Econ 111 Final Exam

What are the 3 Macroeconomic Goals?

1. Economic Growth

2. Price Stability

3. Full Employment

Long run trend or "Potential GDP" associated (3%)

Remember-more stuff per person means a higher standard of living

GDP= another name for aggregated supply

C+G+I+(Xg-M)= another name for aggregated demand

Economic Growth

Why the continued growth of the economy?

US is very (x10) good at producing stuff and has continued to get even better

Why are we so good at producing stuff?

We have high worker productivity

What are the Determinants of Worker Productivity?

1. Educated, healthy, skilled workers, and parents--HUMAN CAPITAL

2. Quality capital and technology

3. Incentives provided by a market economy

Parents make us productive, make us go to school, etc.

U.S. has a 99% literacy rate

-85% of those over 25 have a HS degree (some only 60-65%)

Educated, healthy, skilled workers, and parents--HUMAN CAPITAL

% of population that has completed the fourth grade

Literacy Rate

Tools, equipment, buildings, ability, skill, creativity to innovate

Develop sophisticated production methods

New technologies are the single most important source of productivity improvement

Quality capital and technology

No one works harder than when working for themselves/their family

W/ strong legal and social framework

-encourages productivity and entrepreneurship

Are necessary to reward risk taking

The ability to earn profit, high wages, and own property are powerful incentives in market economies

Incentives provided by a market economy

How is price stability measured?

Inflation Rate

% increase from one year to the next in the average prices of goods and services in the typical market basket for average consumer

-"market basket"=shopping cart

-taking prices every month on the same items

-data available monthly from the BLS (Bureau of Labor Statistics)

Inflation Rate

Most common used measure of inflation rate

Consumer Price Index (CPI)

"All items less food and energy"

-take out food and energy bc fluctuates the most

Core CPI

How much inflation is too much? Too little?

Comfort level for most economists are ok with 2% (The goal is to reach 2%)

Falling price level-DEFLATION NOT GOOD

-cell phone plans are contributing to this bc competing

Real vs Nominal, whats the big deal?

(Remember real means adjusted)

Assume you get a 3% raise and you know that the inflation rate is 3%

What is the real value of your raise? 0

How did we get that answer?

Nominal rate= 3%

Inflation rate= 3%

____________________________

Real Rate

21% (prime interest rate)

14% (CPI)

_________________

7% (real rate)

7% is the "real burden of debt"

This is a burden for the borrower, for the lender it is the "real return"

2.05%

Very unusual "zero" real interest in some markets

Trying to anticipate inflation is very important

How do they Calculate the Unemployment Rate?

U.S. Bureau of Labor Statistics surveys 60,000 households monthly

Asks a series of questions to all

Based on responses all individuals in household are placed into categories

What are the categories of Employment?

1. Employed

-Worked for pay during survey week or on vacation or sick, bad weather, strike

2. Unemployed

-Did not work for pay and ACTIVELY looking for one in the past 4 weeks

3. Not in the labor force

-Did not work for pay and DID NOT ACTIVELY look

-Retired, disabled, students

Labor Force=

Employed + Unemployed

% of population at least 16 working (employed) or searching for employment (unemployed)

-this rate reached a high record of 67.3% in 2000--- declined to 63% by 2017

Labor Force Participation Rate

% of labor force defined as unemployed

-Current rate 4.1%

Unemployment Rate

How low should unemployment be?

Most thing full-employment unemployment rate is about 5%-6%

-Also known as the National Rate of Unemployment

What are the Types of Unemployment?

1. Frictional

2. Structural

3. Cyclical

Those just entering the labor force or changing jobs

-First job or have decided to seek another

Frictional

Those without marketable skills or a mismatch between skills and openings

-HS drop outs without skills, People with criminal records, Language barriers, Drug addicts

There will never be a guarantee for these people in the market

Structural

Those unemployed in a recession

(Traditionally) anything over 6% (bc full employment is considered under) is considered cyclical and we are in a recession

Cyclical

Frictional + Structural=

Natural Rate

What is the Natural Unemployment Rate?

Frictional + Structural= Natural Rate

So, Full Employment traditionally thought to occur @ unemployment rate of 6% or less

-Anything over this is supposedly cyclical

When was the Great Hecession?

December 2007-June 2009

Why did unemployment remain high? Cyclical or Structural?

