Economics Lecture Review

  1. M2 Growth and the FOMC 1.1. M2, a measure of money supply, saw significant growth from March 2020 to March 2022. 1.2. Federal Reserve's policies aiming to combat the COVID-19 pandemic's economic impact led to this growth. 1.3. Correct Tool Identified:

    • Purchasing government bonds increases money supply.
      1.4. Incorrect Tools:

    • Government borrowing does not affect M2.

    • The FOMC lacks control over fiscal deficits.

    • Increasing interest on reserves likely decreases M2.

  2. Structure of the FOMC 2.1. Comprised of the Board of Governors and regional Federal Reserve bank presidents. 2.2. Governors are nominated by the president and confirmed for 14-year terms. 2.3. Meets approximately every six weeks. 2.4. Main roles:

    • Conducting monetary policy.

    • Supervising and regulating banks.

    • Serving as a banker's bank.

  3. Nature of M2
    3.1. M2 includes checking and savings accounts.
    3.2. Impacted by Fed's policies and banks' lending behaviors.
    3.3. Changes in M2 reflect spending behavior.

  4. Federal Reserve's Financing
    4.1. Generates income through interest on reserves.
    4.2. Can print money for operational needs.
    4.3. Regional banks support the overall system.

  5. Government Shutdowns and FOMC
    5.1. Essential members work during government shutdowns, possibly unpaid to maintain continuity.

  6. Mechanics of Money Supply
    6.1. Fed purchases increase liquidity and M2 by expanding the monetary base.
    6.2. Loan creation leads to M2 growth and increased credit supply.

  7. The Cycle of Credit Supply
    7.1. Lower interest rates lead to increased borrowing and demand, causing inflationary pressures.
    7.2. Supply and demand balance in credit markets affects economic activity.

  8. Quantity Theory of Money
    8.1. Amount of money in circulation directly correlates with price levels.
    8.2. Nominal GDP is reliant on money quantity, affecting price levels.

  9. Characteristics of Business Cycles
    9.1. Defined by expansions and contractions around a growth trend.
    9.2. Business cycles have become less frequent in recent decades due to slower growth rates.

  10. Identifying Economic Trends vs. Cycles
    10.1. Growth trend exhibits over time, while deviations are cycle characterized.
    10.2. Influenced by technological progress, human capital, and adverse shocks.

  11. Employment and Business Cycles
    11.1. Unemployment rises in recessions due to wage stickiness.
    11.2. Types of recessions:
    - L-shaped: Long recovery (e.g., Great Depression).
    - U-shaped: Flat bottom recovery (e.g., Great Recession).
    - V-shaped: Quick recovery (e.g., pandemic-related recession).
    - W-shaped: Double dip recession.

  12. Procyclical Behavior of Macroeconomic Variables
    12.1. Indicators like GDP, consumption, and investment move together.
    12.2. Economic conditions reinforce each other.

  13. Limited Predictability of Economic Cycles
    13.1. Forecasting business cycle turning points is challenging.
    13.2. Historical discrepancies in economic forecasts.

  14. Policy Implications
    14.1. Policymakers must respond rapidly to economic downturns.
    14.2. Need for timely data and understanding fundamentals to inform policy decisions.

  15. Real Business Cycle Theory
    15.1. Economic fluctuations arise from real shocks (productivity changes).
    15.2. Critiqued for neglecting monetary policy's role.

  16. Keynesian Theory
    16.1. Aggregate demand influences output and employment in the short run.
    16.2. Advocates for government intervention during demand shortages.
    16.3. Critiques address potential crowding out of private investment.

  17. Financial and Monetary Theory
    17.1. Explores financial markets' influence on monetary policy and economic activity.
    17.2. Suggests direct effects of monetary policy on credit availability and borrowing costs.
    17.3. Critiques focus on implementation complexities of monetary policy