1. Unit-4 Macro Review Money, Money Supply, Bank Accounting, & Fiscal and Monetary Policy 2013

2. Measuring Money Supply M1 - most liquid (cash, checking deposits, travelers checks, etc…) M2 - slightly less liquid (M1 + savings acct., money markets,…) M3 = least liquid (M2 + large time deposits (over $100,000) ) MONEY Commodity money Fiat money Types of Money (Std. of value)

3. Example: –$100 Deposit –10% Reserve Ratio This loan causes money creation Bank Balance Sheet Excess Reserves can be lent out by bank Banks Create Money by lending Fractional Reserve Banking System

4. Money Multiplier = 1/R Reserve Requirement = 10% Money Multiplier = 1/10% = 10 Money Supply Change = Money Multiplier X Initial Excess Reserves $90 * 10 = $900 of “new” money

5. Use for Fed’s Monetary Policy Label Nominal interest rates Supply of Money fixed by Fed Short term interest rate (federal funds rate) Use for Gov’t Debt Label Real interest rates Not an actual market Model of National Savings & Private Investment Supply = National Savings Demand = Investment (borrow $) Money Market Loanable Funds Private + Public Savings

6. CROWDING OUT S2S2 1 ) Government Borrowing reduces Supply of Loanable Funds 2) Real Interest Rates rise 3) Private Investor is “crowded out” of debt market Loanable Funds

7. MS 1 MD Nominal Interest Rate Qty of $ MS 2 ---------------i1i1 --------- i2i2 Affects AD LRAS 1 Price Level Real GDP AD 1 SRAS 1 2 Types of Monetary Policy Expansionary Contractionary AD 2 Contractionary Policy Currently 0.75% Currently 0.0% target Sell Bonds, raise discount rate & reserve requirement MS ↓ => ↑ interest rate => C↓ & I ↓ => AD ↓

8. Quantity Theory of Money Monetary changes have no affect in LONG RUN Money is NEUTRAL! Velocity of money is relatively constant Real GDP is fixed in short run ↑ MS only => ↑Price Level

9. DEMAND FOR MONEY Demand for money is downward sloping The Money Market is not the Loanable Funds market! (It is a much broader market) MS MD Nominal Interest Rate Qty $ Money Market Demand for Money: Transactions Demand Precautionary Demand Speculative Demand Price Level changes shifts Demand Curve for Money ↑ Px level shifts MD right ↓Px level shifts MD left