Extending unemployment benefits prolongs search, keep looking bc you can

Structural changes for some industries means employment in those industries will never reach pre-recession levels again

Structurally unemployed folks require education, training, motivation, and mobility

-Just don't have gov. program to do these things

-Participation rates fall out of the labor force

PROBABLY A LITTLE BIT OF BOTH

What was the historical unemployment rate for Dec. 2009?

10.1

What are the Issues with Unemployment Measure?

1. Part-Time Work

2. Declining Participation Rate-whos out?

3. Rate is National, Over-all Figure

You are employed not unemployed if you work PT but are looking for FT

Part-Time Work

People the prime age group are dropping out of the labor force (no job, not looking)

Declining Participation Rate-whos out?

What are the two types of Declining Participation Rate?

1. Discouraged Workers

2. NEET

Those we thing want to work but have given up looking and so are NOT in the labor force

"Potential Workers"

When unemployment is high, there are more of these than NEETS

Discouraged Workers

Neither employed nor in education or training

Surveys indicate they are entirely idle, male, less educated, never married, socializing leisure full time

1 in 6 men over 20

NEET

Lump everyone in U.S in one giant pool

Can look @ more detailed rate available

-by education attainment, gender, age, and geographic data

Rate is National, Over-all Figure

What are the States with the Highest Unemployment Rates?

1. Alaska

2. New Mexico

3. Ohio

4. Mississippi

5. Kentucky

What are the States with the Lowest Unemployment Rates?

1. North Dakota

2. Colorado

3. Hawaii

4. New Hampshire

5. Idaho

6. Nebraska

What is the minimum HH income that will put you in top 20% in terms of earning? (80% of households earn less)

$112,262+

What is money?

Anything that performs the functions of money is money

Money is what money does

What are the functions of money?

1. Medium of Exchange

2. Standard Value

3. Store of Value

Must be able to carry around and us as money

Avoid barter and requirement of coincidence of wants

-used for cash flow or avoid taxes

-time consuming

Medium of Exchange

Item for item without the use of money

Barter

Have to want what they have and they have to want what you have

Requirement of Coincidence

Serves as a yard stick

-a way to measure and compare

-Ex) Secret Santa, know if you got chipped or got deal

Standard of Value

Money is one way of storing our wealth

Store of Value

What are some of the items used as money in the past?

Cattle

Stones

Salt

Seashells

Skins

An item that has value other than as a medium of exchange

-gold, blankets, furs

Commodity Money

What are the characteristics all types of money should have?

Acceptable

Relatively Scarce

Divisible (make change)

Portable

Durable

Most narrow definition of the money supply

= Currency + Checkable Deposits

M1 "Money Supply One"

Currency is what percentage of M1?

44%

All deposits in commercial banks and "thrift" or savings institutions on which checks of any size can be drawn

Safety and convenience of checks/debit card

Checkable Deposits

Currency=

Coins + Paper Money

Coins= 2-3%

Paper= Federal Reserve Notes = 53%

U.S. currency is ____ money

-face value is unrelated to any intrinsic value

Token

Broader measure of money supply

Everything in M1 included plus...

-Saving and Time Deposits considered near monies

M2

Highly liquid financial assets that can easily be converted into currency or checkable deposits

Near Monies

Same as Checkable Deposits

-ability for use in day to day transactions

Demand Deposit

No check writing privileges

Certificate is an example

Saving Deposits/Accounts

Banking Act of 1933

Maintains this distinction between checking and saving until 1986

Regulation Q

Bans payment of interest on demand deposits

Limited the payment of interest on savings and time deposits (imposed interest rate ceilings)

Regulation Q

Why did they create Regulation Q?

Perception: Bank failures of early 1930's partly result of excessive bank competition for deposits

Why does money have value?

Because we can use it to buy stuff

What gives money its value?

1. Acceptability

2. Relative Scarcity

3. Legal Tender

We accept money because we know it is exchangeable for real goods and services

Acceptability

Helps to maintain value, Basic Supply and Demand

Given a reasonably constant demand for money, the value or "purchasing power" of money is determined by the supply of money

Relative Scarcity

"Fiat" Money

-money by decree

Idea that our money is our money bc the government says so

Must accept money as payment for debt

Legal Tender

Helps us to understand Monetary Policy

Captain captured and held in POW CAMP

-got out and wrote "The Economic Organization of a PoW Camp"

Book gave an explanation of how and why money develop

-use it to avoid barter

-1st step to developing a country is by the use of money

POW CAMP

Every so often they got packages from USA

-snacks, soap, cigarettes

-cigs became the camps commodity money

At first the cigs were worth less bc saturated market but as time goes by there are less cigs and their value goes up

VALUE RELATED TO THE # IN THE MARKET

POW CAMP CONTINUED

How and who measures the money supply?

