UNIT 7

UNIT 7

4/3/16

• Foreign Exchange (FOREX)

-The buying and selling of currency

-any transaction that occurs in the balance of payments

• Change in Exchange Rates
• Exchange rates (e) are function of the supply and demand of currency

-an inc in supply of currency will decrease the exchange rate of a currency

-a decrease in supply of a currency will inc the exchange rate of a currency

-an inc in demand will inc exchange rate

-a dec in demand for cur will dec the exch rate of curr

• Appreciation- of a curr occurs when the exchange rate of that currency increase (e^)
• Depreciation- of a curr occurs when the exchange rate of that currency decreases (ev)
• Exchange rate determinants:

-consumer tastes

-Relative income

-relative price level

-Speculation

• Exports and Imports

-the exchange rate is a determinant of both exports and imports

-appreciation

4/5/16

Floating vs flexible

• It is based on the supply and demand if that currency vs. other currency
• It is very sensitive to business cycles and it provides options for investments.
• Fixed rates- it is based on a country’s willingness to distribute other currencies and control it’s amounts

4/26/16

·      Balance of payments- a measure of money that inflows and outflows between the US and the Rest of the world (ROW)

-inflows are referred to as CREDITS

-outflows are referred to as DEBITS

·      The balance of payments is divided into 3 parts:

-Current account

-Capital/ Financial account

-Official Reserves account

·      Double entry bookkeeping

·      Current Account:

Balance of trade of net exports

- EX- IMP

-exports create a credit to the balance of payments

-import create a debit

Net Foreign income

-Income earned by US owned foreign assets- income paid to foreign held US assets

Net transfers (tend to be unilateral)

-Foreign Aidà a debit to the current account

-Ex. Mexicans working

·      Capital/ Financial Account:

-the balance of capital ownership

-includes the purchase of both real and financial assets

-direct investment in the US is a credit to the capital account

Ex. Toyota factory in San Antonio

-Direct investment by US firms/ individuals in a foreign country are debits to the capital account

Ex. Intel Factory in San Jose, Costa Rica

-Purchase of foreign financial assets represents a debit to the capital account

Ex. Warren Buffet buys stock in Petrochina

-Purchase of domestic financial assets by foreigners represents a credit to the capital account

Ex. The UAE sovereign wealth fund purchases a large stake in the NASDAQ

·      Relationship between current and capital account

-The current account and the capital account should zero each other out.

-That is… is the Cur Acc has a negative balance (deficit), then the Capital Account should then have a positive balance (surplus)

·      Official Reserves

-the foreign currency holdings of the US federal reserve system

-When there is a balance if payments surplus the Fed accumulates foreign currency and debits the balance if payments

- When there is a balance if payments deficit the Fed depletes foreign currency and credits the balance if payments

-the official reserve zero out the balance of payments

·      Active v. Passive Official Reserves

-The US is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.

5/10/16

Absolute advantage:

• Individual- exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources)
• National- exists when a country can produce more good/service than another country can in the same time period.

Comparative advantage:

• A person or a nation has a comparative advantage in the production of a product when it can produce a the product at a lower domestic opportunity cost than can a trading partner.
• Output: mph, cars produced per hour
• Input:hours to do a job, # of acres to feed a horse, # of gallons of paint to paint a house

Specialization and Trade

• Gains from trade are based on comparative advantage, not absolute advantage

UNIT 5&6

UNIT 5&6

Apr. 7, 2016

·      Short run Aggregate Supply-In macroeconomics this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

·      LRAS- period of time in which wages have become fully responsive to changes in price level.

·      Effects over Short-run:

-In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.

-in the long run, wages will adjust to the price level and previous output levels will adjust accordingly

·      Equilibrium in the Extended Model-The long AS Curve in represented with a vertical line @ full employment level of real GDP.

·      Demand Pull inflation in the AS model

-demand pull- prices increase based on increase in aggregate demand

-in the short run, demand pull will drive up prices, and increase production

-in the long run, increases in aggregate demand will eventually return to previous levels.

·      Cost push & the extended model:

-cost push arises from factors that will increase per unit costs such as increase in the price of key resource.

·      Dilemma for the Government

-in an effort to fight cost-push, the government can react in two different ways.

-action such as spending but the govt could begin an inflationary spiral.

-no action however could lead to recession by keeping production and employment levels declining.

4/8/16

·      Long run Phillip’s curve: natural rate of unemployment is held constant. Because the Long-run Phillips curve exist at the natural rate of unemployment (Un) structural changes in the economy that affect (Un) will also cause the LRPC to shift. Increase in Un will shift to right, Decrease will shift to left.

-long run Phillip’s curve: is no tradeoff between inflation and unemployment.

·      Represented by a vertical line

·      Occurs at natural rate of unemployment.

·      LRPC will only shift if LRAS shifts.

·      NRU (4%-5%) = frictional + Structural + Seasonal unemployment

·      Major LRPC composition is that more worker benefits create higher rates and fewer worker benefits create lower rates.

-supply shocks is caused by rapid an significant recourse cost which causes the LRAS curve to shift.

·      The misery index: a combination of unemployment and inflation in a given year.

·      Single digit misery is good.

4/11/16

·      Inflation- general rise in price level

·      Deflation-general decline in the price level

·      Disinflation-decrease in the rate of inflation over time

·      Stagflation- unemployment and inflation increasing at the same time.

