marcroeconomics review

宏观期末复习：10.2&10.3，13,14,15,1610.2&10.3 the financial system and business cycle [model for loanable funds] Part I: financial systemFinancial system: the system of financial markets and financial intermediaries through which firms acquire funds from households.Financial markets: markets where financial securities, such as stocks and bonds, are bought and sold.Stock: a financial security that represents partial ownership of a firm.Bonds: a financial security that represents a promise to repay a fixed amount of funds. Financial intermediaries: bank+ mutual fundMutual fund: which is an institution that sells shares to savers and use the proceeds to buy a portfolio of stocks, bonds and other financial securities.Build a macroeconomic model:Recall: Y=I+C+G+NXFor simplify: Y =I+C+G (closed economy) so, I=Y-C-GS= S private+ S publicS Private=Y+TR-C-TS public=T-G-TRSo, S=Y+TR-C-T+T-G-TR=Y-C-GIn conclusion, S=IMarket for loanable funds: the interaction of borrowers and lenders that determine that market interest rate and loanable funds exchanged.The quantity of loanable funds is LThe price of it is the real interest rate (i)The demand for loanable funds comes from firms that want to borrow from investment (I) The supply comes from households that spend less than they earn(S private) and from government saving or dissaving(S public)When the L* Increases, the economy’s capital stock increases and (or) technology improves, so the productivity and livingThe government can encourage an incentive in the economy’s L* by1)Increasing the incentive to save: shift the supply rightBy lowering the tax rate on interest income, by switching from taxing nominal interest to taxing the real interest, or by switching from income tax to a consumption tax2)Increasing firm’s incentive to invest: shift the demand rightBy providing tax credits for investment3)Reducing or eliminating a government budget deficitPart 2: business cycleExpansion: the period of a business cycle during which total production and total employment are increasing.（rising profits, falling unemployment, increasing inflation rate, increasing interest rate）buy bonds=>low demand of stock, low prices downward movement begins before a recessionRecession: the period of a business cycle during which total production and employment are decreasing.( begin with a decline in spending by firms on capital and by households on durables=>falling profits and rising unemployment=>low inflation rate, low stock prices, low interest rate.Business cycle are irregular and unpredictable, but economic indicators tend to begin turn upward or downward before the economy does.1)stock indexes, which are averages of stock price=>first indicatorBecause of low interest rate and low stock prices, people are more likely to buy stockinstead of buying bonds, and then, it will cause the supply of stock prices. This usually begins before expansion so it is why stock indexes id a leading economic indicator.The unemployment rate usually does not increase fall until the latter part of expansion because: 1) firms will increase the work hours of existing workforce, 2) discouraged worker will return to the labor force.Crowding out: a decline in private expenditures as a result of an increase in government purchases. Budget deficitAt the end of expansion, interest rate will be rising, wages are usually rising faster than prices, and as the end of above, the profits of firms will be falling. Toward the end of expansion, both households and firms will have substantially increased their debts.Four reasons that to be more stable in the 1950s-2007 period than in other periods:∙The increasing importance of services and declining importance of goods.∙The establishment of unemployment insurance programs∙The use of active government policyIncreased stability of financial systemChapter 13: aggregate demand and aggregate supply analysis [model for AD and PL]Aggregate demand and aggregate supply model: a model that explains short-run fluctuations in real GDP and in the price level.Aggregate demand curve:a curve that shows the relationship between pl and the quantity demanded of real GDP demanded by households[c], firms[I], governments[G] and rest of world[nx].Slope of AD: when the price level increases, the quantity of real GDP demanded decreases; when the price level decreases, the quantity of real GDP demanded increases.1)The wealth effect explains how a change in the price level affects consumption.The price level increases, the purchasing power decreases and people are more likely spend the less, so the consumption decrease and meanwhile, real GDP decreases2)The interest rate effect explains how a change in the price level affects investmentWhen the price level increases, people have less money to save and the supply of loanable fund decreases, so the interest rate will increase which will cause the firm do not want to borrow money to invest. Meanwhile, the investment will decrease and real GDP will decrease.3)The international-trade effect explains how a change in the price level affects netexports.When the price level increases, the products of USA become more expansive than other countries, and the imports increases, exports decreases, net exports decreases.Meanwhile, the real GDP decreases.If the price level changes, the economy will move along with the stationary AD curve; if other relevant variables change, the AD will shift.1)Monetary and fiscal policy will shift the AD curve2)The money supply and interest rate will shift AD curve: money supply increases, theinterest rate decreases, and then the AD curve shift right.NOTE: If the interest rate changes because of the money supply, AD shift; if it changes because of price level [pl变了,花的多存的少，supply of loanable funds 减少，interest