Transcript i 2 - Chandler Unified School District

and its
Macroeconomics – Unit 4
WARNING
WARNING
You’ll work an open-book free response AP
question at the end of class tonight with an
“earned partner.”
AP question will be based on lecture
notes & reading assignments
WARNING
WARNING
Since the 1930’s our Government has
been required to carry out policies to
[1]
growth / GDP
maximize ___________
unemployment
[2] minimize ___________
inflation
[3] minimize ___________
Let’s say the economy is having a
problem.
What’s the problem illustrated here?
PL
SRAS
LRAS
economy in recession
PL
1
AD
Y1 YP
Q=realGDP=Y
We have 2 kinds of policy that we can
pursue to ameliorate the problem...
Fiscal policy has 2 possibilities:
(1) ________
G which will shift ____
AD
a. change ____
DY
b. change ___
T which will  ____
C & ___I which will
which will  ___
AD
shift ___
Fiscal Policy is carried out by ....
The President
Congress
(a) __________
& (b) _________
(2) _________
Monetary policy
Monetary Policy is carried out by our
Central Bank – in the US called ...
The Fed =
The Federal Reserve System
The Fed was established in 1913 &
restructured in 1935 to ...
[1] aide expansion of US businesses by
supplying more cash, and
[2] be a source of emergency cash in
case of a panic
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Structure of the Federal Reserve System
7-member
Board of
Governors
(including Chair of Board)
12 District
Reserve Banks
4000 private
bank members
who benefit from
membership
The Federal Reserve System is comprised
of 12 regional banks with 25 branches.
This man served as Chair of the
Board for 18 years.
Alan
Greenspan
_______________
This man was sworn
in as our new Chair
on Jan 31, 2006.
Ben
Bernanke
_______________
The Fed is constantly monitoring the
health of the USA economy.
The Fed is owned by its 12-member
government
banks, NOT the USA ____________
 high degree of independence.
B/c Fed officials aren’t elected, the
Fed most often acts with the best
interests of the country in mind,
unlike politicians who have to worry
re-elected
about being __________.
Functions of the Fed:
[1]
to serve as the bank of
the US Gov’t
[2] to regulate its member banks
[3]
to serve as a lender of last
resort for member banks
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Functions of the Fed:
[4] to issue new currency
coins are minted at the
US Mint part of the
Dept of Treasury (gov’t)
new paper currency is
printed by the Fed and
first issued by the Fed
Reserve Banks
Once the Fed designs
its “Federal Reserve
Note” it is signed by
the Treasurer of the
U.S.
Anna Escobedo
Cabral – 42nd
Treasurer of the
USA Summer, 2007
Newly-designed “5”
had not been released
and she told us that it
would be the color
________.
Functions of
the Fed:
[5]
to clear
checks
Functions of the Fed:
[6]
to set the supply of
money in the economy
[7] to set a key interest rate – the
discount rate
These decisions are made by
the 14 members of the
Federal Open Market
Committee (FOMC). The
FOMC meets 8 times per year
at the Washington DC Fed.
The Fed has 3 tools to carry out
Monetary Policy to help control the
economy
reserve requirement
set the _______
at private banks
discount
set
the
________
rate – the
[2]
interest rate at which the Fed
loans money to banks
[1]
[3] open market operations
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# 1 Reserve
Requirement
If the Fed increases the reserve

requirement  money supply ____
If the Fed decreases the reserve

requirement  money supply ____
__1__
simple money multiplier =
r
# 2 Discount
Rate
The discount rate is the rate of interest
the Fed charges for loans it makes to
banks.
If the Fed decreases the discount rate 
encouragedto borrow
banks are ____________

