Input/Output Problems

Input/Output Problems

• Output Problem presents data as products produced given a set of resources
• Input Problem presents data as amount of resources needed to produce a fixed amount of output.

In absolute advantage, input changes from who can produce the most to who can produce a given product with the less resources.

Comparative Advantage

May 10, 2017

Comparative Advantage

Speculation

• Individuals and countries can be made better off if they will produce what they have a comparative advantage and then trade with others for whatever else they need/want.

Absolute Advantage

• Producer that can produce the most output or requires the least amount of inputs/resources

Comparative Advantage

• Producer with lowest opportunity cost
• *countries should trade with relatively low opportunity cost*
  

Mechanics Of Foreign Exchange (FOREX)

Mechanics Of Foreign Exchange (FOREX)

• Buying/Selling of Currency
• Any transaction that occurs in the balance of payments necessitates foreign exchange
• The foreign exchange rate (e) is determined in the foreign currency markets
• -exchange rate is the price of a currency-

Changes in Exchange Rates

• Exchange rates (e) are function of supply/demand for currency
• An increase in supply of currency will decrease exchange rate of currency.
• Decrease in supply will increase exchange rate
• Increase in demand will increase exchange rate
• Decrease in demand will decrease exchange rate

Appreciation and Depreciation

• Appreciation of a currency occurs when the exchange rate of that currency increases
• Depreciation occurs when exchange rate of that currency decrease

Exchange Rate Determinants

1. Consumer Taste
2. Relative Income
3. Speculation

Exports/Imports

• Exchange rate is determinant of both exports and imports
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
• Depreciation- relatively cheaper and foreign goods more expensive, increases exports, decreases imports

Balance Of Payments

May 4, 2017

Balance of Payments

• Measure of money inflows and outflows between the U.S and the rest of the world (ROW)
• Inflows= Credits
• Outflows= Debits
• Balance of Payments divided into 3 accounts
1. Current Account
2. Capital/Financial Account
3. Official Reserves

1. Current Account
• Balance of Trade/Net Exports
1. Exports of goods/services-imports goods/services
2. Exports creates a credit to balance of payments
3. Imports create debit
• Net Foreign Income
1. Income earned by US foreign assets - income paid to foreign held US assets
• Net transfers (tend to be unilateral)
1. Foreign aid= a debit to current account.
2. Capital/ Financial Account
• Balance of capital ownership
• Includes purchase of both real and financial assets
• Direct investment in U.S is credit to capital account
• Direct investment by U.S firms/ individuals in foreign country are debits to capital account
• Purchase of foreign financial assets (debit to capital account)
• Purchase of domestic financial assets by foreigners represents credit.

*current account and capital account zero each other out.*

1. Official Reserves
1. Foreign currency holdings of U.S Fed. Reserve Sys.
2. When there is a balance of payments surplus, the Fed accumulates foreign currency and debits the balance of payments.
3. When there is balance deficit, the Fed depletes reserves of foreign currency and credits balance.

*Official Reserves zero out balance of payments

Monetary Policy Video

Loanable Funds Market

April 3, 2017

Loanable Funds Market

• Private sector supply and demand of loans
• Bring together lenders and borrowers
• Shows effect on real interest rate
• Demand: inverse relationship between real interest rate and quantity loans demanded
• Supply: Direct relationship between real interest rate and quantity loans supplied
• NOT the same as money market (supply is not vertical)

Federal funds rate: interest rate that banks charge one another for overnight loans

Prime rate: interest rate banks charge their most creditworthy customers

Tools of Monetary Policy

Tools Of Monetary Policy

FED adjusts money supply by changing 1 of the following….

1. Setting reserve requirements
2. Lending money to banks and thrifts
1. Discount rate
3. Open Market Operations
1. Buying and selling bonds

1. Reserve Requirement
1. Fed sets amount that bank must hold (fractional reserve banking).
2. RR ration is % of deposits banks must hold in reserve (can NOT loan out)
2. Open Market Operations
1. If the Fed buys bonds- it takes bonds out of the economy and replaces them with money. MS increases.
2. Most important and widely used monetary policy
3. To increase MS, Fed should buy govt securities
4. To decrease money supply, fed should sell govt securities
3. Discount Rate
1. Interest rate that the Fed charges commercial banks for short term loans.

