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Final Exam Review Macroeconomics

Final Exam Review Macroeconomics. Econ EB222 Fall 2012 Inst. Shan A . Garib Mohawk College. Final Exam Macroeconomics. Date: Friday, December 14 th 2012 Time: 11:00am – 2:00pm In-Class Review ALL Quizzes given in class. Consumption, Investment and the Multiplier: Chapter 9.

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Final Exam Review Macroeconomics

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  1. Final Exam ReviewMacroeconomics Econ EB222 Fall 2012 Inst. Shan A . Garib Mohawk College

  2. Final Exam Macroeconomics Date: Friday, December 14th 2012 Time: 11:00am – 2:00pm In-Class Review ALL Quizzes given in class

  3. Consumption, Investment and the Multiplier: Chapter 9

  4. Consumption (Continued) • The consumption functions states • As income rises, consumption (C) rises, but not as quickly Income = Consuption + Saving + taxes Y = C + S + t and, Disposible Income = Consuption + Saving Yd = C + S or, Yd = Y - t Therefore, consumption varies with disposable income (DI)

  5. Marginal Propensityto Consume (MPC) CHANGE in Consumption MPC = CHANGE in Income

  6. $6000 ? Consumption & Saving $1000 45 $1000 $6000 Disposable Income ($)

  7. Saving = $300 5700 $2700 $2700 $6000 C Consumption & Saving $3000 Saving = - $300 Dissaving = $300 $6000 Disposable Income ($)

  8. At a Y,GDP0 = $10,000bn, consumption (C0) is $8,600 bn. The MPC = 0.25. At a Y, GDP1 of $9,000bn, how much would be saved? (Assume there is no taxes in the economy)   Since there are no taxes, disposable income (DI) = (Y,GDP). ChngC = MPC x  ChngDI ChngDI = $10,000bn - $9,000bn = $1,000bn ChngC = 0.25 x  -$1,000bn = -$250bn. Since C0 was $8,600bn, the ChngC of -$250bn will bring consumption down to C1 = $8,350bn (= $8,600bn - $250bn). If, S = DI – C1 At a national income of $9,000bn (S) = $9,000bn of DI - $8,350bn  of C = $550bn.

  9. Remember!! ChngC = MPC x  ChngDI. If MPC = 0.50 ChngDI +$50,000 ChngC = 0.50 x $50,000bn = $25,000 If C0 $25,000, with ChngC = $25,000 C1 = $25,000 + $25,000 = $50,000.

  10. Fiscal Policy and thePublic Debt Chapter 10&11 Instructor Shan A. Garib, Fall 2012

  11. Expansionary fiscal policy • If budget is initially balanced, moves it towards a budget deficit during recession • Increased government spending (G) and/or lower taxes • Aim to stimulate economic activity and to move the economy out of a recession Higher P, and wages, costs SRAS shift left LRAS LRAS SRAS2 SRAS SRAS1 c d c P2 P2 Price Level Price Level P1 b P1 b AD2 AD2 AD1 AD1 Y1 Y2 Y1

  12. Contractionary fiscal policy • If budget is initially balanced, moves it towards a budget surplus during an inflationary period • Decreased government spending and/or higher taxes • Aim to control demand and reduce demand-pull inflation Lower P, and wages, costs SRAS shift right LRAS LRAS SRAS1 SRAS SRAS2 b b P2 P2 Price Level Price Level P1 c P1 c AD1 AD1 d AD2 AD2 Y2 Y1

  13. Government Budgets and Finances • Government’s budget balance is amount of revenue it recieves minus its spending Balanced budget is when: Revenues = Spending 0 = Revenue – Spending Budget Surplusis when: Revenues > Spending 0 > Revenue – Spending Budget Deficit is when: Revenues < Spending 0 < Revenue – Spending

  14. Money and the Banking System Chapter 12 Instructor Shan A. Garib, Fall 2012

  15. Defining Money (cont'd) • The transactions approach to measuring money: M1 􀂃 Currency 􀂃 Checkable (transaction) deposits 􀂃 Traveler’s checks not issued by banks

  16. Defining Money (cont'd) • The liquidity approach: M2 is equal to M1 plus 1. Savings and small denomination time deposits 2. Balances in retail money market mutual funds 3. MMDAs

  17. Money Creation and Deposit Insurance Chapter 13 Instructor Shan A. Garib, Fall 2012

  18. Reserves • Reserves • deposits held by BOC for chartered banks like BMO, plus their vault cash

  19. Reserves • Legal Reserves • Anything that the law permits banks to claim as reserves—for example, deposits held at BofC and vault cash

  20. Reserves • Required Reserves • The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC

  21. Reserves • Required Reserve Ratio • The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed Required reserves = Demand deposits  Required reserve ratio (M)

  22. Reserves • Excess Reserves • The difference between legal reserves and required reserves Excess reserves = Legal reserves – Required reserves

  23. 1 Potential money multiplier = Required reserve ratio Actual change in the money supply Actual money multiplier Change in total reserves =  The Money Multiplier (cont'd)

  24. 1 .10 Potential change in the money supply = $1,000,000 $100,000 = x The Money Multiplier (cont'd) • Example • Fed buys $100,000 of government securities • Reserve ratio = 10%

  25. The Bank of Canada purchases $10,000 of Canadian government bonds on the open market directly from Scotia Bank. If the required reserve ratio (m) is 25%, then the maximum potential change in the money supply as a result of the open market operation will be?:   All $10,000 of these new reserves are excess reserves, because: Required Reserves = M x Demand Deposits and there has been no change in demand deposits so,: Required Reserves = 25% x 0 = 0 Therefore, Excess reserves = Reserves of $10,000 - Required Reserves of 0 = $10,000 Resultant change in the money supply: = 1/m x initial change in excess reserves. = (1/.25) x $10,000 = 4 x $10,000 = $40,000

  26. BMO has $160 million of reserves. The M 20%. The Bank of Canada then lowers M to 16%. How much can RBC lend out? BMO is ALL LOANED UP ie. it cannot make any additional loans so it has 0 excess reserves. Excess Reserves = Reserves - Required Reserves Since excess reserves = 0 then, reserves = required reserves = $160 million Required Reserves = M x Demand Deposits $160 million = 20% x Demand Deposits $160 million/.20 = Demand Deposits $800 million = Demand Deposits By lowering the required reserve ratio to 16%, required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves. Now, Required Reserves = 16% x $800 million = .16 x $800 million = $128 million. Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million, the amount BMO may now lend out.

  27. 1997's money GDP was $8,320 billion. 1997's price level index was 102.0. In 1997 to 2001, what is the real GDP 1997's real GDP: Real GDP = (Money GDP/Price Level Index)  x 100 Real GDP for 1997 = ($8,320 billion/102.0) x 100 =  $81.57 billion x 100 = $8,157 billion.

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