AD has shifted left by what appears to be a drastic amount. Real GDP has fallen a lot
and unemployment is likely on the rise. That is a recession!
AD2
21. Slide 21 of 31
Tool #2: The Required Reserve Ratio
While Open Market Operations is the most
commonly used monetary policy tool, there
are others.
The second covered here involves the
required reserve ratio.
Recall that when you make a deposit at a
bank, that bank is required to hold some of
that money in reserve.
That insures the bank’s health and helps prevent
bank runs. But the ratio that is required to be
held has big implications on the amount of
money created by the banking system.
22. Slide 22 of 31
Tool #2: Required Reserve Ratio
Note that with a
required reserve ratio
of 40%, a $10 million
initial deposit creates
$15 million in money.
Lowering the required
reserve ratio
increases money
creation. With a 3%
reserve requirement,
$323 million is created
by an initial $10
million deposit.
If that is true, then the required reserve
ratio can be used to influence the
money supply!
23. Slide 23 of 31
Using the Required Reserve Ratio to
manage the economy
The Required Reserve Ratio is set by the
Federal Reserve's Board of Governors.
In theory, if that body wanted to expand the
money supply – thereby stimulating economic
activity, it could lower the reserve ratio.
A lower RRR would mean that more money
is created though the money creation
process.
A greater money supply should lower interest
rates and induce investment and exports.
24. Slide 24 of 31
The Reserve requirement is not typically
used as a policy tool (in the U.S.)
However, history has shown us that changing the Required
Reserve Ratio has a jarring affect on the economy.
Imagine if you are a banker and you
agree to loan me money next week for a
new plant.
I hire architects and construction workers
to get started.
Then, the Required Reserve Ratio is
changed and you have to cancel my
loan.
Then, the Required Reserve Ratio is
changed and you have to cancel my
loan.
These jarring impacts are tough on an
economy so the Fed generally does not
alter the required reserve ratio.
In fact, it has not been changed in
decades….
…though some are arguing that if banks
had higher reserves, they would have
been better prepared to handle the
financial crisis.
25. Slide 25 of 31
Tool #3: The discount rate
$
Borrowing money from the Fed is more expensive and usually
indicates that a bank is in “trouble”. For these reasons banks
avoid putting themselves in this position.
The interest rate that banks charge each
other is called the “Federal Funds Rate”.
*The actual rate varies depending on how much a bank has on
deposit. Assume the required reserve ratio is 10%.
Member banks are required to have
10% of deposits in an account with a
Federal Reserve Bank.*
If a bank appears to be unable to meet
that requirement, it may borrow from
another bank to get the funds.
If other banks are unable or unwilling to extend
them credit, they can borrow from their regional
Federal Reserve Bank.
26. Slide 26 of 31
How the Fed uses the discount
rate as a monetary policy tool
• Increasing the discount rate will discourage banks from
borrowing from the Fed (called “borrowing from the
discount window”)
• This will discourage banks from being aggressive about
making loans for fear that they will not be able to meet
their required reserve ratio
• This works in reverse too. Lowering the discount rate
might encourage banks to be more aggressive and make
more loans. An increases in loans expands the money
supply!
Fewer loans means
less money is created!
%
The discount rate is not an effective monetary policy
tool and is only typically used to signal changes in
future open market operations
27. Slide 27 of 31
Which direction should we go…Easy
or tight money?
• Easy Money
– Purchase bonds in
Open Market
Operations
– Lower the required
reserve ratio
– Lower the discount
rate
• Tight Money
– Sell bonds in Open
Market Operations
– Raise the reserve
ratio
– Raise the discount
rate
This is the Fed’s Primary monetary policy tool. The
others are rarely used or used only for symbolic
reasons
28. Slide 28 of 31
Monetary policy has some pros and
cons. The pros:
• Monetary policy is not politically sensitive
• The Federal Reserve is isolated from political pressure,
particularly with 14 year terms
• Monetary policy impacts the economy
quickly
• It can take 6 months or a year (or more) for other tools used
by our government to impact the economy
29. Slide 29 of 31
Disadvantages of monetary policy
• In some cases, easy money won’t spur
increases in AD
– Just because a central bank increases money supply (thereby
reducing interest rates) does not mean banks will loan more
money
• For example: Japan instituted a “zero interest rate policy in August
2000
• Rates that banks loan each other money was zero
• Despite this, AD did not increase (enough) and deflation remained
• 6 years later, rates were raised to 0.25%
This dilemma is referred to as “pushing on
a string”. Even with very low interest rates,
if economic conditions are bad, people
might still not borrow money!
30. Slide 30 of 31Slide 30 of 31
New tools are being developed
In response to financial crisis, the Fed has created
some new tools.
One is called a Term Auction Facility where banks
borrow money from the fed for a short period of time –
from two weeks to three months.
Loan amounts and the interest rate banks are willing
to pay are submitted in secret.
And the Fed makes loans to the banks with the
highest bids until the have reach a loan limit (for
example $20 billion in loans).
This plan ensured that the Fed would be able to inject
a set amount of money in the economy – in a time
when banks may be nervous to make loans!
31. Slide 31 of 31
In Summary
The Federal Reserve is responsible to
ensure we have economic growth
without high inflation.
The Fed uses monetary policy to
manage the economy
It has several tools to do this, though Open
Market Operations is its primary tool.
By increasing the money supply,
economic growth can be stimulated.
By decreasing the money supply, inflation
can be contained.
$