UNIT 4

3/4/16

Money

·      Uses of money

-Medium exchange- Barter and trading

-Unit of Accounting-It establishes economic value

-Store of Value- money holds its value over a period of time whereas products may not.

·      Types of money

-Commodity money- it gets its value from the type of material from which it is made (ex. Gold and silver coins)

-Representative money- Paper money that is backed by something tangible

-Fiat money- money because the government says so.

·      Characteristics of money

-Divisible- breaking down money

-Portable- carry

-Uniform- a dollar is a dollar

-Acceptable- everywhere we go

-Scarce

-Durable

·      Money supply

Liquid- easy to change to cash

-M1 money- Currency, checkable deposits (demand deposits), travelers check. 75% of money comes from this. Most liquid.

-M2 money- Consists of M1 money, savings accounts, and deposits made by banks outside the USA.

-M3 money- Consists of M2 and certificate of deposits, better known as CDs.

CD- Money in a bank for x amount of time. Get interest, but pulled out early you are charged.

3/9/16

·      Time Value of Money

-Is a dollar today worth more than a dollar tomorrow?

Yes, because of inflation.

This reason is the reason for charging and paying interest.

·      Let v= Future value of money

·      P= Present value of $

·      R=real interest rate (nominal rate- inflation rate)

Expressed as a decimal

N= Years

K= number of times interest is credited per year

·      The simple interest formula

V=( 1 + r) ^n *p

·      The compound interest formula

V= (1 + r/K) ^ nk *p

·      Demand for money has an inverse relationship between nominal rates and the quantity of money demanded

·      What happened to the quantity demanded of money when interest rates increase?

-Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities.

·      What happens to the quantity demanded when interest rates decrease?

-Quantity demanded increases. There is no incentive to convert cash into interest earning assets.

·      The money demand shifters:

Change in price level

Change in income

Changes in taxation that affects investment

·      Increasing money supply, interest rate decrease, investment increases, AD Increase

·      Decreasing money supply, interest rate increase, investment decreases, AD decrease

·      Financial Sector:

·      Financial assets- Something that you own.

·      Liabilities-Something you owe

Financial assets

Financial Liabilities

·      Interest Rate- cost to borrow money

·      Stocks- a share of a company you buy

·      Bonds- lend money to the government and promise to pay you back with interest.

Stocks

Bonds

What do Banks do

·      A bank is a financial intermediary

-uses liquid assets (i.e. bank deposits) to finance the investments of borrowers

-Process is known as Fractional Reserve bank

A system in which depository institutions hold liquid assets less than the amount of deposits.

-can take the form of:

1. currency in bank vaults

2. Bank reserves- deposits held at the federal reserve.

·      T- Account (balance Sheet)

·      Assets (amounts owned)

-items to which a bank holds legal claim

-the uses of funds by financial intermediaries

·      Liabilites (Owed)

-The legal claims against

Liabilities (owe)

Assets(own)

3/10/16

·      Reserve requirements:

-the fed requires banks to always have some money readily available to meet consumer’s demand for cash.

-the amount is set but the Fed, is the required reserve ration

-the required reserve ratio is the % of demand deposits (checking account balances) that must not be loaned out

-Typically the required reserve ration= 10%

·      Type of multiple deposit expansion questions:

-Type 1: calculate the initial change in excess reserves (Amount a single bank can loan from the initial deposit)

-Type 2: calculate the change in loans in the banking system

-Type 3: calculate the change in the money supply (sometime 2&3 have the same result) Ex. No Fed involvement

·      Monetary ratio: 1/ reserved requirement

·      Total change in deposits in the bank (Maximum change in money supply) - ER X MM + Deposit

3/21/16

3 tools of monetary

1.     Reserve requirement: only a small percent of your bank is in the safe. The rest of your money has been loaned out. This is called “Fractional Banking”. Fed sets amount of banks must hold. Reserve requirement (reserve ratio) is the % of the deposits that the bank must hold in reserve and not loan out. When FED increases money supply it increases the amount of money held in bank deposits.

-statement 1: if there is a recession what should FED do to reserve requirement? Decrease reserve ratio 1) Banks hold less money and have more excess reserves. 2) banks create more money by loaning out of access. 3) money supply increases interest rates fall AD goes up

-Statement 2: if there’s an inflation what should FED do to the reserve requirements? Increase reserve ratio

2.     Discount rate: discount rate is the interest rate that the FED charges commercial banks.

EX: to increase money supply the FED should decrease discount rate. To decrease money, supply the FED should increase the discount rate.

3.     OMO (open market operations): FEDS buy / sell government bonds (securities). This is most important and widely used monetary policy.

-to increase money supply FEDs should buy government securities

- to decrease money supply FEDs should sell government securities.

Federal Fund rate: Where FDIC member’s banks loan each other overnight funds.

Prime Rate: the interest rate that banks give to their credit worthy customers.

3/29/16

·      When a customer deposits cash or withdraws cash from their demand deposit acct., it has no effect on money supply.

Single Bank ex. Chase	Banking System  ex. Chase, wells, B.O.A.
-loan money from excess reserves	- ER X Multiplier *total money supply ^

It only changes:

·      The composition of the money 

·      Excess reserves

·      Required reserves

When the FED buys or sells bonds ER is created