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lecture 12 - Economics 100b Professor Wood Lecture 12 ASUC...

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ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course Lecture 11: The Asset Market, Money, and Prices The class average on the test was around 75-76, and the median was 77-78, the SD was 11.5-12.5. Professor Wood will adjust final grades based on the difficulties of the grader (your gsi). News 1. Decline in home prices accelerates. Home prices are falling at a faster and faster rate. Over the past year they have fallen by almost 10%. The last time this happened was during the 1930’s during the great depression. They have been falling for the last year and a half. This is causing lenders who made loans versus the value of homes to have non-performing assets (i.e. the collateral of the loan is worth less than the value of the loan). 2. Gas prices continue to soar. Crude has reached around $102 per barrel. This has an effect of dragging down growth and increasing prices (stagflation). 3. This puts the fed in a quandary over its interest rate policy. The fed’s purpose is to maintain employment as well as price levels. The fed is fighting a two sided battle. However, when the fed lowers interest rates to stimulate the economy, that action can increase inflation within the economy. We will talk later about the policy choices that the fed needs to make, and how monetary policy is affected. The fed is still indicating that they will drop interest rates even further at their next meeting. This indicates that they are more concerned with potential recession than with the effects of inflation Agenda Asset Market Equilibrium Money Growth and Inflation 1. Asset Market Equilibrium a. Assets are the sum total of our wealth. b. We can break those into two groups i. Money ii. Non Money c. When we think about money, we can think about it as the medium of exchange (even checking accounts). There may be an interest rate associated with these assets, but we can consider them to be zero. d. Money supply is controlled by the central bank, so we can assume that it is fixed at its current level e. Non Money assets (NM) i. There is a rate of return that is associated with those assets. We are interested in the average rate of return in a broad portfolio.
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