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Macroeconomics Why the economy expands or contract?, The AD/AS does not…

- - - - Governors
        
        7 members appointed by the President of the United States and confirmed by the Senate
        
        14-year terms and one term expires January 31 of even-numbered years. (This insulates the Board of Governors as much as possible from political pressure)
        
        Each member only serves one term (except when filling an unfinished term)
        
        Fed's policy decisions do not require congressional approval
        
        President cannot ask governor to resign
      - Chair
        First among equals on the Board of Governors
        
        Controls the agenda
        
        He or she is the Fed's public voice
      - Holdings Company Supervision
        Fed is responsible for supervising the financial institutions.
      - Lender of last resort
        Fed stands ready to lend to banks and other financial institutions when they cannot obtain funds form anywhere else.
      - Execution of policy
        Can be done by managing interest rates and credit conditions
        
        Open market operation
        Central bank sells/buys U.S. Treasury bonds in order to influence the quantity of bank reserves and the level of interest rates.
        
        Buy T bonds
        
        Sell T bonds
        
        Federal Open Market Committee (FOMC)
        Makes the decisions regarding the Open Market Operation
        
        Comprises 7 members of the FED's Board of Governors and 5 voting members who the board draws, on rotating basis.
        
        Reserve Requirement
        Central bank may raise or lower the reserve requirements
        
        Changing the discount rate
        Banks can borrow as much cash as they needed from Fed's discount window
        
        discount rate: interest rate banks pay for the loans from the central bank
        
        Economic Outcomes
        
        Expansionary Monetary Policy
        Shifts money supply to outward
        
        Interest rate drops
        
        Contractionary Monetary Policy
        Shifts money supply inward
        
        Interest rate rise
        
        Pitfalls
        
        No rule prohibits banks from holding additional excess reserves: Expansionary monetary policy isn't effective if this happens.
        
        Unpredictable Movements of Velocity
        
        Velocity
        How quickly money circulates through the economy
        $Velocity = \frac{nominalGDP}{MoneySupply} $
      - Quantitative Easing (QE)
        Non-traditional method of purchasing long-term government and private mortgage-backed securities by central banks.
    - - Practical questions
        Measuring the value of a bank's assets is not always straightforward
      - Political questions
        Bank supervisor's decision to require a bank to close or to change its financial investments is often controversial
    - - Deposit Insurance
        Insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt.
        
        Federal Deposit Insurance Corporation (FDIC) is responsible for this in the United States.
  - - - Government Budgets
        
        Budget Surplus
        Spends less than it receives
        
        Balance Budget
        Spending and taxing are equal
        
        Budget Deficit
        Spends more money than it receives
        
        Standardized employment budget
        What the budget deficit or surplus would be if the economy were producing at potential GDP
        
        Standardized employment budget is less than the actual budget deficit in the recession
      - Treasury Bond
        Government borrows funds from U.S. citizens and foreigners to cover its budget deficits and promise to pay it back with principal + interest in the future.
      - Deficit vs Debt
        
        Deficit refers to what happens with the federal government budget each year
        
        Debt refers to accumulated sum
    - - Federal Taxes
        
        Typically within the range of 17% ~20% of GDP
        
        Individual tax
        Due every year on April 15
        
        Largest single source of federal government revenue
        
        Marginal Tax Rates: a progressive tax (tax rates increases as income increases). 10% ~35% depending on the income level
        
        Payroll tax
        
        Medicate payroll tax
        fixed at 2.9% with no upper ceiling
        
        Proportional tax: flat percentage of all wages earned
        
        Social Security tax
        Rate of 12.4% up to a certain wage limit ($118,500 in 2015). Employee and employer split them in half, each paying 6.2%
        
        Proportional tax: Up to the wage limit
        
        Regressive tax: People with higher incomes pay a smaller share of their income in tax.
        
        Corporate Income tax
        average of 1% to 2% of GDP
        
        Excise tax
        Tax on particular goods, such as gasoline, tobacco, and alcohol.
        
        Regressive tax
        
        Estate and Gift tax
        Tax on people who pass large amounts of assets to the next generation.
    - - Economic Outcomes
        
        Expansionary Fiscal Policy
        Shifts aggregate demand to outward. Used if the equilibrium point of AD/AS is below the LRAS
        
        increase in government spending
        
        reduction in tax rates
        
        Contractionary Fiscal Policy
        Shifts aggregate demand to inward. Used if the equilibrium point of AD/AS is above the LRAS
        
        decrease in government spending
        
        increase in tax rates
      - Crowding Out
        Government borrowing and spending results in higher interest rates, which reduces business investment and household consumption.
        
        Central bank can reduce or keep short-term interest rates low to deal with it.
      - Recognition lag
        It often takes some months before the economic statistics signal clearly that a downturn has started.
        
