Adding Money To The ModelLecture 15

Jennifer P. Wissink©2015 Jennifer P. Wissink, all rights reserved.

October 15, 2015

Prelim 1 Epilogue – Good Job! Scores are posted on the CMS site (not Bb)!

See Blackboard for important message and links.

About any low scores: Stay calm and do NOT panic. Remember our grading rubric... you can bank on those MEL and clicker points, so try to relax. Go re-read the syllabus.

TAs will hand back exams in sections and during their office hours based on what you checked on the front of your exam paper. If you did not check anything your official TA of record based on student center has your prelim.

Re-grades: Wissink and only Wissink deals with ANY re-grade issues. Even if the re-grade is simply adding points wrong, it goes via Wissink (so we can make sure the master spread sheet gets updated). Consult the announcement on Bb for procedure, link and policy on re-grades.

Wissink Econ 1120 Prelim 1 Stats

semester mean median sdf2015 87.4 90.5 11s2015 87.2 89.5 11f2014 85 87 11.8s2014 88.4 90.3 9.6s2013 88.6 91 10.5s2012 88.3 92 10.8s2011 84.4 86.8 11.8s2010 82 86 17s2009 77 81 15s2008 82 85 12s2007 74 76 14s2006 88 89 9s2005 75 78 16s2004 81 84 11

The Nobel Prize - 2015

Official Nobel Link– http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2015/press.html

10/8/2015 16:18:36

Charles ManskiRichard BlundellJohn List

10/9/2015 1:19:06

Sir Richard BlundellJohn A. ListCharles F. Manski

10/9/2015 22:09:52

John ListRichard BlundellCharles Manski

10/10/2015 14:45:28 Donald Trump

10/10/2015 23:02:51

Bob HallPaul RomnerJennifer Wissink

10/11/2015 10:41:13

Charles ManskiJohn List Richard Blundell

10/13/2015 13:18:11

Richard BlundellAngus DeatonJohn List

The Budget and the Deficit

Fiscal Policy Since 1993: The Clinton, Bush, and Obama Administrations

FIGURE 9.4 Federal Personal Income Taxes as a Percentage of Taxable Income, 1993 I–2012 IV

Fiscal Policy Since 1993: The Clinton, Bush, and Obama Administrations

FIGURE 9.5 Federal Government Consumption Expenditures as a Percentage of GDP and Federal Transfer Payments and Grants-in-Aid as a Percentage of GDP, 1993 I–2012 IV

Fiscal Policy Since 1993: The Clinton, Bush, and Obama Administrations

FIGURE 9.6 The Federal Government Surplus (+) or Deficit (−) as a Percentage of GDP, 1993 I–2012 IV

The Federal Government Debt

FIGURE 9.7 The Federal Government Debt as a Percentage of GDP, 1993 I–2012 IV

The Debt Clock! (Thanks for reminding me about this E.G.!!!)– http://www.usdebtclock.org/

Notes on the Budget of theUnited States Government

According to the Budget and Accounting Act of 1921, the president must annually submit a budget to Congress by the first Monday in February. The proposed spending plan, the president's budget must show:

– The condition of the Treasury at the end of the last completed fiscal year.– The estimated condition of the Treasury at the end of the current fiscal year.– The estimated condition of the Treasury at the end of the next fiscal year if the budget

proposals are carried out.– The 2015 United States federal budget is the federal budget for fiscal year 2015, which

runs from October 1, 2014 to September 30, 2015.– We are now in fiscal year 2016!

The Office of Management and Budget (OMB) assists the president in the creation of the president's budget by gathering data from agencies and compiling it into the final plan to be approved by the president.

The totals for the current and upcoming fiscal years are only projected amounts. Annual budget documents provide Congress, State and local governments, and the public with a complete description of the president's budget plans for the coming fiscal year. Other related and supporting budget publications, such as the Economic Report of the President, are included, which may vary from year to year.

Souce: http://www.gpoaccess.gov/usbudget/about.html

Now..., How About Money? What is money? Supply of money? Demand for money? How does money enter the model of the

determination of Y*? How does money impact fiscal policy? And what about the Fed and monetary

policy?

How Will Money Enter The Frugal Governed Open Economy?

AEd = C + Id + G + EX – IM Need to specify all the relationships

– C = – Id = – G = – EX = – IM = – T =

Why Do We Need Money, Anyway? Barter is the direct exchange of goods

and services for other goods and services.

A barter system requires a double coincidence of wants for trade to take place.

Money eliminates this problem and many others by the functions it serves.

What is Money?Money is What Money Does

Money is anything that is generally accepted as a medium of exchange.

Money is not income, and money is not wealth. Money is money. Money defined by its functions:

– it’s a means of payment/medium of exchange; money is generally accepted by buyers and sellers as payment for goods and services.

