No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

What is a balance sheet?

Posted on May 24, 2014 at 9:35 AM Comments comments (0)

A balance sheet (or t-account) keeps record of a commercial bank's assets and liabilities after each banking transaction.


An example of a liabilitiy is a demand deposit (checkable deposit) because the bank must pay its depositors on demand.  An example of an asset is a loan issued by the bank because the debtor must repay the loan amount to the bank.


This No Bull Review video explains how to record a bank's transactions using a balance sheet.  It also discusses the role of required reserves and excess reserves in money creation.


You need Adobe Flash Player to view this content.


AP Macroeconomics Unit 4 Monetary Policy

What happens when the Fed buys or sells bonds?

Posted on May 24, 2014 at 9:25 AM Comments comments (0)

When the Fed buys treasury bonds, the money supply increases and interest rates fall.  This increases investments and consumption spending. Aggregate demand increases, price level increases, and real GDP increases, and unemployment falls. 


When the Fed sells government bonds, the money supply decreases and interest rates rise.  Investment and consumption decreases, aggregate demand decreases, price level falls, real GDP falls, and unemployment rises.


The No Bull Review video below simplifies monetary policy and open market operations in less than 1 minute.  It includes all of the necessary graphs associated with monetary policy action.


You need Adobe Flash Player to view this content.


AP Macroeconomics Unit 4 Monetary Policy

How do you graph a contractionary monetary policy?

Posted on April 18, 2014 at 10:40 AM Comments comments (0)

When graphing a contractionary monetary policy (AKA tight monetary policy), it is a good idea to draw a money market graph and an AD/AS graph. A tight monetary policy makes most sense during periods of high inflation. The Fed will sell bonds on the open market (or increase discount rate or increase reserve ratio)

 

In the money market, you want to show a leftward shift of the vertical money supply curve. This will raise interest rates and decrease investment and consumer spending. As a result of the decrease in spending aggregate demand will shift to the left, decreasing RGDP, price level, and employment.

 

The No Bull Review graph below shows a contractionary monetary policy in the money market. As you can see, the policy raises the nominal interest rate.


AP Macroeconomics Unit 4 Monetary Policy

How do you graph an expansionary monetary policy?

Posted on April 18, 2014 at 10:35 AM Comments comments (0)

When graphing an expansionary monetary policy (AKA easy monetary policy), it is a good idea to draw a money market graph and an AD/AS graph. An expansionary monetary policy makes most sense during a recession. The Fed will buy bonds on the open market (or decrease discount rate or decrease reserve ratio)


In the money market, you want to show a rightward shift of the vertical money supply curve. This will reduce interest rates and increase investment and consumer spending. As a result of the increase in spending aggregate demand will shift to the right, increasing RGDP, price level, and employment.


The No Bull Review graph below shows an expansionary monetary policy in the money market. As you can see, the policy lowers the nominal interest rate.


AP Macroeconomics Unit 4 Monetary Policy

What are the tools of monetary policy?

Posted on April 18, 2014 at 10:25 AM Comments comments (0)

The Federal Reserve (central bank) has several tools of monetary policy that influences money supply and interest rates. Here are the major monetary policy tools:


1. Open Market Operations: When the Fed buys and sells government bonds (or securities) to change the money supply and interest rates. The Fed targets the federal funds interest rate (bank-to-bank interest rate for short-term loans) through open market operations. If the Fed wants to increase money supply and reduce interest rates, then it buys bonds. If the Fed wants to reduce the money supply and increase interest rates, then it sells bonds.


2. Discount Rate: The Fed can increase or decrease the interest rate it charges banks for short-term loans. When the Fed lowers the discount rate, the money supply increases. When it raises the discount rate, the money supply decreases.


3. Reserve Requirement: The Fed can reduce the reserve ratio, which means banks can lend more of its excess reserves to increase the money supply. It can also raise the reserve ratio, which reduces a bank's excess reserves and the money supply.


Wild Card. Interest Paid on Bank Reserves: As a result of the Great Recession (2007-2009), the Fed began paying interest on bank reserves held at the Fed. As of 2014, this tool is still considered experimental and we do not know the true effects of this policy tool.


AP Macroeconomics Unit 4 Monetary Policy

What is the difference between fiscal policy and monetary policy?

Posted on April 14, 2014 at 7:45 PM Comments comments (0)

Fiscal policy consists of actions taken by the government to bring about full employment. In the Keynesian model, fiscal policy consists of changes in government spending and/or changes in income taxes.


Monetary policy consists of actions taken by the Federal Reserve to bring about full employment and to promote price stability. The most important tool of the Fed is open market operations (buying and selling of government bonds).


AP Macroeconomics Unit 4 Monetary Policy

What is the discount rate?

Posted on April 14, 2014 at 6:15 PM Comments comments (0)

The discount rate is the interest rate which the Fed lends to banks over night. When the discount rate is low, interest rates fall and investment spending rises. Aggregate demand shifts to the right in the AD/AS model.


When the discount rate is high, interest rates rise and investment spending falls. Aggregate demand would then shift to the left in the AD/AS model.


AP Macroeconomics Unit 4 Monetary Policy

What is the federal funds rate?

Posted on April 14, 2014 at 5:35 PM Comments comments (0)

The federal funds rate is an interest rate that the Federal Reserve (the central bank) targets through open market operations. The Federal Open Market Committee meets every six weeks to determine the federal funds rate. Traditionally, when the Fed lowers the federal funds rate, money supply increases, interest rates fall, investment and consumption increase, aggregate demand increases, real GDP increases, price level increases, and unemployment falls.


AP Macroeconomics Unit 4 Monetary Policy


iPhone Apps by Mr. Medico

   


Mr. Medico's Review Books (Paperback)