        Legislative lag
        Time it takes to pass a bill
        
        Implementation lag
        Time it takes to start the projects
        
        Politician dilemma
        While the economist is accustomed to the concepts of lags, the politician likes instant results.
- - - - Trade Balance
        Trade surplus: Exports are larger than the imports
        Trade deficit: Imports are larger than the exports
  - - - Nominal and Real GDP
        
        Nominal GDP = GDP Deflator X Real GDP
        
        Real GDP = $ \frac{Nominal GDP}{Price Index} $
        
        Note: The Price Index is usually multiplied by 100, so divide Price Index by 100 before doing the calcuation.
        
        Nominal value
        Measure the statistic in terms of actual prices that exist at the time.
        
        Quantity of every good or service produced multiplied by the price
        
        Real value
        same statistic after it has been adjusted for inflation.
        
        GDP deflator: Price index measuring the average prices of all goods and services
        
        % Change in Real GDP
        $= \frac{Current Real GDP - Base Year Real GDP}{Base Year Real GDP} * 100$
- - - - Sticky Downward Wages
        Wage increases may occur with relative ease, wage decreases are few and far between
        
        Since the wage is set above the equilibrium point, unemployment (surplus of labor) occurs.
        
        Legal issue
        It's illegal to reduce the wage of workers receiving minimum wage
        
        Implicit Contract
        
        Employers will try to keep wages from falling when the economy is weak or the business is having trouble
        
        Employees will not expect huge salary increases when the economy or the business is strong.
        
        Efficiency Wage Theory
        Workers' productivity depends on their pay. Employees who receive better pay than others will be more productive.
        
        Employers know that it is costly and time-consuming to hire and train new employees.
        
        Adverse Selection of Wage Cuts
        Employer reacts to poor business conditions by reducing wages for all workers, then the best workers, those with the best employment alternatives at other firms, are the most likely to leave.
        
        Insider-Outsider Model
        Those already working for firms are "insiders," while the new employees are "outsiders"
        
        Relative Wage Coordination
        Workers were hypothetically willing to see a decline in their own wages in bad economic times. Instead, workers confronted with the possibility of a wage cut will worry that other workers will not have such a wage cut.
      - Cyclical Umemployment
        
        Expanding Business: Firms will desire to hire a greater quantity of labor. Labor demand shifts to the right
        Economy slowing down or entering a recession: Firms hire a lower quantity of labor at any given wage. Labor demand shifts to the left
    - - Natural rate of unemployment
        Remaining level of unemployment that occurs even when the economy is healthy
      - Frictional Unemployment
        
        It takes time to find out about new jobs, do interview, etc.
        
        One may have to move to new locations
        
        One may have to start a new career paths
      - Structural Unemployment
        
        Lack skills valued by the labor market
        
        Demand has shifted away from the skills that one have
        
        One does not have any skills
        Education seems to be the key in minimizing such unemployment
      - Relation to GDP
        When the economy is at full employment, real GDP is equal to the potential real GDP
        
        Unemployment rate prevents the economy to reach its fullest potential GDP.
      - Productivity Shifts
        Adjustments of wages to productivity levels will not happen quickly or smoothly. When productivity changes unexpectedly, it can affect the natural rate of unemployment for a time.
        
        The expectation of employers and workers for wage increases do not shift immediately, so wages keep rising as before.
        
        The rate of productivity increase, yet the employers and workers accept the previous wage level as wage increases do not shift immediately.
- - - - Restriction on the types of investments
      - Capital requirements
  - - - Commodity Money
        Gold, silver, cowrie shells, cigarettes, etc. using commodity as money
      - Fiat Money
        Declared by a government to be a country's legal tender.
        
        No intrinsic value
        
        Only backed by the universal faith and trust that the currency has value.
    - - M1 Money Supply
        Monies that are very liquid:
        
        cash
        
        checkable deposits
        
        and traveler's checks
      - M2 Money Supply
        In addition to M1:
        
        time deposits
        
        certificates of deposits (< $100,100)
        
        money market funds.
        
        saving deposits
      - Cards
        
        Debit card
        An instruction to the user's bank to transfer money directly and immediately from your bank account to the seller.
        
        Credit card
        Financial institution does not consider it money but rather a short term loan from the credit card company to you
        
        Smart card
        Store certain amount of money and purchase later
  - - - Loans
        The first category of bank assets
        
        Mortgage loan to purchase a house
        
        Riskiness
        Given the borrower's characteristics and the performance of the local economy, what proportion of loans of this type will the borrower replay?
        
        What was the interest rate charged on the original loan?
      - Bonds
        The second category of bank assets
        
        Borrowing, used by the federal and local government, private companies, and nonprofit organizations.
      - Reserves
        Final entry of bank assets
        
        Money that the bank keeps on hand
        
        Does not lend or invest
    - - Diversify
        Lending to a variety of customers to avoid unexpectedly high rate of loan defaults and asset-liability time mismatch
      - Secondary loan market
        Banks can sell some of the loans to the secondary loan market to reduce the risks