more
_________
 money supply ____
changes in reserve requirement & discount rate are not
used on a day-to-day basis by the Fed...more frequently
used is tool # 3
Banks we use are private businesses
... they set their own rates
Our new car loan rates range from 6.74% to 13.74%
APR. To obtain the lowest annual percentage rate, you
must have excellent credit history, .... (Dec. 2008)
Annual Percentage Rates (APR) As Low As ....
New car 5.30%
Used car (franchise dealer) 5.85%
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but ...
Used car (private party) 8.34%
but ... the rate at which banks loan
money to us is strongly impacted by the
discount rate – the rate at which the Fed
loans to private banks.
$
discount rate – the
rate at which the
Fed loans to banks
$
$
$
$
Fed Reserve
Bank of New
York
$
$
federal funds rate –
the rate at which
banks loan to each
other over night
commercial paper –
overnight loans
between banks
The Fed uses its open market operations to
target the federal funds rate.
the federal funds rate – the interest rate at
which banks lend to each other.
Fed funds rate determined by supply &
demand, but thru its operations the FED
“targets” this rate. This rate has a direct
impact then on the interest rate at which
banks are willing to loan money to
consumers
investors
___________
& ___________.
# 3 Open
Market Operations
Open Market Operations = the Fed’s
buying and selling of government
securities.
A security is either a stock or a bond.
US Dept of Treasury issues US Gov’t
securities which are called
Treasury Bills
Treasury Bonds
Treasury Notes
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A bond is an _____
IOU in which the issuer of
the bond agrees to pay the owner of the
face _______
value
bond the amount of the _____
(“par value”)of the bond on a future date.
Bonds -- a way for the
government (or
borrow
corporations) to _______
money to finance new projects or
expansions. Bond buyers are essentially
loaning
__________
money to the bond issuers.
Treasury Bills
T-Bills
mature in less than 1
year
Treasury Notes mature in 1 year – 10
years
T-Notes
mature in 10 years or
Treasury Bonds more from their issue
T-Bonds
date
Open-Market Operations – buying and
selling of gov’t securities (bonds).
Southwest Airlines owns
bonds. The Fed goes to
the bond market and buys
a $50,000 worth of bonds
from Southwest 
The Fed pays Southwest $50,000
which it deposits into its account
with Wells Fargo bank 
The Fed takes the
$50,000 worth of bonds
and puts them in the Fed’s
vault (which is NOT
circulated in the economy)
and 
The Fed takes $50,000 out of
its vault to pay Southwest by
depositing it into SW’s account
with Wells Fargo bank
The supply of money
circulating in the economy

has ____
This is an example of a(n)......
expansionary / contractionary
monetary policy
If the Fed has expanded the money supply 
interest rates will ____
 because there will be ______
money
more out there to lend out  lower
interest rates lead
individuals & firms
PL
SRAS
to __________
more
borrow
which will in
LRAS
P2
turn increase
AD2 ______________
P1
&consumption
___________

investment
shifts _____ to
AD
AD
the right.
Y1 Y2 YP
Q=realGDP=Y
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How about the Fed goes out and sells
$50,000 worth of T-Bonds to Southwest
... which way do arrows go?
So has the Fed increased the supply of
money circulating in the economy or
decreased it?
AP workbook p. 203, Act 38
do charts on overhead with class
Money Market
The demand for money is based on
whether to hold your wealth as ...
interest
rate
money
market
i2
(1) interest-bearing assets such as
savings
acct or _________
stocks
_________,
......or......
(2) interest
as money which doesn’t earn
________.
MD
i1
Q
Q1
So what’s the shape of the
demand curve for
money....what if interest
rates are high...will Q be
high or low?
quantity of
money
Money Market
money
market
interest
rate
i2
The opportunity cost of holding money
interest rate
is the ________________.
The demand for money depends on
the PL and on Y
right
As PL   MD shifts ______
left
As Y   MD shifts ______
MD1
i1
MD0
MD2
Q
Q1
quantity of
money
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Money Market
interest
rate
MS2 MS
The supply of money is presumed set
by the Fed. What do you think it
looks like?
MS3
i2
If the Fed contracts the


MS  Q ____ & i _____
If the Fed expands the


MS  Q ____ & i _____
i1
i3
MD
Q
Q1 Q
quantity of
money
money
market
interest rate
MS
MS2
investment
price
level
interest rate
i1
i1
i2
i2
MD
Q1
Q2
quantity of
money
AD
AD
ID
Q1
Q2 Q of I
Y1
Y2
Q = Real
GDP = Y
On the AP/IB exams you’ll be expected to
explain step-by-step how an action by the Fed
affects the economy.
money market
interest rate
MS
MS2
investment
price
level
interest rate
i1
i1
i2
i2
MD
Q1
Q2
quantity of
money
AD2
AD
ID
Q1
Q2 Q of I
Y1
Y2
Q = Real
GDP = Y
The Fed purchases gov’t securities  Fed issues

IOU’s for the purchase causing MS ____
interest
  I ____
 & C ____


rate ____
 AD ____
AP workbook p. 206-207, Act 39
20 min
interest
rate
MS
money
market
i1
MD
Q1
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quantity of
money