Transcript Required Reserves

Final Exam Review
Macroeconomics
Econ EB222
Fall 2012
Inst. Shan A . Garib
Mohawk College
Final Exam Macroeconomics
Date: Friday, December 14th 2012
Time: 11:00am – 2:00pm
In-Class
Review ALL Quizzes given in class
Consumption, Investment and
the Multiplier: Chapter 9
Consumption (Continued)
• The consumption functions states
–As income rises, consumption (C)
rises, but not as quickly
Income = Consuption + Saving + taxes
Y = C + S + t and,
Disposible Income = Consuption + Saving
Yd = C + S or,
Yd = Y - t
Therefore, consumption varies with disposable income (DI)
Marginal Propensity
to Consume (MPC)
MPC =
CHANGE
in Consumption
CHANGE
in Income
$6000
?
$1000
45
$1000
$6000
Saving = $300
$6000
C
5700
$3000
$2700
Saving = =
- $300
Dissaving
$300
$2700
$6000
At a Y,GDP0 = $10,000bn, consumption (C0) is $8,600 bn. The MPC = 0.25. At a Y,
GDP1 of $9,000bn, how much would be saved? (Assume there is no taxes in the
economy)
Since there are no taxes, disposable income (DI) = (Y,GDP).
ChngC = MPC x ChngDI
ChngDI = $10,000bn - $9,000bn = $1,000bn
ChngC = 0.25 x -$1,000bn = -$250bn.
Since C0 was $8,600bn, the ChngC of -$250bn will bring consumption down to
C1 = $8,350bn (= $8,600bn - $250bn).
If, S = DI – C1
At a national income of $9,000bn
(S) = $9,000bn of DI - $8,350bn of C
= $550bn.
Remember!!
ChngC = MPC x ChngDI.
If MPC = 0.50
ChngDI +$50,000
ChngC = 0.50 x $50,000bn
= $25,000
If C0 $25,000, with ChngC = $25,000
C1 = $25,000 + $25,000
= $50,000.
Fiscal Policy and the
Public Debt
Chapter 10&11
Instructor Shan A. Garib, Fall 2012
10
Expansionary fiscal policy
• If budget is initially balanced, moves it towards
a budget deficit during recession
• Increased government spending (G) and/or
lower taxes
• Aim to stimulate economic activity and to move
the economy out of a recession
LRAS
c
P2
P1
b
AD2
AD1
Y1 Y2
Price Level
Price Level
SRAS
P2
P1
Higher P,
and
wages,
costs
SRAS shift
left
LRAS
d
SRAS2
SRAS1
c
b
AD2
AD1
Y1
Contractionary fiscal policy
• If budget is initially balanced, moves it towards
a budget surplus during an inflationary period
• Decreased government spending and/or
higher taxes
• Aim to control demand and reduce
demand-pull inflation
LRAS
b
P2
P1
c
AD1
AD2
Price Level
Price Level
SRAS
P2
P1
Lower P,
and
wages,
costs
SRAS shift
right
LRAS
SRAS1
SRAS2
b
c
AD1
d
AD2
Y2 Y1
Government Budgets and Finances
• Government’s budget balance is amount of
revenue it recieves minus its spending
Balanced budget is when:
Revenues = Spending
0 = Revenue – Spending
Budget Surplus is when:
Revenues > Spending
0 > Revenue – Spending
Budget Deficit is when:
Revenues < Spending
Money and the Banking System
Chapter 12
Instructor Shan A. Garib, Fall 2012
14
Defining Money (cont'd)
• The transactions approach to
measuring money: M1
􀂃 Currency
􀂃 Checkable (transaction) deposits
􀂃 Traveler’s checks not issued by banks
Defining Money (cont'd)
• The liquidity approach: M2 is equal to
M1 plus
1. Savings and small denomination
time deposits
2. Balances in retail money market
mutual funds
3. MMDAs
Money Creation and Deposit
Insurance
Chapter 13
Instructor Shan A. Garib, Fall 2012
17
Reserves
• Reserves
– deposits held by BOC for chartered banks like
BMO, plus their vault cash
Reserves
• Legal Reserves
– Anything that the law permits banks to claim as
reserves—for example, deposits held at BofC and
vault cash
Reserves
• Required Reserves
– The value of reserves that a depository institution
must hold in the form of vault cash or deposits
with the BofC
Reserves
• Required Reserve Ratio
– The percentage of total transactions deposits that
the Fed requires depository institutions to hold in
the form of vault cash or deposits with the Fed
Required reserves = Demand deposits  Required reserve ratio (M)
Reserves
• Excess Reserves
– The difference between legal reserves and
required reserves
Excess reserves = Legal reserves – Required reserves
The Money Multiplier (cont'd)
1
Potential money multiplier =
Required reserve ratio
Actual change
in the money
supply
=
Actual money
multiplier

Change in
total reserves
The Money Multiplier (cont'd)
• Example
– Fed buys $100,000 of government securities
– Reserve ratio = 10%
Potential change
1
in the money = $100,000
= $1,000,000
x
.10
supply
The Bank of Canada purchases $10,000 of Canadian government bonds on the open market
directly from Scotia Bank. If the required reserve ratio (m) is 25%, then the maximum potential
change in the money supply as a result of the open market operation will be?:
All $10,000 of these new reserves are excess reserves, because:
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so,:
Required Reserves = 25% x 0 = 0
Therefore,
Excess reserves = Reserves of $10,000 - Required Reserves of 0
= $10,000
Resultant change in the money supply:
= 1/m x initial change in excess reserves.
= (1/.25) x $10,000 = 4 x $10,000 = $40,000
How much can RBC lend out? BMO is ALL LOANED UP ie. it cannot make any additional
loans so it has 0 excess reserves.
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then,
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20% x Demand Deposits
$160 million/.20 = Demand Deposits
$800 million = Demand Deposits
By lowering the required reserve ratio to 16%, required reserves will be reduced and excess
reserves will increase as some required reserves are converted into excess reserves.
Now,
Required Reserves = 16% x $800 million
= .16 x $800 million
= $128 million.
Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million,
the amount BMO may now lend out.
1997's money GDP was $8,320 billion. 1997's price level index was 102.0. In 1997 to 2001,
what is the real GDP
1997's real GDP:
Real GDP = (Money GDP/Price Level Index) x 100
Real GDP for 1997 = ($8,320 billion/102.0) x 100
= $81.57 billion x 100
= $8,157 billion.