Week 12 AP This week you need to read modules 25-29 and create vocabulary cards. You read module 22 last week and did the cards for that module. Due next.

Week 12 AP This week you need to read modules and create vocabulary cards. You read module 22 last week and did the cards for that module. Due next Monday Copy the PP that have a star on them this week at home so that you can practice more in class.

Monday- This week make sure you are reading modules 25, 28, 29 (26 and 27 if you miss classes) Do Vocabulary in 22, 25, 28, 29- test on Monday Objective be able to describe and create a Loanable funds graph and explain what causes shifts. They will be able to explain what happens to the real interest rate and what crowding out is. They will be able to create a Phillips curve and analyze where the points from ADAS would go on the Phillips curve. Objective they will be able to read the notes on PP, be able to discuss them with the class and write in their notebooks. They will be able to use correct terms for the graphs and in the explanations EQ How does the demand for money change the interest rates? What impact does the government have on the interest rates when it borrows to pay for the spending? Crowding out, Loanable Fund Graph, Phillips curve Voc

Draw an Inflationary Gap. Draw a Recessionary Gap. Define Stagflation.
Explain the results of Calvin’s proposal using AS and AD. Start at equilibrium and show the shift. Draw an Inflationary Gap. Draw a Recessionary Gap. Define Stagflation. Bonus. If gap is 20 Million and the MPC is ____ what is the multiplier and how much is needed to close the gap? YOU MUST SHOW THE MATH!

Review from last week What does it mean when you hear, “pay yourself first?” THE RULE OF 72 (SOMETIMES CALLED RULE OF 70) This rule tells you how long it would take to double your savings at different interest rates. 72/interest percent. So you can double at an interest rate of 2% in 36 years. How long would it take at 5%? At 10%? Does the interest rate matter when you are saving or investing your money?

Copy at home Discuss and make sure understood the differences The amount of savings is equal to the amount of investment. Banks loan savings to businesses and consumers. Economist view investment spending as spending on real capital. The investment discussed in this module is financial investment (savings accounts, stocks, bonds. . .)

Two instrumental sources of ECONOMIC GROWTH:
1. INCREASE IN SKILLS AND KNOWLEDGE – HUMAN CAPITAL 2. INCREASES IN CAPITAL (GOODS USED TO MAKE OTHER GOODS) ALSO REFERRED TO AS PHYSICAL CAPITAL. Review At home

Unit 4: Money and Monetary Policy
Module 29 Unit 4: Money and Monetary Policy 7

Loanable Funds Market 8

Loanable Funds Market The Loanable Funds Market is a variety of financial markets like banks and bond markets that bring together borrowers and lenders of money.

In class Loanable funds: The money for investment Comes from savings. The cost of borrowing is the Interest rate. When the rates go up Then firms are less likely To invest in capital goods. All businesses weigh the Benefits of investment purchases The marginal benefit has to be Greater than the cost. How would the investment demand curve Relate to the loanable funds? CROWDING OUT.: is the concept that when government increases spending, but has to borrow the funds or reduces the savings it depletes the amount of loanable funds and drives the real interest rates up.

Loanable Funds Market Is an interest rate of 50% good or bad?
Bad for borrowers but good for lenders The loanable funds market is the private sector supply and demand of loans. This market shows the effect on REAL INTEREST RATE Demand- Inverse relationship between real interest rate and quantity loans demanded Supply- Direct relationship between real interest rate and quantity loans supplied This is NOT the same as the money market. (supply is not vertical)

Loanable Funds Market At the equilibrium real interest rate the amount borrowers want to borrow equals the amount lenders want to lend. Real Interest Rate SLenders re DBorrowers QLoans Quantity of Loans 12

Loanable Funds Market Example: The Gov’t increases deficit spending?
Government borrows from private sector Increasing the demand for loans Real Interest Rate SLenders Real interest rates increase causing crowding out!! r1 re D1 DBorrowers QLoans Q1 Quantity of Loans 13

Loanable Funds Market Demand Shifters Supply Shifters
Changes in perceived business opportunities Changes in government borrowing Budget Deficit Budget Surplus Changes in private savings behavior Changes in public savings Changes in foreign investment Changes in expected profitability 14

Interest Rates and Inflation
If the nominal interest rate is 10% and the inflation rate is 15%, how much is the REAL interest rate? Real Interest Rates- The percentage increase in purchasing power that a borrower pays. (adjusted for inflation) Real = nominal interest rate - expected inflation Nominal Interest Rates- the percentage increase in money that the borrower pays not adjusting for inflation. Nominal = Real interest rate + expected inflation

