P4 UTA ECON NOTES
Econometricians - practitioners of econometrics—transform models developed by economic theorists into versions that can be estimated.
Keynes - circular flow - money flows from households to firms to gov’t and back
Hayek - pretense of knowledge
Economy is not a class you can master in college
Made to show how much we imagine we can design and not KNOWING everything
Functions of money
Money is not always the dollar
Cigarettes/ramen used in prison
Primary functions
Medium of exchange
Coincidence of:
Wants
Time
Space
Scales
^To trade efficiently
Do you want the good?
Do the goods remain usable for the same amount of time?
Are the traders in the same space?
What is the scale between two different goods?
Unit of account
Ammo can be used as currency at a gunshow but not at a gas station
Store of value (scarce?)
Is the product worth the same over time?
Additional
Liquid/Salability
Fungible
One dollar = one dollar
One apple = one apple? Depends on quality
Also issue of how currency is accepted or different forms (cash v. check)
Legal tender
If the court orders a payout, the court will not recognize a payout has been made unless it is cash being offered
Can be something else if the other person states they want something else
Intrinsic value
The value of a good beyond being used as money
Eating ramen noodles, smoking cigarettes
Goldsmith Table
The process by which banks create money is so simple that the mind is repelled
Goldsmiths began as artisans that were qualified to create precisely weighed gold coins
Began lending his own gold while it was claimed by others who used paper money instead of the gold sitting in the bank for ease
Central Bank Tools
Opening a bank requires permission
Fractional reserve ratio 9:1
Only one currency that is managed by the federal reserve--creates a “closed loop” of banks shifting the same money around in a perfect world
The fractioned money (9) cannot be split again because it is no longer high power money
Money Definition
M1 adds up
Currency
Checkable deposits
Travelers checks
M2 = M1 + ‘near-monies”
Slightly less liquid
Savings deposits including money market deposit accounts (MMDA)
Small-denominated time deposits
Money market mutual funds (MMMF)
M3 = M2 + Large Time Deposits
What “Backs” the Money Supply?
Backed by the government’s ability to keep the value stable and repay debt.
Money as debt
Why is money valuable?
Acceptability
Legal tender
Relative Scarcity/Demand
Functions that it serves (duh)
Functions of Money
Primary Functions:
Medium of exchange
Unit of Account
Store of Value (Scarce?)
Additional Functions:
Liquid
Fungible
Legal Tender
Intrinsic Value
Federal Reserve
Must have permission from daddy government
Issue currency
Lender of last resorts
Fiscal agent
supervise banks
Controls money supply
Set requirements
Independence:
Established by Congress in 1913 as an independent agency
Enables the Fed to take actions to increase interest rates in order to stem inflation as needed
REKT
Slavery:
Not free labor - highly productive, work overtime (if forced to), overall highly inefficient, not cheap,
in eyes of slave owner slaves are pieces of capital,
theft of ones fruits of labor
Money Definition M1
M1 (M0? MB?)
Currency
Checkable Deposits
Travelers Checks
Institutions offering checkable deposits
Commercial Banks
Savigns and loan associations
Mutual savings banks
Credit unions
Money Definition M2
M2 = M1 + “near-monies”
Saving deposits including money market deposit accounts (MMDA)
Small-denominated time deposits
Money Market mutual funds (MMMF)
M3
M2 + Large time deposits
The Financial Crisis of 2007 and 2008
Troubled Asset Relief Program (TARP)
Allocated $700 billion to make emergency loans
Bailed out several institutions to avoid failure. Which ones and why? Too big to fail?
Credit default swaps bundle of home loans to lower risk of default
During conflict of interests in government; people wanted firms to regulated, however firms r already heavily regulated
BIG MORAL HAZARD
GNAWING AT THE BARS OF MY ENCLOSURE RAHHHHHHH
Post-Crisis U.S. Financial Services
TSA
Electronic Banking
“Cash-less” society?
