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