rate增加]， AD moves along.3)The G increase, AD shift right.4)Personal income tax increases, AD shifts left.5)Business tax increases, AD shifts left.6)If households are optimistic, they would spend more right now [increase c], then shiftAD curve right. If firms are optimistic, they would invest more [increase I], then shift AD curve right.7)When the growth rate of US is slower than other country, us export grows faster thanimports, NX increases, Shift AD right. When us dollars become cheaper, the exports increase, imports decrease, the NX increases, shift AD right.Potential GDP is the output which firms could produce normally; it is also the unemployment is equal to the normal unemployment rate, the cyclical unemployment rate is 0.Slope of LR AS is vertical because the real GDP won’t be influenced by the PL.Shifts of LRAS: An increase in the quantity of capital per hour worked and improvement in technology will shift the LRASIn the long run, changes in the price level will affect the quantity of real GDP supplied.Slope of SRAS is upward for 2 reasons, 1) some input prices change more slowly than the prices of final goods, 2) some firms adjust the prices of final goods and services more slowly than other firms.If the price level changes, the economy will move along the SRAS; otherwise, SRAS will shift.1)An increase in the quantity of capita per hour worked and improvement in technology t2)The future expected price level decrease, the SRAS shifts right. [automatic mechanism]3)Errors in past expectation about the price level, lower, shift right.4)The input price decreases unexpectedly, SRAS shift right.Supply shock: an unexpected event that causes the SRAS CURVE shift.An increase in AD is usually caused by the optimism.A decrease in AD is usually caused by the pessimism.A decrease in SRAS is mostly caused by an adverse supply shock.Stagflation: a combination of inflation and recession.The government cannot successfully fight with both components of stagflation simultaneously. Business cycle fluctuations are most often caused by shifts in aggregate demand, occasionally by the SRAS.The government taking intervention only through shifting ADFiscal policy: changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.Monetary policy:the actions that federal reserve takes to manage the money supply and interest rate to pursue macroeconomics policy objectives.The increase in the number of workers, the accumulation of more machinery and equipment and technological change will shift LRAS right.If the firms and households could predict the future price level, the SRAS will be exactly same as the LRAS.If firms charge higher prices and workers accept lower wage when the economy enters the recession, it will cause economy to return to its long-run equilibrium.总结：automatic mechanism: SRAS increases, fight recession; SRAS decrease, fight inflation Chapter 14.1&14.3 Money and bankAsset: anything of value owned by a firm or a personMoney: assets that people are generally willing to accept in exchange for goods and services or for payments of debts.Barter economy以物换物，要求coincidence=>inefficiency in intermediate tradeMoney is most liquid but it is not the best store of value because of inflation; however, the famous painting is the best store of value other than efficient medium of exchange. Money serves four functions:1) A medium of exchange2) A unit of account: 衡量价值3) A store of value：未来的购买力4) A standard of deferred延迟的paymentCommodity money and fiat moneyM1: the narrowestdefinition of the moneysupply: the sum of currency in circulation, checking account deposits in banks and holdings of traveler’s checks.14.3 How do banks create Money?Reserve: deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.Required reserve:reserves that a bank is legally required to hold, based on its checking account deposits.Required reserve ratio: the minimum fraction of deposits banks are required by law to keep as reserves. RRExcess reserve: 现金储备大于法律要求先存再借会一直循环，create money other than wealth.这个过程会停在一个点，银行不能再create loans:Simple deposit multiplier= 1/RR=total change in checking deposits/initial depositTotal change in checking deposits= initial deposit* simple deposit multiplier在现实生活中， real deposit multiplier is less than 1/RRChapter 14.4 the Federal Reserve System AND Chapter 15.1, 15.3&15.6 Monetary policyFractional reserve banking system: the reserves of banks are lower than the required reserve ratio.*on a typical day, about as much money is deposited as is withdrawn from a bank.Bank run: 大家在同一时间取钱但是银行可以向别的银行借钱handle the bank runBank panic: a situation in which many banks experience at the same time.Economy central bank can help stop bank panic.Federal Reserve: THE FED=> central bank of the U.S.建立初衷是为了stop bank panic, 现在的重要意义是1）control money supply 2)act as a banker’s bank 3)regulate financial system.12个分支，总部在D.C.Before the financial crisis of 2007-2009, the fed use only three monetary policy tools to manage the money supply, all of which rely on the deposit multiplier:1)Open market operations:the buying and selling of treasury securities by the feralreserve in order to control the moneysupplyFederal open market committee（FOMC）：the Federal Reserve committee responsible for open market operations and managing the money supply in U.S.FOMC每六周见一次，一年大约八次在D.C.If the FOMCdecides to change monetary policy, it sets a new target for the federal fund rate: the interest rate banks charge each other for overnight loans.When the FOMC decides to decrease the money supply, it announces a higher target for the federal funds rate and sell treasury securities to the public. (Open market sales)解释：People想买treasury securities然后从银行里取钱，然后银行的RESERVE减少，从而MONEY SUPPLY就减少了，supply shift left; 同时由于银行缺钱然后borrow federal funds, demand 增加，demand shifts right, 两者同时构成FFR增加。