Hellooo~

hola! This is my blog for AP-Economics! hopefully I can provide you with the needed resources to pass your next test! And hopefully i do a better job than your calculus teacher! :D

Sunday, March 29, 2015

Unit 4: (3/5/2015)

Three Types of Multiple Deposit Expansion:
Type 1: Calculate the initial change in excess reserves. Also known as the amount a single bank can loan from the initial deposit.

Type 2: Calculate the change in loans in the banking system

Type 3: Calculate the change in money supply. (Sometimes Type 2 and 3 will have the same result)                No FED involvement

Type 4: Calculate the change in demand deposits

Unit 4: (3/23/2015)

loanable funds market - market where savers and borrowers exchange funds (Q lf) at real rate of interest (r%)

Demand for loanable funds comes from or borrowing households, firms, govs, and foreign sectors.

supply - or savings comes from h, f, govs, and fs. supply is demand for bonds

demand = borrowing

more borrowing = more demand for loanable funds
less borrowing = less demand for loanable funds

When government does fiscal policy it will affect the loanable funds market
changes in real int rate will affect gross private investment.


Unit 4: (3/19/2015)

Monetary and Fiscal policy

Fiscal policy
-Congress and president controls
-Tax on spend

Monetary policy
-FED
-OMO (open market operation)
-discount rate
-federal fund rate
-reserve requirement

Tools of monetary policy


Expansionary (easy money)
Contractionary (tight money)
Open market operation
Buy bonds
Increase money supply
Sell bonds
Decrease money supply
Discount rate
Decrease
Increase
Reserve requirement
Decrease
Increase



bank reserves and money supply have a direct relationship

federal find rate - interest rate that commercial banks charge each other for over night loans. 

Prime rate - interest rates that banks charge to their most credit worthy customers. 

Unit 4: (3/17/2015)

Key principles
- a single bank can create money through loans by the amount of excess reserves
- the banking system as a whole can create money by a multiple (deposition money multiplier) of the initial excess reserves.

Initial deposit
New/existing money
Bank reserves
Immediate change in M.S
Cash
Existing
Up
No; because the composition of M1 money changes cash to currency.
FED Purchase of a bond from the public
New
Up
Yes; because money coming out of the FED is new Money in circulation
Bank purchase of a bond from the public
New
Up
Yes; because money coming from bank reserves is new money in circulation.


Factors that weaken the effectiveness of the deposit multiplier:

1. if bankers fail to loan out all their excess reserves
2. if bank customers take their loans in cash rather than new checking account deposits it creates a cash currency drain.



Money market
Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.

Unit 4: (3/6/2015)

How banks work

Right side: Assets

Assets
-Reserves
>required reserves (rr) - percent required by the fed to keep on hand to meet demand
>excess reserves (er) - percent reserves over and above the amount needed to satisfy the minimum reserve ratio set by the fed
-Loans to firms, consumers, and other banks
-Loans to government - treasury securities
-Bank property - if bank fails you could liquidate the bank property.

Left side: liabilities

Liabilities
- Demand deposits
-CD's
-Loans from federal reserves and other banks
-Shareholders equity

Unit 4: (3/4/15)

Time value of money

Is a dollar today worth more than a dollar tomorrow?
-Yes, because inflation and opportunity cost.
- This is the reason for charging and paying interest.
Let
V = future value of money
P = resent value of money
r = real interest rate
n = years
K = number of times interest is created per year

simple interest form

V = (1 + r) ^n  multiplied by p

compound interest form

V = (1 + r/k) ^ nk multiplied by p

7 functions of the FED 
1. issues paper currency
2. sets reserve requirements and holds reserves of banks
3. it lends money to banks and charges them interest
4. they are a check cleaning service for banks
5. acts as a personal bank for the government
6. supervises member banks
7. controls the money supply in the government

Unit 4: (3/3/2015)

     Money is any asset that can be used to purchase any goods or services.

3 uses of money
1. The medium of exchange: used to determine value.
2. Unit of account: how do you compare prices.
3. store of value: how money can be stored.

