What decade were ATMs introduced in the US?

BONUS!!!

Money Market and Loanable Funds

Mods 28 and 29

MM and LF

A. Loanable Funds Market and the Money Market

1. Reminder and Reviewa. Savings-Investment Spending

IdentityS = I

b. This includes government and private savings!

National Savings (Pub. and Priv.)= I

2. Through financial markets, borrowers and lenders are matched.

MM and LF (29)

Opportunity cost to holding cash money – not making

any interest on it interest rate (r), quantity of money

demanded

interest rate (r), quantity of money demanded

Short term interest rates tend to move together, they are competition for each other

Long-term interest rates change much slower because they take longer to mature

EASIEST to assume only the short-term

MM

Money demand curve – relationship

between quantity of money demanded and r Use the nominal r for this because the

purchasing power of your money is caused by inflation so you need to look at money value now

Shifts of money demand Changes in Aggregate Price Level Changes in real GDP Changes in Technology Changes in Institutions

MM

Fed can influence the money supply (through

the monetary supply but it can still be done) Fed able to choose the level they want and use open operations to get there

MM and the Fed

B. Loanable Funds Market and the Interest Rate

1. In the real world, MANY different financial markets with many different interest rates, however, to simplify, economists created a hypothetical market.

2. Loanable Funds Marketa. Nominal vs. Real interest rates

Incredibly important to the MM and LF market!

MM and LF (29)

3. How does a spender (firm or business)

decide how much to borrow?a. Rate of Return

pg. 278RofR= Revenue of Proj-Cost of Proj X

100

Cost of Proj.4. Demand and Supply of Loanable funds

a. based on interest rates, government influence

b. Interest Rate = Price of a loan

MM and LF (29)

5. Shifts of Demand for Loanable Fundsa. Changes in Perceived Business Opportunities (1990s investment boom)b. Changes in government borrowing1. Crowding Out*When a government needs

to borrow money (run a deficit), this increases the demand for loanable funds

*In turn, this leads to higher interest rates.

*If rates rise, businesses cut back in investment spending

MM and LF (29)

6. Shifts in Supply of Loanable Funds

a. Changes in Private sector behavior (private savings)

2000-2006- More spending, less saving, SLF shifts left.

b. Changes in Capital Inflow (open economy)

MM and LF (29)

C. Interest Rates and Inflation

1. Inflation is arguably the most important factor affecting interest rates

a. Real and Nominal ratesReal= Nominal – Inflation

2. Expected inflation vs. Unexpected inflation3. Fisher Effect

a. The expected future real interest rate is unaffected by the change in expected future inflation!1% of expected inflation = 1% of nom interest rate… SO…real =

unchanged

MM and LF (29)

4. Interest Rates in the Short Run

a. Money Market and LFM relate to each other through interest rates.b. If one is at equilibrium so is the other

(causal relationship)1. This is always true!!! (pg. 285)

b. EXAMPLEWhat happens to LFM when a shift occurs in the MM?

MM and LF (29)

Connecting the Two Interest Rate Models

EX- In the short run, the right ward shift of the money supply…

- Leads to a rise in real GDP- Generates a rise in savings through

the multiplier process.- Rise in savings shifts the supply curve

for LFM rightward, S1 to S2.!!- Moves equilibrium and reduces the

interest rate in LFM** In the SHORT RUN, the supply and demand

for money determine the interest rate. The LFM follows the lead of the MM!!!!!!

MM and LF (29)

5. Long Run?- Changes in MS don’t affect the r%!!

a. In the long run, after an increase in money supply drops the interest rate…

1. Aggregate Price Levels adjustby the same proportion as the initial increase in the money supply2. In the long run, the money demand curve shifts outward, returning interest rates to their original level.

b. In the LFM, the supply curve shifts right, but falls back in the long run as real GDP

falls back to original level due to wages and other nominal prices increases over the long run!!!

MM and LF (29)

Read your assigned article! Be sure to note the following:

Key points by the author Suggested course for the “Fiscal Cliff” Political critiques (opinions on Repubs

and Dems) Write down a quote you find relevant

and be prepared to discuss.

Debt and Deficit Articles