Nominal vs. Real Interest Rates
Example #1: You lend out $100 with 20% interest. Inflation is 15%. A year later you get paid back $120. What is the nominal and what is the real interest rate? Nominal interest rate is 20%. Real interest rate was 5% In reality, you get paid back an amount with less purchasing power. Example #2: You lend out $100 with 10% interest. Prices are expected to increased 20%. In a year you get paid back $110. Nominal interest rate is 10%. Real rate was –10%

Phillips Curve William Phillips: 1958 Basic Assumptions:
There is an inverse relationship between inflation and unemployment. When one increases the other decreases. If an economy has inflation, usually due to demand pull growth, (the AD shifts right) then more workers are being hired to produce the greater number of goods being produced If an economy is in a recession, more resources are being left idle, therefore fewer workers are needed and less pressure is put on the resources base. This results in less inflation. Movement along the Phillips Curve represents year to year changes in the business cycle.

Stagflation in the late 1970’s to 1981 had high inflation and high unemployment so the model was not accurate and a new approach The SRPC shifts outward and inward due to the shift on the SRAS. (outward at negative supply shock and inward for positive supply shock) The SRPC has movement when it’s a shift on the AD Long Run Phillips Curve is the equivalent of the PPC’s frontier line or the Full Employment/potential output of the LRAS.

2007B Practice FRQ Exit Ticket 19

2007B Practice FRQ 20

Tuesday Students will practice the time value formula and the MPC/MPS for spending multiplier to show their ability to read different cases and be able to calculate in different ways. Students will work with a shoulder partner to read the different situations and answer the questions by calculation. They will show their work and explain to the partners when confused. Do Now: go back in your notes from last week for the spending multiplier. EQ: What does the spending multiplier do for the economy?

Wednesday Students will be able to create all of the graphs learned so far on a foldable and describe what each element of the graph indicates. Students will work in their groups and discuss each graph as they all draw them on their foldables. They will share what they know about the graphs and how each graph relates to the others. They will be able to verbalize what shifts the graphs and what happens to the price and unemployment. Do Now: Go back over your notes from yesterday and highlight the elements of the two new graphs. Vocabulary: the terms for each element for each graph EQ: What goes on each axis for each graph? What is each graph called? How might it be referred to? How might it relate to the other graphs?

Each student will create a foldable booklet
They will create: PPC, Business Cycle, CFM, Supply and Demand with ceiling and floor marked, ADAS at equilibrium, Recessionary gap, Inflationary gap, Investment Demand, Loanable Funds, Phillips Curve The booklet will have a graph and have key concepts to know about the graph written out. Use cards on the desks to help you make sure you have everything on each graph

Thursday- corrections to test must be done this week
Be able to calculate PV and FV Be able to explain what they are and why they are used in the economy Do Now: Do you have all the graphs done? EQ: What does present value of money and future value have to do with the economy?

The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

future value and present value
FV= PV(1+i)t PV= FV/(1+i)t dollars today =x dollars in t years Where i is the interest and t is the time

The chart shows the impact of compounding interest for $100.00 at 8%
Compound interest is where interest is figured based on adding the interest earned to the principal and then calculating the new interest earned. The chart shows the impact of compounding interest for $ at 8% Years of compounding Compounding computation X(1+i) Value at years end 1 $ (1+.08) $108.00 2 $ (1+.08) 0r 100(1+.08)2 $116.64 3 $ (1+.08)3 4 5 17 Finish the chart to practice finding the FV of invested today Investors know that if X dollars is invested today and earns compound interest at the rate of I, it will grow into exactly (1+i)t X dollars in t years

By the same reasoning then and that you can determine X dollars today- which is what essentially is what happens with a loan. If you took out a loan for $100 will accumulate interest at 8% per year for 5 years. (1.08)5 $100=$ in five years This formula defines not only the rate at which present amounts of money can be converted to future amounts of money but also the rate at which future amounts of money can be converted into present amounts of money. It allows us to measure the so called time-value of money.