3 types of money
1. commodity money - has value within itself.
EX: salt, gold, and olive oil
2. representative money - represent something of value
EX: I.O.U.
3. Fiat money - it is money because the government says so.
EX: paper currency and coins,




Money supply - total value of financial assets available in the U.S economy.

M1 money
-Liquid assets - easily to convert to cash

M2 money 
-M1 money plus
      *savings account
      *money market account

3 purposes of financial institutions.
1. store money
2. save money
3. loan money

4 ways to save money
1. savings account
2. checking account
3. money market accounts
4. certificate of deposit

Loans  -  Banks operate on a fractional reserve system. which is where they keep a fraction of the funds and loan out the rest.

Interests rates
- Principle - amount of money borrowed
- Interest - price paid for the use of borrowed money
     > simple interest - paid on the principle
     > compound interest - paid on the principle plus accumulative interest.













And Finance companies are part of the financial institution.

Investment - redirecting resources you would consume now for the future.

Financial assets - claims on property or income of borrower

Financial intermediaries - institution that channels funds from savors to borrowers

Savers ----> financial institution ----> investors.

Purposes of financial intermediaries
1. sharing risks
    diversification - spread out investment in order to reduce risk
2. providing information
3. liquidity
    returns - amount an investor receives above and beyond the sum of initially invested.

Bonds and stocks
Bonds you loan; stocks you own
Bonds - I.O.U.'s or loans that represent that the government/corporation must repay to an investor
   3 components
1. coupon rate: interest rate the issuer pays ti the bond holder
2. maturity: time at which payment to a bond holder is due.
3. par value: amount an investor pays to purchase a bond and that will be repaid to an investor at maturity.

Yield - annual rate of return on a bond if the bond were held at maturity.













video response

In this video i learned about the money making process. The fed makes money by making loans. I learned that the money multiplier is 1/rr (required reserve) and you need this in order to figure out how much  money is created. using this formula you multiply it by what is loaned out and you will get a huge increase in money that is created and this is because of multiple deposit expansion. But that gives you the max amount of money they can make the bank doesn't have to loan out all of the excess reserves.

Video respose

In this video i learned about the loadable funds graph, which is money that is available in the banking system for people to borrow. the Y axis is interest rat (i) and the X axis is quantity of loadable funds. Demand for loan-able funds is downwards sloping and then an upwards sloping of supply loan-able funds. Supply loan-able finds is dependent on savings. When government is running a deficit the demand of money shifts to the right in the money market graph and when you increase demand for money we increase demand for loan able funds. Does this lady ever change?

video response

In this video i learned about what the fed can actually do to manipulate the money supply.
I learned about the tools of the feds. There is Expansionary (Easy money) and Contractionary (Tight money). The fed can change Reserve requirements, Discount rate, and they can buy or sell bonds and securities. Reserve requirement is the percentage of the banks total deposit that they must hold on as vault cash or a fed branch, for expansionary the fed would decrease required reserves and for contraction they would increase. The discount rate is the rate at which banks can borrow money from the FEDs, for expansionary they would decrease the discount rate and increase it for contractionary. Then we have the buying and selling of bonds and securities for expansionary they would buy bonds to increase money supply and sell for contractionary in order to reduce money supply. Do you feel like they go off topic too much? like omg.

video response

In this video i learned about the money market graph, it is very similar to supply and demand but it just has a few things that are different, on the vertical axis we have the interest rate (i) and on the horizontal axis we put the quantity of money. The demand is curved downwards and we also have the supply of money and that is vertical, it is fixed and doesn't changed unless the FED changes it. When demand is lowered it shifts to the left and when it fluctuates it shifts to the right. Even if you shift the curve the quantity is the same because it is set by the FED. The man in the back is so annoying.