Interest Rates
Price paid for the use of money
Many different interest rates
Speak as if only one interest rate
Determined
Equilibrium interest rate
D
Tools of Monetary Policy
How to change the money supply; done by central banks
Open market operations (fav tool)
Buying and selling of government securities (or bonds)
Makes money supply go up
Commercial banks and the general public
Used to influence the money supply
When the Fed sells securities, commercial bank reserves are reduced
The Reserve Ratio
Changes the Money Multiplier
How many credit dollars allowed to lend backed by one paper dollar in vault one paper dollar for every 10 fictional (electric) dollar
Don’t want to change often; last changed in 1992
The Discount Rate
The Fed as lender of last resort
Short term loans
Rate that ur willing to lend to banks
The rate at which the federal reserve bank charges
Federal funds rate - rate at which banks charge each other to borrow; tends to be higher than discount rate
Term Auction Facility ← not covered
Introduced December 2007
Banks bid for the right to borrow reserves
Open market operations are the most important
At moments notice to control money can sell and buy government bonds and change money supply
Happened so much in 2008, people lost trust in this system; people don’t want anymore debt
Monetary policy
Expansionary monetary policy
Economy faces a recession
Lower target for Federal funds rate
Fed buys securities
Expanded money supply
Downward pressure on other interest rates
Contractionary monetary policy
Periods of rising inflation
Increases federal funds rate
Decrease money supply
Increases other interest rates
The Federal Funds Rate
Rate charged by banks on overnight loans
Targeted by the Federal Reserve
FOMC conducts open market operations to achieve the target💩 😣
Stocks (he said not gonna be on test but good to understand)
Represents ownership in a company
Bankruptcy possible
Limited liability rule
Capital gains
Dividends
Mutual funds
Bundling stocks together and over time the risk of failure lowers
Arbitrage
Triangular:
Buying and selling process to equalize average expected returns
Sell asset with low return and buy asset with higher return at same time
Bitcoin:
Satoshi nakamoto no one knows who this is, developed bitcoin
Hal finney developed cryptography and had first bitcoin transaction
Centralized de
Test #4 REVIEW
The red is from the prof’s slides and the green is from the textbook/google
Asymmetric Info / Moral Hazard / Adverse Selection
Asymmetrical Information: Imbalance of info
Adverse selection
Little information (no guidance) leads ppl to enter markets they should AVOID, making less optimal decisions
ex) Buying homes you shouldn’t be
Moral Hazard
Ppl BELIEVE they are shielded from risk, leading them to engage in risky behavior
ex) football players have more injuries AFTER pads/equipment were invented cuz they thought they were shielded from risk (they were more careful BEFORE these inventions)
Primary / Secondary Functions of Money
Primary
Medium of exchange
Any item that sellers will accept as payments
Unit of account
Store of value (scarce?)
Additional (Ig second)
Liquid and fungible
Legal tender
intrinsic value
Coincidence of Wants / Space / Time / Scales
Barter is inefficient because of opportunity costs
Basic Understanding of Bitcoin
Fiat Currency / Fractional Reserve / Commodity Money
Fiat currency
Gov-issued currency that is not backed by commodity such as gold
ONLY BACKED BY DEPT
Gives central banks greater control over economy
They can control how much money is printed
fractional reserve
System in which depository institutions hold reserves that are less than the amount of total deposits
Enables the federal reserve to use an open market purchase (sale) of US gov bonds to generate an expansion/contraction of deposits
Effect:
Makes depository institutions somewhat fragile
Commodity money
A physical good that may be valued for other uses it provides
Main forms: gold and silver
USA no longer uses after 1975
M0 / MB / M1 / M2 / M3 (What's in each)
M1 (M0? MB?)