The Federal Reserve calculates the size of two

Monetary Aggregates: M1 and M2

-is the overall measure of the money supply

-M1 and M2 differ in how strictly money is defined

-M1 is the narrowest definition, M2 adds near monies

Amount of goods and services a unit of money will buy

Purchasing Power of Money (the Dollar)

Amount a dollar will buy varies inversely with price level, what is the rule?

When CPI goes up the value of the dollar goes down and vise versa

Passed in 1913 but the banks didn't actually open until the 1914

12 (District) Federal Reserve Banks are created

-STL, ATL, KANSAS CITY, CHICAGO, SF

Federal Reserve Act (1913)-Federal Reserve System

What are the three types of Federal Banks?

1. Central Bank

2. Quasi-Public Bank

3. Bankers Banks

Providing central banking functions

Central Bank

Privately owned but operated in public interest

Owned by the commercial banks in their districts

Quasi-Public Bank

Businesses that you use as a consumer, banks used to make a profit

Commercial Banks

Banks for banks not for us

Perform some functions for banks that banks perform for you

-Lender of last resort

Bankers Bank

What are the parts of the Federal Reserve System?

Board of Governors

Federal Open Market Committee

Policy making arm of the Federal Reserve System

7 Members

-appointed by president with Congress approval

-14 year term (so they are not influenced by politics)

-chair appointed for a 4 year term

Current Chair= Professor Janet Yellen (Jan 2018)

New Chair= Jerome Powell (after Jan 2018)

Board of Governors

The FOMC

Responsible for a key tool= open market operations

Made up of the 7 board of governors and 5 district FED presidents

-NY FED Bank Pres. always has a seat

-Other 4 rotate and each of the districts has a buddy (STL is with ATL)

8 regularly scheduled meetings a year

Federal Open Market Committee

What are the functions of the Federal Reserve System?

1. Hold deposits of commercial banks called Reserves

2. Assist in check clearing (payment system) process

-use debit card, money goes from your bank to the companies

3. Act as Fiscal agents for the Federal Gov

-Bank for Federal gov, is independent from the gov

4. Supervise commercial banks

5. Regulate the Money Supply (M1) (Currency + CD)

Federal Reserve is in charge

Holding reserves and controlling the money supply are key functions of the FED

The manipulation of the money supply to achieve price stability, full employment, and economic growth

Monetary Policy

Congress in charge

The manipulation of government spending (G) and taxes (T) to achieve price stability, full employment, and economic growth

Fiscal Policy

Same goals but different methods and tools

Fiscal v Monetary Policy

How does Monetary Policy Work?

Fractional Reserve Banking

Commercial banks required to hold only a fraction of assets as reserves

Required Reserves must be kept on deposit with FED district bank or as cash in vault

Fractional Reserve Banking

Amount of funds equal to a specified percentage (10%) of the banks demand deposit liabilities

Required Reserves

What is the main function of Fractional Reserve Banking?

Allows banks to increase money supply by making loans

More loans, more money

Less loans, less money

What is the key to the ability of banks to loans?

Excess Reserves

-The FED has an arsenal of tools available that can provide banks with more reserves

More reserves --> More Loans --> More Money (VV)

Used to stimulate a sluggish or recessionary economy

Increase spending bc GDP=C+I+G+(X-M)

Expansionary Monetary Policy

How does the Expansionary Monetary Policy work?

Increased Reserves -->

More Loans -->

Increase Ms -->

Lower Interest Rates -->

More Spending (I) -->

Higher GDP

An increase in the money supply causes a ____ in interest rates

Decrease

Remember- not just one interest rate

Interest rates are prices reflecting market forces

Prime Rate Nov 2017= 4.25

T-Bill Rate= 1.61 and 2.34

Interest rates are very low right now

Side Road on Interest Rates

Percent banks charge their best costumers

Prime Interest Rate

Borrowing of money by the federal government

T- Bill Interest Rate

Used to discourage spending

Used to soak out the money in the economy

Restrictive or Tight Monetary Policy