Video respnse

In this video i learned about the types of money and the functions of it. There are three types of money and there are three functions of money. The three types of money are commodity money which has been around the longest, representative money for example the gold and silver standard, and then we have fiat money which is the one we use currently. The three functions are medium of exchange which means exchanging money for goods, store of  value  which is storing money and it still having some sort of value later on, and lastly we have unit of account which means we pay th more value it has. This lady's voice is strange though.

Sunday, March 1, 2015

Unit 3 (2/25/15)

     Fiscal policy
-Changes in the expenditures or tax revenues of the federal government.
-2 tools of fiscal policy:
1) Taxes - government can increase / decrease taxes.
2) Spending

     Deficits, Surplus, and Debt
Balance budget
-Revenue = Expenditure
Budged deficit
-Revenue < Expenditures
Budget surplus
-Revenue > Expenditures
Government Debt
-Sum of all deficits - Sum of all surplus

Government must borrows $ when it runs a budget deficit.
Borrows from...
- Individuals
- Corporations
- Financial Institutions
- Foreign Entities

     Discretionary fiscal policy. (action)
- Expansionary fiscal policy: Think deficit.
- Contractionary fiscal policy: Think surplus
Non-Discretionary fiscal policy. (no action)

     Discretionary Vs. Automatic fiscal policy
- Increasing or decreasing government spending and or taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal politics in response to an economic problem.
- Unemployment compensation and marginal tax rates are EX. of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

     Contractionary Vs. Expansionary fiscal policy
Contractionary
- Policy designed to decrease aggregate demand
  + Strategy for controlling inflation.
Expansionary fiscal policy
- Policy designed to increase aggregate demand
  + Strategy for increasing GDP combating the recession and reducing unemployment.
* Increase government spending G goes up
* Decrease Taxes T goes down

Contractionary fiscal policy
-Inflation is countered with contractionary policy
Decrease government spending. G goes down

Automatic built in stabilizer
-Anything that increases the government budget deficit during a recession and increases its budget surplus during an inflation without requiring explicit action by policy makers.
EX. Transfer payment, welfare, food-stamps, unemployment checks, corporate dividends, social security, and veterans ben.

Progressive tax system
-Average tax rate (Tax rev / GDP) rises with GDP.

Proportional tax system
-Average tax rate remains constant as GDP change

Regressive tax system
-Average tax rate falls with GDP



















Unit 3 (2/20/15) consumption and savings

Disposable income (DI)
-Income after taxes or net income.
-DI = gross income multiplied by taxes.
     2 choices...
1. Consume (spend $ on goods and services)
2. Save (not spend money on goods and services)

      Consumption 
  Household spending: the ability to consume is constrained by...
-The amount of disposable income.
-The propensity to save.
  Do households consume if DI = 0?
-Autonomous consumption
-Dis-saving
       APC = C / DI = % DI is spent

     Saving
  Household not spending.
The ability to save is considered by...
-The amount of disposable income.
-The propensity to consume.
  Do households save if DI = 0?
-No.
          APS = S / DI = % DI is not spent


APC and APS
* APC + APS = 1
* 1 - APC = APS
* 1 - APS = APC
* APC > 1.: Dis-saving
* -APS.: Dis-saving

     Marginal propensity to consume.
ΔC / ΔDI
* % of every dollar earned that is spent
     Marginal propensity to save.
ΔS / ΔDI 
* % of every extra dollar earned that is saved.
      The spending Multiplier effect.
An initial change in spending ( C, Ig, G, and Xn) causes a larger change in aggregate spending, or aggregate demand (AD)

* Multiplier = Change in AD / Change in spending

* Multiplier = Change in AD / Δ C, Ig, G, or Xn

Why does this happen?
-Expenditures and income flow continuously, which sets off a spending increase in the economy.
-The spending multiplier can be calculated from the MPC or the MPS

* Mulitplier = 1 / 1 - MPC or 1 / MPS

  Multipliers are positive when there is an increase in spending and negative if there is a decrease in  spending.

     Calculating the tax multiplier
When government taxes, the multiplier works in reverse.
Why?
- Because now money is leaving the circular flow.
 