New vs. Existing Money

New vs. Existing Money

Single bank can create money by amount of ER

Banking system as a whole can create money by a multiplier of the ER

• MM•ER = expansion of Money
• Money multiplier = 1/RR

If initial deposit in a bank comes from the Fed or a bank purchase of a bond or other money out of circulation (buried treasure), the deposit immediately increases money supply.

The deposit can then lead to further expansion of money supply through money creation process.

• Total change in MS if initial deposit is new money= deposit + money created by banking system.
• If deposit in a bank is already existing money (already counted), depositing amount does not change MS immediately because it is already counted.
• Existing currency deposited into a checking account changes only the composition of money supply from coins/paper money to checking account deposits

Supply and Demand For Money

March 22, 2017

Supply and Demand for Money

• Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded
• Ex: quantity demanded increases when interest rate decreases

What causes money demand shift?

• Changes in price level, income, taxation that affects investment.

Demand deposit is created through fractional reserve system.

FRS: process by which banks for a small portion of the deposit in reserve and loan out excess. Banks keep cash on hand(required reserves) to meet depositors needs.

Bonds v. Stocks

March 22, 2017

Bonds v. Stocks

• Bonds are loans or “IOU’s” that represent debt that the government or a corporation must repay to an investor. The bondholder has no ownership of the company
• If a corporation issues and then sells a bond, it is a liability for corporation but asset for the buyer

** if nominal interest rate falls, value of the bond increases (inverse relationship)**

Stocks

Stockowners can earn a profit in 2 ways:

1. Dividends- portion of a corporation's profits are paid out to stockholders
1. the higher the corporate profit, the higher the dividend
2. Capital gain-  earned when stockholder sells stock for more than he or she paid for it. stockholder that sells stock at a lower price than the purchase price suffers a capital loss

Financial Institutions

March 21 2017

Purpose of Financial Institutions:

1. Store Money
2. Save Money
1. Saving account
2. Checkable Deposits
3. Money Market account
4. Checking account
3. Loan Money

Principal - amount that you borrow

Interest - Price paid for the use of borrowed money

 

Types of Financial Intermediaries:

• Commercial bank
• saving and loans institutions
• credit unions
• mutual fund companies
• finance companies

The financial system

• Assets: anything of monetary value owned by a person or business
• Financial asset: paper claim that entitles the buyer to future income from the seller
• Physical asset: A claim on tangible object (ex: house or car)
• Liability: requirement to pay money in the future (usually with interest)

Five major financial assets

1. Loans
2. stocks
3. bonds
4. Loan-backed securities
5. bank deposits

Interest rates and inflation

Time value of money- A dollar is worth more today than it is tomorrow. You are losing money every second you are not investing it.

• Future value (FV)- If you invest or lend money to someone it will compound/girl according to the following equation: FV = PV(I+i)^t
• Present value (PV)- amount of money you need to invest now in order to get some amount in the future. PV= FV/(I+i)^N

Formulas

Time Value of Money

• Simple interest formula
• V= (I + r) ^n • P
• Compound Interest Formula
• V= (I +r/k)^nk • P

Where r= nominal interest rate, k= Number of times interest is credited per year, n= years, and V= future value of money

Money

If we had no money, we would use barter system: goods/ services traded directly with no money exchanged.

Money

• Anything generally accepted in payment for goods and services
• NOT wealth or income
• Wealth: total collection of assets that store value
• Income: Flow of earnings per unit of time

Can be used as:

1. Medium of exchange: buying goods and services
2. Unit of Account: measuring value of goods and services
3. Store of Value

3 types of Money

1. Representative Money: Represents something of value. Ex: IOU’s
2. Commodity Money: Something that performs functions of money and has alternative uses. Ex: good, silver, salt
3. Fiat Money: Money because government says so. Ex: paper money, coins

6 Characteristics Of Money

• Durability
• Portability
• Divisibility
• Limited Supply
• Uniformity
• Acceptability

Liquidity: ease in which an asset an be accessed and converted into cash (liquidized)

• M1 (high liquidity) coins, currency, and checkable deposits (checks) (personal and corporate checking accounts which are largest components of M1) AKA demand deposits. MONEY SUPPLY
• M2 (medium liquidity)  M1 + savings deposits (money market accounts), time deposits (CD’s = certificates of deposit), and mutual funds below $100k
• M3 (low liquidity) M2 + time deposits above $100k