– it’s a store of value; money serves as an asset that can be used to transport purchasing power from one time period to another.

– it’s a unit of account; money is a standard that provides a consistent way of quoting prices.

Money also brings together saversand borrowers via the middle man– the lender

Good Money Good money is easily portable, and

easily exchanged for goods and services at all times.

The liquidity property of money makes money a good

– medium of exchange– as well as a store of value– and unit of account.

Early Coin “Money” An Historical

Perspective: Coins

– Early coins were tied to the value of the precious metals used to make them.

– Got “clipping”.– Gersham’s Law -

bad money drives out good. The law was named in 1858 by Henry Dunning

Macleod, after Sir Thomas Gresham (1519–1579), who was an English financier during the Tudor dynasty. (Wikipedia®)

Early Paper “Money” An interesting and very long history…. Warehouse receipts in ancient Egypt during the reign of the

Ptolemies (circa 330BC). Ancient China and the Song Dynasty (circulating paper money as

a government, circa 960AD) The Knights Templar (circa 1150) The British Goldsmiths (circa the 1600s)

– Goldsmiths functioned as warehouses where people stored gold for safekeeping.

– A goldsmith would issue a receipt to the depositor. Eventually, these receipts themselves began to be traded for goods, and were backed 100% by gold.

– Then, Goldsmiths realized that they could lend out some of this gold without any fear of running out. Now there were more claims than there were ounces of gold on hand. The beginning of a fractional reserve system!

– A run on a goldsmith (or a modern-day bank) occurs when many people present their claims at the same time.

Commodity and Fiat Monies Commodity monies are items used as money that

also have intrinsic value in some other use. Gold is one form of commodity money.

Fiat, or token, money is money that is intrinsically worthless.

Legal tender is money that a government has required to be accepted in settlement of debts.

Currency debasement is the decrease in the value of money that occurs when its supply is increased rapidly.

Two Very Interesting Reads

The Wizard of Oz & Money Written in 1899 by L. Frank Baum, who was from Chittenango, NY. Hugh Rockoff claims it’s an allegory on political and economics debates of

the Populist Era (circa 1890, think William Jennings Bryan). Changes that were made in the movie obscure much of this.

– E.g. the slippers were changed to ruby red (they were silver in the book). At this time the U.S was on the “gold standard” and there was a big debate

over whether it should be just gold or if it should be a bimetallic standard, which would be gold and silver.

Consider these suggestions...coincidences...?– Oz = ounces of gold?

– The yellow brick road = bars of gold?

– Emerald City = green = paper money?

– The Wizard was a fraud = Wall Street Bankers?

– Dorothy, sweet innocent naïve young Dorothy = America?

– The Wicked Witch of the EAST = New York City, Wall Street Bankers?

– The cyclone = free silver movement forming & blowing in from the midwest?

– The Good Witch of the NORTH = New England folk?

– Huuummmmmmmmmmmmmmmmmmm…..

Measuring the Supply ofMoney in the United States

M1, or transactions money is money that can be directly used for transactions.M1 =

currency & coins held outside banks by the public+ demand deposits (checking account balances)+ travelers checks+ other checkable deposits (e.g., NOW accounts)

From the FED: “M1=Measure of the U.S. money stock that consists of currency held by the public, travelers checks, demand deposits and other checkable deposits including NOW (negotiable order of withdrawal) and ATS (automatic transfer service) account balances and share draft account balances at credit unions.”

“Demand Deposit=A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.”

M1 is a stock measure—it is measured at a point in time—on a specific day.

Measuring the Supply ofMoney in the United States M2, or broad money, starts with M1 and adds to it near monies, or close

substitutes for transactions money.

M2 = currency & coins held outside banks by the public+ demand deposits (checking account balances)+ travelers checks+ other checkable deposits (e.g., NOW accounts)

+savings accounts + money market deposit accounts + small time deposits + other near monies

From the Fed: “M2=Measure of the U.S. money stock that consists of M1, certain overnight repurchase agreements and certain overnight Eurodollars, savings deposits (including money market deposit accounts), time deposits in amounts of less than $100,000 and balances in money market mutual funds (other than those restricted to institutional investors).”

The main advantage of looking at M2 instead of M1 is that M2 is sometimes more stable.

There is even an M3!

i>clicker questions

Suppose Ben takes $1,000 out of his checking account and puts the money under his bed.

Suppose Ben takes $1,000 out of his checking account and puts the money into a savings account.

Will this transaction decrease M1?A. YesB. No

Will this transaction decrease M2?A. YesB. No

Will this transaction decrease M1?A. YesB. No

Will this transaction decrease M2?A. YesB. No