Why do we care Because it allows an investor to know how to pay for an asset If Cecilia has the chance to buy an asset that is guaranteed to return a single payment of exactly $ in 17 years and the interest rate is 8% per year. Then the present value for that asset or investment can be determined by using the formula. $370.00/(1+.08)17 = /(1.08)= $ today. This can be useful for determining what to pay for an investment or asset, if you should take the lottery in installments or a smaller lump sum, and for salary caps like in professional sporting teams

Exit ticket is the completed chart

Friday Objective: Students will be able to describe the Federal Reserve Structure and its function. They will compare the monetary policy to the fiscal policy Students will fill out the monetary policy study guide from their readings and from lecture. They will work with their shoulder partner to complete the comparison of fiscal and monetary policy on the graphic organizer Do Now: Look back over your notes and find information on Fiscal Policy- who does it? How? What actions are to expand and what contracts? EQ: When the economy is in trouble what are the two different policies used? How are they alike? How do they differ? Vocabulary: Open Market Operations, Federal Funds Rate, Discount Rate, Required Reserve Ratio Exit tickets: Show me your completed handouts

Handouts- monetary policy study guides
Fiscal and monetary comparison sheets

Friday Objective: Students will be able to draw the money supply graph and explain its function. Be able to calculate the Money Multiplier Students will look at the graph and duplicate, they will share with partners and class what the elements are, verbally using correct terms. Do Now: Look at your notes from yesterday and mark the tools used by the Federal Reserve to change the money supply. EQ: How does the Money Supply Graph work? How does it relate to the other graphs? Vocabulary: Easy money, Tight money

Buy- bigger Sell --smaller
On whiteboards practice creating and working with the MS graph Then add it to your booklet with the other graphs. And take down the notes On the whiteboards practice shifting the MS from different cases. Make sure you understand what the tools are, Which tools are used most often How they are applied What expands and what contracts the money supply

The Money Market (Supply and Demand for Money)
Module 28 in Krugman’s The Money Market (Supply and Demand for Money) 36

The Demand for Money At any given time, people demand a certain amount of liquid assets (money) for everyday purchases The Demand for money shows an inverse relationship between nominal interest rates and the quantity of money demanded 1. What happens to the quantity demanded of money when interest rates increase? Quantity demanded falls because individuals would prefer to have interest earning assets instead 2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increases. There is no incentive to convert cash into interest earning assets

Nominal Interest Rate (ir)
The Demand for Money Inverse relationship between interest rates and the quantity of money demanded Nominal Interest Rate (ir) 20% 5% 2% DMoney Quantity of Money (billions of dollars)

What happens if price level increase? Nominal Interest Rate (ir)
The Demand for Money What happens if price level increase? Money Demand Shifters Changes in price level Changes in income Changes in taxation that affects investment Nominal Interest Rate (ir) 20% 5% 2% DMoney1 DMoney Quantity of Money (billions of dollars) 39

The Demand for Money At any given time, people demand a certain amount of liquid assets (money) for everyday purchases The Demand for money shows an inverse relationship between nominal interest rates and the quantity of money demanded 1. What happens to the quantity demanded of money when interest rates increase? Quantity demanded falls because individuals would prefer to have interest earning assets instead 2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increases. There is no incentive to convert cash into interest earning assets 40

This shows the 12 different Federal Reserve Districts
Monetary Policy When the FED adjusts the money supply to achieve the macroeconomic goals 41

This is called Monetary Policy.
The Supply for Money The U.S. Money Supply is set by the Board of Governors of the Federal Reserve System (FED) Interest Rate (ir) SMoney The FED is a nonpartisan government office that sets and adjusts the money supply to adjust the economy This is called Monetary Policy. 20% 5% 2% DMoney 200 Quantity of Money (billions of dollars)

Increasing the Money Supply
Interest Rate (ir) SM SM1 If the FED increases the money supply, a temporary surplus of money will occur at 5% interest. The surplus will cause the interest rate to fall to 2% 10% 5% 2% How does this affect AD? DM 200 250 Quantity of Money (billions of dollars) Increase money supply Decreases interest rate Increases investment Increases AD

Decreasing the Money Supply
Interest Rate (ir) SM1 SM If the FED decreases the money supply, a temporary shortage of money will occur at 5% interest. The shortage will cause the interest rate to rise to 10% 10% 5% 2% How does this affect AD? DM 150 200 Quantity of Money (billions of dollars) Decrease money supply Increase interest rate Decrease investment Decrease AD 44

Unit 4: Money and Monetary Policy
Goes with module in Krugman’s Unit 4: Money and Monetary Policy 46

Showing the Effects of Monetary Policy Graphically
Three Related Graphs: Money Market Investment Demand AD/AS

Quantity of Investment
Interest Rate (i) S&D of Money Interest Rate (i) Investment Demand SM SM1 10% 5% 2% 10% 5% 2% DM DI 200 250 QuantityM Quantity of Investment AD/AS PL The FED increases the money supply to stimulate the economy… AS PL1 PLe Interest Rates Decreases Investment Increases AD, GDP and PL Increases AD AD1 Qe Q1 GDPR

