Unit 4

Loa able funds market

The market where savers and borrowers exchange funds(Qlf) at the real rate of interest. (R%)

The demand for loan able funds, or borrowing comes from households, firms, government and foreign sectors. The demand for loan able funds is in fact the supply of bonds

The supply for loan able funds, or saving comes from households, firms, government, and the foreign sectors. The supply loanable funds is also the demand for bonds

Changes in the demand for loanable funds.

Remember that demand for loanable funds= borrowing 

More borrowing your do = more demand for loanable funds. ->

Less borrowing = less demand for loanable funds <-

Examples-

Government deficit spending = more borrowing = more demand for loanable funds 

R%= ->

Less investing = less borrowing = 

R% <-

Changes in the supply of loanable funds = savings

More saving = loanable funds ->

Less saving = loanable funds <-

Examples 

Government  surplus = more saving = real interest  rate   Decreases 

The other is decreasing 

When government   does fiscal policy it will affect the loanable funds market 

Changes in the real interest rate will affect gross private investment. 

Video response

1.) The first video discusses the types of money and the functions of the money. The three types of money are commodity, representative, and flat money. The three types of functions for money are mediums of exchange, money as a stored value, and unit of account. Commodity money is commodities that also function as money. Representative money means that whatever you are using as currency represents a specific quantity of a precious metal. Fiat money, is the money that makes it have value 

2.) In order to have a correct money market graph, you must have the correct labels. The Y-axis should be labeled interest rate while the X-axis is labeled the quantity of money. Whenever there is an increase in the demand of money the interest rates will also rise. When the interest rate is low, it encourages people to borrow more money, and vice versa.

3.) Expansionary and contractionary money supply are the Fed's tools of money suppy. Expansionary is usually referred to as easy money while contractionary is considered as tight money. The Fed has another tool of monetary policy known as the discount rate. The discount rate is known to not be so successful or important because if you lower the rate it will not automatically mean that banks will borrow the money.

4.) In this video we discussed loan able funds graphs. Whenever you are doing a loanable funds graph you  label your price on the y axis which in this case is the interest rate and your x axis qlf which stands for quantity of loan able funds.In order to show a result of saving more you will increase in the supply of loanable funds and in the incentives to save less we decrease the loanable funds. whenever there is a defecit it is when the government is demanding money in order to spend

5) Banks create money buy making loans. The money multiplier is found by one divided by reserve requirement. To find total money created, it would be excess reserves multiplied by the money multiplier. The video shows examples on how to find total money created. 

6.) The collaboration of all the key concepts are discussed in the last video. The government is put in a deficit as an example. Whenever the government is in deficit they are borrowing money from the public. The amount of money the government is in debt is mostly out to the people in the U.S.

3 schools

3 schools 

Classical

 Adam Smith, David Ricardo, Affret Marshal 

Competition is good 

Supply creates its own demand 

What ever output is produce it will be demanded.

AS determines output 

Invisible hand- market functions by it self. "Laissez-faire"

Saving( Leakage)= investment (injection) 

Saving increase with the interest rate. 

AS= AD @ full employment equilibrium 

Long run,  economy will balance @full employment.

Economy, always close to or at full employment 

Believe in trickle down effect.

Prices and wages are flexible downward. 

Keynesian

John Maynard

Competition is flawed, AD is key and not AS

AD determines output, there for demand creates its own supply.

Savers and investors, save and invest for different reasons.

Saving are inverse to interest rates.

Leaks cause consent recession, also saving causes recession.

Ratchet effects , and sticky wages blocks "says law"

Prices/ wages are inflexible downwards 

There is no mechanism capable of guaranteeing full employment.

In the long run we are dead.

The economy is not close to or at full employment 

Some government intervention 

Add stabilizers, use expansionary and contractionary policy. We use fiscal  

Monetary

Allan Greenspan, Ben benanke 

Fine tuning is needed

Congress can't time policy options

Voters won't allow contractionary options 

We use easy and tight money

Change required reserves if needed 

Buy and sell bonds on the open market.

Change the interest rates for the discount rates and federal fund 

Long run be Short run

Long run vs Short run 

Long run- period of time where input prices are completely flexible and adjust to changes in the price level.

Real GDP is independent of PL

Short run- Period of time where input prices are sticky and do not adjust to changes in price level.

Real GDP supplied is directly related to the PL

LRAS- marks the level of full employment in the economy( analogous to PPC)

LRAS is vertical at the economy level of full employment. Do not change firm profit which won't change firms Level of output

SRAS- Because input prices are sticky in the short run, the SRAS is upward sloping.

Increase in SRAS= ->

Decrease in SRAS = <-

Key= per unit cost of production

Per unit production cost= total input cost / total out put

Determinant of short run-

Input prices 

Productivity 

Legal institutional environment 

Input prices

Domestic-

Wages (75% of all business cost)

Cost of capital 

Raw material

Foreign-

Strong $= lower foreign prices

Weak $= higher foreign prices 

Market power- 

Monopolies and cartels. 

Increase in resources prices= SRAS<-

Decrease in resource price= SRAS->

Productivity

Productivity= total output/input

More= lower unit price=->

Less= more = <-

Legal institutional environment

Taxes and subsides- 

Taxes= <-

Subsidies = ->

Government regulation 

Government regulation= <-

Deregulation reduces = -> 

AD

AD

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

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

Three Reasons AD is downward sloping-

1. Real Balances Effect- Price low, more buying. Price high, low buying

2. Interest rate effect- High interest rate discourages investment.

Lower Price level decreases the interest rate, tend to encourage investment 

3. Foreign Purchases Effect- Higher prices makes us want cheaper imports. Lesser price means foreign demand for cheap US exports.

Shifts in Aggregate Demand-

1. Change in Expenditure approach

2. Multiplier Effect that produces a greater change in the original change in the 4 components.

Increase in AD= Shift Right

Decreases in AD= Shift Left

Determinants of AD-   

Consumption

Household spending is affected by-

Consumer Wealth-  More Wealth= More Spending shift right

Less Wealth= Less spending shift left

Consumer Expectation-Postivie Expectation= More spending shift right

negative expectation= Less spending shifts left

Household Indebtedness- Less Debt= More Spending Shift right

More Debt= Less Spending Shift left.

Taxes- Less Taxes=  More spending Shift right. More Taxes= Less Spending. Shift Left

Gross Privet Investment

The Real Interest Rate-

Low=More ->

High= Less <-

Expected Returns-

High= More Investment  ->

Lower= Less Investment <-

Expected return are influenced by-

Expectation of future profitability.

Technology

Degree of  Excess Capacity ( Existing Stock of Capital)

Business Taxing

Government Spending 

More government spending = ->

Less government spending = <-

Net Exports

Exchange Rate-

Strong $= More imports <-

Weak $= More Exports ->

Relative Income-

Strong Foreign Economy= More Exports ->

Weak Foreign Economy= Less Exports <-