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Ch. 8: Money and inflation

Ch. 8: Money and inflation. Money Definition Types Functions Gresham’s law & bimetallic standard History of banking Fractional reserve banking and the creation of money. History and structure of the Fed Fed tools for controlling the money supply Discount rate Reserve ratio

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Ch. 8: Money and inflation

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  1. Ch. 8: Money and inflation • Money • Definition • Types • Functions • Gresham’s law & bimetallic standard • History of banking • Fractional reserve banking and the creation of money • History and structure of the Fed • Fed tools for controlling the money supply • Discount rate • Reserve ratio • Open market operations • Components of the money supply • Monetary base, reserves, M1, M2

  2. Ch. 8: Money and inflation • Balance sheet entries for • Open market operation • Change in reserve ratio • Change in public cash holdings • Equation of exchange • Quantity theory of money • Link between inflation and money supply growth • Money market and determination of interest rates • Factors affecting money supply /demand • Bond market when interest rates are above or below equililbrium.

  3. Financial markets • Present and future value • Bond prices and interest rates • One year bond • Zero coupon bond • Determinants of bond yields • Risk • Term • Liquidity • Stock market • Fundamental value of stock • Stock metrics • PE ratio • Beta • Factors influencing stock prices • Efficient markets hypothesis • Futures markets and price expectations.

  4. Ch. 9: Exchange rates and the balance of payments • Supply/demand model and determinants of exchange rates • Interest rates, imports/exports, expected asset returns, inflation, expected future exchange rates, etc. • Interest rate parity • Conditions required for parity • Arbitrage opportunities when parity doesn’t hold • Implications for exchange rate movements when interest rates aren’t equal • Purchasing power parity • Conditions required for parity • Arbitrage opportunities when parity doesn’t hold • Implications for movements in exchange rates based on inflation differentials

  5. Ch. 9: Exchange rates and the balance of payments • (X-M=(S-I) + (Tn-G) • X-M as indicator of a country’s status as internat’l borrower or lender. • Factors affecting a country’s status as borrower or lender • Debtor/creditor versus borrower/lender • Balance of payments accounts • Capital, current, official settlements • Debits vs credits in accounts • Implications of surplus or deficit in each account • Exchange rate regimes • Flexible • Fixed • Crawling peg • How central banks can manipulate exchange rates and implications for official settlements account and trade flows

  6. Ch. 10: AD and AS • Determinants of long run AS • Labor market • Production function • Determinants of short run AS • Nominal wages sticky in short run • Effect of a movement along SRAS on prices, real wages and employment • LRAS • Determinants of AD • C+I+G+(X-M) • Why AD is downward sloping. • Fiscal policy (taxes or spending) • Expectations about inflation, future income • Exchange rates

  7. Ch10 AD and AS • Implications of inflation/recessionary gap for • Real wages relative to equilibrium • Employment relative to equlibrium • Unemployment relative to natural rate • Real GDP relative to potential • Short run and long run effects of a change in AD. • Keynesians versus others on merits of policy interventions to stabilize economy.

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