Currency
Checkable/transaction deposits
Institutions offering this
Commercial banks
Savings and loan associations
Mutual savings bank
Credit union
Travelers checks
Financial instruments obtained from a bank and signed during purchase that can be used in payment upon a second signature
Money supply = total value of currency + transaction deposits + traveler’s checks not issued by banks
M2
M2 = M1 + “near-monies”
“Near monies:”
Savings deposits: money market deposit accs (MMDA)
Small-denominated time deposits
Money market mutual funds (MMMF)
M3
M2 + Large time deposits
Token Money
$100 is same as $20
Face is more valuable than intrinsic value
Purchasing Power
Value of money for buying goods
If money income stays same but price of good rises, purchasing power falls
Tools of the Federal Reserve to Control the Money Supply (Reserve Requirement, Open Market Operations, Discount Rate)
Reserve ratio - number of fictional dollar i can lend out
Discount rate -lend to other banks
Open market operation - buy/sell gov bonds
Dual mandate
Try to control the prices to keep inflation in check
Try to promote low unemployment
Credit cards ARE NOT IN THE MONEY SUPPLY (debt)
Keynes says gov should spend more during a recession
classicals say that it crowds out private consumption
Bitcoin mining - processing transactions rewarded with newly minted coins
Application specific integrated surfaces need to mine (very expensive)
Miners keep the network alive
Difficulty goes up and down
Block discovered every 10 minutes
Allows cash base transfers on internet with low fees 😭
Federal cost of holding money
Federal Funds Rate
Rate charged by banks on overnight loans
Targeted by federal reserve
FOMC conducts open market operations to achieve target
Goldsmith's Tale
Stored gold and gave a receipt
Receipts used as money by public
Made loans by issuing receipts
Monetary vs Fiscal Policy
Fiscal (gov controlled)
Changing of gov expenditures/taxes/revenues
To promote economic growth, control inflation, full employment
Monetary (central bank controlled)
Controlling interest rates and money supply to promote economic activity
Fed's Dual Mandate
ECONOMICS QUIZ #2
Highlight in yellow if not sure
Highlight in Green if sure
MACRO QUIZ #2 (For Exam #4)
1. If you purchase some gourmet coffee on Amazon, you are using money primarily as a:
A. medium of exchange.
B. store of value.
C. unit of account.
D. standard of value.
2. If you are projecting the cost of a construction project, you are using money primarily as:
A. a medium of exchange.
B. a store of value.
C. a unit of account.
D. an economic investment.
3. In the United States, the money suppfly (M2) is comprised of:
A. coins, paper currency, and checkable deposits.
B. currency, checkable deposits, and Series E bonds.
C. coins, paper currency, checkable deposits, and credit balances with brokers.
D. paper currency, coins, savings deposits, and small time deposits
4. Checkable deposits are classified as money because:
A. they can be readily used in purchasing goods and paying debts.
B. banks hold currency equal to the value of their checkable deposits.
C. they are ultimately the obligations of the Treasury.
D. they earn interest income for the depositor.
5. Currency in circulation is part of:
A. M1 only.
B. M2 not including M1.
C. neither M1 nor M2.
D. both M1 and M2.
6. The primary purpose of the legal reserve requirement is to:
A. prevent banks from hoarding too much vault cash.
B. provide a means by which the monetary authorities can influence the lending ability of commercial banks, and thereby control the money supply.
C. prevent commercial banks from earning excess profits.
D. provide a dependable source of interest income for commercial banks.
7. The opportunity cost of holding money:
A. is zero because money is not an economic resource.
B. varies inversely with the interest rate.
C. varies directly with the interest rate. ← if interest rate is high I could be earning lots of money; thus, if I forgo it I lose money if I could have placed in it
D. varies inversely with the level of economic activity.
8. If in the market for money the quantity supplied exceeds the money demand, the interest rate will:
A. fall, causing households and businesses to hold less money. ← if interest rates r low spend, if high save
B. rise, causing households and businesses to hold less money.
C. rise, causing households and businesses to hold more money.
D. fall, causing households and businesses to hold more money.
9. The sale of government securities from the public by the Fed will cause:
A. commercial bank reserves to increase.
B. demand deposits to increase.
C. the money supply to decrease. ← because Fed takes ur money and throw it away
D. the interest rate to increase.
10. Credits cards are:
A. the fastest growing component of the M1 money supply.
B. near-monies that are part of the M2 money supply but not the M1 money supply.
C. also known as time deposits.
D. not in the official money supply. ← short term debt