Chapter 9 Real int Rate(rate return- Ann % inc purch power of asset Nom Int Rate-observed market rate in current $ Fisher effect-nom int rate high when inflation high. Vice versa Financial intermediaries (commercial banks, state government pension funds, insurance companies, mutual funds)-extend credit to borrowers using funds from savers-gather important info, reducing costs of gathering-direct saving toward productive projects-provide borrowers access to credit Financial Markets-lend and borrow 1)bond2)stock3)short-term security4)Loan Market Loan market—banks lower cost of financing capital expenditures by accepting short-term deposits & making long-term loans Bonds- Price (1+coupon)=n Money-any asset used directly in making purchases Princpal uses of money-Medium of Exchange—asset used in purchasing goods and services-Reduce trans, barter alt., specialization-Unit of account—yardstick measure, prices-Store of value—holding wealth Money Supply-1) currency of public 2)deposit balances held by banks Reserve-Deposit Ratio: Bank Reserves/Deposits Money supply= currency of public +bank deposits Federal Reserve System “Fed” =central bank of us-Monetary policy—circulation & interest ratesFed---Formed in 1914 by Federal Reserve Act-12 Districts. Board of Governors in Wash D.C-7 governors appt by Pres staggered 14-year term-Chair of board appointed for 4-year term-Federal open Market Committee (FOMC)-8x/year to determine monetary policy-7 fed govs, pres of NY bank, 4 other fed reserve presidents on roatating basis(12)-Fed Reserve- Chair board of Gov most influence over monetary policy (greenspan…now Bernake) Fed conrols monetary supply indirectly-Open-market operations---purchases&sales most used tool-Purchase-buy gov bonds from public (inc)-Open mark sale-sell bonds to public (dec bank reserves, ultimately money supply decrease -Discount Window lending-Fed lends reserves to banks-Change Discount Rates-rate fed charges bank-Change Reserve to Deposit Ratio-Min value of reserves bank must maintain Chapter 12 Output gap = Y*-Y. Recessionary Y*>Y. Exp= Y*<Y Recessionary Gap : low utilize resources, high unempl. Frictional : short-term, normal labor search, voluntary Structural : long-term, skill mismatch, involuntary Cyclical : Extra unemp during recession. U-U* Okun’s Law : 1% cyclical= 2% potential output gap Short-run conclusions : 1) some prices adjust slowly 2) economy-wide spending changes 3) firms changes prices eventually 4) long-run output determined by Y* Equation of Exchange : M x V= P x Y Velocity of money : avg speed money circulates in economy. Nominal GDP/ Quantity of Money V 1 =V0 x (1+i) Inc . M shift Demand right: SRAS output rises Inc . M shift Demand right: Long-run effect:inc. price $ Long run : flexible prices, output/employment at natural rates, actual output determined by potential output Short run : prices sticky, shocks push output/employment
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