Quantity of Investment
Interest Rate (i) S&D of Money Interest Rate (i) Investment Demand SM1 SM 10% 5% 2% 10% 5% 2% DM DI 175 200 QuantityM Quantity of Investment AD/AS PL The FED decreases the money supply to slow down the economy… AS PLe Interest Rates increase Investment decreases AD, GDP and PL decrease PL1 AD AD1 49 Q1 Qe GDPR

The role of the Fed is to “take away the punch bowl just as the party gets going”

How the Government Stabilizes the Economy

How the FED Stabilizes the Economy
These are the three Shifters of Money Supply

3 Shifters of Money Supply
The FED adjusting the money supply by changing any one of the following: 1. Setting Reserve Requirements (Ratios) 2. Lending Money to Banks & Thrifts Discount Rate 3. Open Market Operations Buying and selling Bonds The FED is now chaired by Janet Yellen Janet L. Yellen took office as chair of the Board of Governors of the Federal Reserve System in February 2014, for a four-year term ending in January Her term as a member of the Board of Governors will expire in January 2024.

#1. The Reserve Requirement
If you have a bank account, where is your money? Only a small percent of your money is in the safe. The rest of your money has been loaned out. This is called “Fractional Reserve Banking” The FED sets the amount that banks must hold The reserve requirement (reserve ratio) is the percent of deposits that banks must hold in reserve (the percent they can NOT loan out) When the FED increases the money supply it increases the amount of money held in bank deposits. As banks keeps some of the money in reserve and loans out their excess reserves The loan eventually becomes deposits for another bank that will loan out their excess reserves.

= The Money Multiplier 1 Reserve Requirement (ratio)
Example: Assume the reserve ratio in the US is 10% You deposit $1000 in the bank The bank must hold $100 (required reserves) The bank lends $900 out to Bob (excess reserves) Bob deposits the $900 in his bank Bob’s bank must hold $90. It loans out $810 to Jill Jill deposits $810 in her bank SO FAR, the initial deposit of $1000 caused the CREATION of another $1710 (Bob’s $900 + Jill’s $810) Money Multiplier Reserve Requirement (ratio) 1 = Example: If the reserve ratio is .20 and the money supply increases 2 Billion dollars. How much the money supply increase?

Using Reserve Requirement
1. If there is a recession, what should the FED do to the reserve requirement? (Explain the steps.) Decrease the Reserve Ratio Banks hold less money and have more excess reserves Banks create more money by loaning out excess Money supply increases, interest rates fall, AD goes up 2. If there is inflation, what should the FED do to the reserve requirement? (Explain the steps.) Increase the Reserve Ratio Banks hold more money and have less excess reserves Banks create less money Money supply decreases, interest rates up, AD down

#2. The Discount Rate The Discount Rate is the interest rate that the FED charges commercial banks. Example: If Banks of America needs $10 million, they borrow it from the U.S. Treasury (which the FED controls) but they must pay it bank with 3% interest. To increase the Money supply, the FED should _________ the Discount Rate (Easy Money Policy). To decrease the Money supply, the FED should _________ the Discount Rate (Tight Money Policy). DECREASE INCREASE

#3. Open Market Operations How are you going to remember?
Open Market Operations is when the FED buys or sells government bonds (securities). This is the most important and widely used monetary policy To increase the Money supply, the FED should _________ government securities. To decrease the Money supply, the FED should _________ government securities. BUY SELL How are you going to remember? Buy-BIG- Buying bonds increases money supply Sell-SMALL- Selling bonds decreases money supply

Don’t forget the Monetary Multiplier!!!!
Practice Don’t forget the Monetary Multiplier!!!! If the reserve requirement is .5 and the FED sells $10 million of bonds, what will happen to the money supply? If the reserve requirement is .1 and the FED buys $10 million bonds, what will happen to the money supply? If the FED decreases the reserve requirement from .50 to .20 what will happen to the money multiplier? 59

Federal Funds Rate The federal funds rate is the interest rate that banks charge one another for one-day loans of reserves. The FED can’t simply tell banks what interest rate to use. Banks decide on their own. The FED influences them by setting a target rate and using open market operation to hit the target The federal funds rate fluctuates due to market conditions but it is heavily influenced by monetary policy (buying and selling of bonds) 60

Federal Funds Rate .25% 61

Week 12 AP This week you need to read modules 25-29 and create vocabulary cards. You read module 22 last week and did the cards for that module. Due next.

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Week 12 AP This week you need to read modules 25-29 and create vocabulary cards. You read module 22 last week and did the cards for that module. Due next.

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Presentation on theme: "Week 12 AP This week you need to read modules 25-29 and create vocabulary cards. You read module 22 last week and did the cards for that module. Due next."— Presentation transcript:

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