* Tax Multiplier  (negative) = -MPC / 1 - MPC or -MPC / MPS.

If there is a tax cut, then the multiplier is positive, because there is more money in the circular flow now.































Unit 3 (2/19/15) The three schools of economics

The three school of economics 
1. Classical
2. Keynesian
3. Monetary

1. Classical
-Adam Smith: Invisible hand, market will function by itself
-John B. Say: Say's law, supply creates its own demand
-David Ricardo
Alfred Marshall
-The economy is always close to or is at full employment.
-Trickle down effect: Help the rich first everyone else later.
-AS = AD at full employment equilibrium.
-In the long run the economy will balance at full employment.
-AS determines output
-Savings (Leakage) = investment (injection)
-Savings increase with interest rates
-Prices and wages are flexible downwards.
-Laisseze Faire.

2. Keynesian 
-Economy is not always close to or at full employment.
-There is government intervention.
-Fiscal policy.
-John Maynard keynes: competition is flawed, AD is AD is keyed and not AS. (AD determines its own output and demand creates its own supply.)
-Leaks cost constant recessions.
-Savings cos recession.
-Savors and investors save and invest for different reasons.
-Savings are inverse to the interest rate.
-Ratchet effect and sticky wages block say's law.
-Prices and wages are inflexible downward.
-Since there isn't a mechanism capable to determine full employment, in the long run we are all dead.
-Do add stabilizer
-Use expansionary and contractionary policy.

3. Monetary
-Allen Greenspan
-Ben Bernanke
-Fine tuning is needed
-Voters wont allow contractionaryn options.
-Congress cant time policy action
-Institute tight money/easy money
-We change required reserved of needed .
-We buy and sell bonds through open market operations.
-We use interest rates to change the discount rates and the federal fund rate.














Unit 3 (2/18/15)

     Investment demand curve (ID) 
Shape?
-Downward sloping
Why?
-When interest rates are high, fewer investments are profitable; when interest rates are low more investments are profitable. 
  changes in r% causes changes in Ig. Factors other than r% may shift entire ID curve. 

-Cost of production
*Lower cost shifts ID to the right. (Vice Versa)
-Business taxes
*Lower Shits ID to the right. (Vice Versa)
-Technology change
*New technology shifts ID to the right,
*Lack of technology change shifts ID to the left.
-Stock of capital 
*If economy is low on capital ID shifts to the right. 
*If economy has much capital ID shifts to the left. 
-Expectations 
*Positive expectations ID shifts to the right.  (Vice Versa)

    Long run AS
-It is always vertical at full employment 
-It represents a point on the economies production possibility curve 
-Does not change as the price level changes, only thing that changes long run AS is the same things that change PPC outwards.
*Resources
*Technology
*Economic Growth. 

Unit 3 (2/17/15)

Full employment
  Full employment equilibrium exist where AD intersects SRAS and LRAS at the same point .
Recessionary gap
  Exist when equilibrium occurs below full employment output.
Inflationary gap 
  Exist when equilibrium occurs beyond full employment output.

   Invest rates and investment demand
Investment: money spent or expenditures on:
-New plants (factories)
-Capital equipment (machinery)
-Technology (hardware and software)
-New homes
-Inventories (goods sold by producers)

   Expected rates of return
How do businesses make investment returns
-Cost/Benefit analysis
-How does business determines the benefits
-Expected rate of returns
How does business count the cost?
-Interest cost
How does business determine the amount of investment thy undertake?
-Compare expected rate of return to interest cost
*If expected return > interest: Invest (Vice Versa)

Real (R%) Vs. Nominal (I%)
Whats the difference?
-Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known ex post facto.
How do you compete the real interest rate (R%)
-R% = I% - π%
What the determines the cost of an investment decision?
-The real interest rate (R%)





Unit 3 (2/12/15)

2/12/15

Aggregate supply - The level of real GDP that firms will produce at each level. (PL)

Long run Vs. Short run.

Long:
- Period of time where input prices are completely flexible and adjust to change in price level.
- Level of GDP is supplied and is independent of the price level.

