1.   What decade were ATMs introduced in the US? BONUS!!!

2. Mods 28 and 29

3.  MM and LF

4.  A.Loanable Funds Market and the Money Market 1. Reminder and Review a. Savings-Investment Spending Identity S = I b. This includes government and private savings! National Savings (Pub. and Priv.)= I 2. Through financial markets, borrowers and lenders are matched. MM and LF (29)

5.   Opportunity cost to holding cash money – not making any interest on it  interest rate (r), quantity of money demanded  Short term interest rates tend to move together, they are competition for each other  Long-term interest rates change much slower because they take longer to mature  EASIEST to assume only the short-term MM

6.   Money demand curve – relationship between quantity of money demanded and r  Use the nominal r for this because the purchasing power of your money is caused by inflation so you need to look at money value now  Shifts of money demand  Changes in Aggregate Price Level  Changes in real GDP  Changes in Technology  Changes in Institutions MM

7.   Fed can influence the money supply (through the monetary supply but it can still be done)  Fed able to choose the level they want and use open operations to get there MM and the Fed

8.  B. Loanable Funds Market and the Interest Rate 1. In the real world, MANY different financial markets with many different interest rates, however, to simplify, economists created a hypothetical market. 2. Loanable Funds Market a. Nominal vs. Real interest rates Incredibly important to the MM and LF market! MM and LF (29)

9.  3. How does a spender (firm or business) decide how much to borrow? a. Rate of Return pg. 278 RofR= Revenue of Proj-Cost of Proj X 100 Cost of Proj. 4. Demand and Supply of Loanable funds a. based on interest rates, government influence b. Interest Rate = Price of a loan MM and LF (29)

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11.  5. Shifts of Demand for Loanable Funds a. Changes in Perceived Business Opportunities (1990s investment boom) b. Changes in government borrowing 1. Crowding Out *When a government needs to borrow money (run a deficit), this increases the demand for loanable funds *In turn, this leads to higher interest rates. *If rates rise, businesses cut back in investment spending MM and LF (29)

12.  6. Shifts in Supply of Loanable Funds a. Changes in Private sector behavior (private savings) 2000-2006- More spending, less saving, S LF shifts left. b. Changes in Capital Inflow (open economy) MM and LF (29)

13.  C. Interest Rates and Inflation 1. Inflation is arguably the most important factor affecting interest rates a. Real and Nominal rates Real= Nominal – Inflation 2. Expected inflation vs. Unexpected inflation 3. Fisher Effect a. The expected future real interest rate is unaffected by the change in expected future inflation! 1% of expected inflation = 1% of nom interest rate… SO…real = unchanged MM and LF (29)

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15.  4. Interest Rates in the Short Run a. Money Market and LFM relate to each other through interest rates. b. If one is at equilibrium so is the other (causal relationship) 1. This is always true!!! (pg. 285) b. EXAMPLE What happens to LFM when a shift occurs in the MM? MM and LF (29)

16.  Connecting the Two Interest Rate Models

17.  EX- In the short run, the right ward shift of the money supply… - Leads to a rise in real GDP - Generates a rise in savings through the multiplier process. - Rise in savings shifts the supply curve for LFM rightward, S1 to S2.!! - Moves equilibrium and reduces the interest rate in LFM ** In the SHORT RUN, the supply and demand for money determine the interest rate. The LFM follows the lead of the MM!!!!!! MM and LF (29)

18.  5. Long Run?- Changes in MS don’t affect the r%!! a. In the long run, after an increase in money supply drops the interest rate… 1. Aggregate Price Levels adjust by the same proportion as the initial increase in the money supply 2. In the long run, the money demand curve shifts outward, returning interest rates to their original level. b. In the LFM, the supply curve shifts right, but falls back in the long run as real GDP falls back to original level due to wages and other nominal prices increases over the long run!!! MM and LF (29)

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20.   Read your assigned article!  Be sure to note the following:  Key points by the author  Suggested course for the “Fiscal Cliff”  Political critiques (opinions on Repubs and Dems)  Write down a quote you find relevant and be prepared to discuss. Debt and Deficit Articles