Econ Outline

Econ Outline - Introduction to Macroeconomics Final Outline...

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Introduction to Macroeconomics Final Outline 1) Monetary System a) Functions of Money (3) i) Medium of exchange = an item buyers give to sellers when they want to purchase goods and services (ex: buying a shirt) ii) Unit of account = the yardstick people use to post prices and record debts, to measure economics value (ex: price of an item, quantity of money in a loan) iii) Store of value = an item that people use to transfer purchasing power from the present to the future (wealth = total of all stores of value), holding money or depositing it to use it in the future b) Liquidity i) Most to least liquid = money > stocks/bonds > house c) Fiat money (paper dollars) vs. commodity money (gold/cigarettes) d) Money stock = quantity of money circulating in economy e) Measure of Money Stock (2) i) M1 = demand deposits, traveler’s checks, other checkable deposits, currency ii) M2 = M1 + savings deposits, small time deposits, money market mutual funds 2) Federal Reserve System a) Fed’s Two Primary Jobs i) Regulate banks and ensure health of banking system (includes being lender of last resort to financially troubled banks) ii) Controls money supply through monetary policy (Federal Open Market Committee) b) Federal Open Market Committee (FOMC) i) Open-market operations: buy bonds = increase money supply, sell bonds = decrease money supply c) Bank Reserves - $100 with 10% reserve ratio i) Assets = $10 (Reserves) + $90 (Loans) ii) Liabilities = $100 (Deposits) iii) $190 now in economy, banks with fractional-reserve banking create money iv) BUT creates only more currency and liquidity, not more wealth d) Money Multiplier = Reciprocal of Reserve Ratio (Ex: R = 1/10, MM = 10) i) Higher reserve ratio = banks loans out less per deposit = smaller MM e) Tools of Monetary Control (3) i) Open-Market Operations ii) Reserve Requirements = an increase decreases money supply and MM, a decrease increases money supply and MM iii) Discount Rate = an increase decreases reserves, therefore money supply, a decrease increases reserves, therefore money supply f) Fed’s Problems = Do not control how much people choose to deposit or bankers choose to lend 3) Inflation a) Value of Money
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i) P = price of goods and services ii) 1/P = quantity of goods and services that can be bought with $1 b) Classical Dichotomy = the separation of real and nominal variables c) Nominal vs. Real variables i) Real Variables = relative price, real interest rate, real wage ii) Nominal Variables = dollar price d) Monetary Neutrality = the proposition that changes in money supply do not affect real variables (BUT this applies in the long-run, not in the short-run) e) Inflation tax = the depreciating effect of inflation, therefore it is like a tax on everyone who holds money 4) Equations Relating to Inflation a) Velocity of Money i) Nominal GDP/Quantity of Money ii) P = price level, Y = quantity of output iii) V = (PxY)/M b) Quantity Equation i) M x V = P x Y ii) M = quantity of money, V = velocity of money
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This note was uploaded on 04/18/2008 for the course ECON BC1001 taught by Professor Colacelli during the Spring '07 term at Columbia.

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Econ Outline - Introduction to Macroeconomics Final Outline...

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