Short:
- Period of time where input prices are sticky and do not adjusts to changes in the price level.
- The level of real GDP supplied is directly related to the price level.

Long run aggregate supply (LRAS)
- Marks the level of full employment in the economy (analogous to PPC)
- Because input prices are completely flexible in the long run changes in price level do not change firms real profits and therefore do not change firms level of output. This means that LRAS
vertice at the economy's level level of full employment.
 

Short run aggregate supply (SRAS)
- Because input prices are sticky in the short run, the SRAS is upward sloping.

Changes in SRAS
- Increase in SRAS is seen as a shift to the right. -->
- Decrease in SRAS is seen as a shift to the left. <--
-Key to understanding shifts in SRAS is per unit cost of production.

Per unit production cost:
Total input cost / total output


Determinants of SRAS
(all affect unit production cost)
- Input prices
- Productivity
- Legal institutional environment

 *Input Prices:
Domestic resource prices
-Wages
-Cost of capital
-Raw material (commodity prices)
Foreign resource prices
-Strong $: Lower foreign resource prices
-Weak $: Higher foreign resource prices
-Market power Monopolies and cartels that control resources control the price of those resources
     Increase in resource prices SRAS shifts to the left. <--
(Vice Versa)

*Productivity
  Total output / total inputs
     More productivity = Lower unit production cost = SRAS shifts to the right -->
(Vice Versa)

*Legal institutional environment
 - Taxes ans subsidies
   Taxes: ($ to gov't) on business' increase per unit production cost. SRAS shifts to the left <--
   Subsides: ($ from gov't) to business reduce per unit production cost SRAS shifts to the right. <--
   Government regulation creates a cost of compliance SRAS shifts to the left. <--
   Deregulation reduce compliance cost SRAS shifts to the right. -->




Unit 3 (2/11/15)

Aggregate demand - shows amount of real GDP that private, public, and foreign sector collectively desire to purchase at each possible price level.

Relationship between price level and the level of real GDP is inverse.

Reasons why AD is downward sloping.
     - Real balance effect: 
When price level is high households and businesses cannot afford to purchase as much output. (Vice Versa)
     -Interest rate effect: 
Higher price level increase interest rule which tends to discourage investment. (Vice Versa)
     -Foreign purchase effect: 
Higher price level increases demand for relatively cheaper imports.
Lower price level increased the foreign demand for relatively cheaper U.S. exports.

Shifts in aggregate demand.
     - Change in C, Ig, G, and Xn
     - Multiple effect that produces a greater cange than the original change in 4 compounds

Increase in AD: Shifts to the right.
Decrease in AD shifts to the left.

     Consumption
Household spending is affected by...
  -Consumer wealth 
*More wealth: more spending AD shifts to the right.
*Less wealth: less spending AD shifts to the left.
  -Consumer expectation
*Positive expectations; more spending AD shifts to the Right.
*Negative expectations: less spending AD shifts to the left.
  -Household indebteners
*Less debt: more spending AD shits to the right.
*More debt: less spending AD shifts to the left.
  -Taxes
*Less tax: more spending AD shifts to the right.
*More tax: less spending AD shits to the left. r

     Gross private investment
Investment is sensitive to...
  -Real interest rate
*Lower interest rate: more investment AD shifts to the right,
*Higher interest rate: less investment AD shifts to the left.
*Higher expected returns: more investment AD shifts to the right.
*Lower expected returns: less investment AD shits to the left.
    Expected returns are influenced by
-Expectations of future profitability
-Technology
-Degree of excess capacity
-Business

     Government spending 
*More government spending AD shifts to the right.
*Less government spending AD shits to the left.

     Net exports
sensitive to...
  -Exchange rates (international vale of money)
*Strong: more imports and few exports AD shifts to the left.
*weak: Fewer imports and more imports Ad shifts to the right.
  -Relative income
*strong foreign economies: more exports AD shift to the right.
*Weak foreign economies: less exports AD shifts to the left.