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ECA 251-002 - Fall 2019: Money and Banking

Date: 10/8/2019

Launch a Pre-Emptive Strike Against Recession Chapter 13 VERY IMPORTANT One of the problems that we have is that monetary policy is the only game in town. This article is saying that as soon as there is the next contraction developing, as soon as the unemployment rate begins to increase or even before that, let’s have automatic stabilizers introducing an increase in spending as part of the sequence as to not only relying on monetary policy to reduce interest rates. As per the article: Jobs Report Numbers Back the Glass Being Half 136,000 jobs were created and wages for the past month only went up 2.5 %. Somewhere in the article, you see a surprise that the inflation is not going up with the unemployment rate hitting a new low of 3.5 %. Economy slowing down, anticipating a slower rate of growth, for a bunch of reasons. The tax reductions from last year, the craziness of the tariffs and uncertainty, investments don’t look that good, consumers are becoming cautious, manufacturing is decreasing as compared to the previous year. All of these are slowing down the growth yet and the number of jobs, it might not be a bad report. This looks like a typical soft landing, the fed may be comfortable with this, may have slowed down the growth in order to prevent the inflation from taking off. Number of other reasons: -

Workers are too afraid to be more aggressive which may have made the violation of the Philips curve.

Synopsis of today’s situation. Professor shall begin Chapter 13 in next class. Chapter 13 will be complex. Professor shall teach the chapter with storytelling and no equations. Announcement: Day of Atonement. Professor can’t be reached till 7 PM the next day. Money plays an important role in the economy and the behavior of money is closely related to the level of output, employment and prices.

Equation of Exchange:

MV = PQ M = Money Supply V = Velocity of circulation of money MV = Total amount spent by buyers of output P = Average Price Q = Quantity of goods sold in a period PQ = Total Amount received by sellers of output High cyclical unemployment, If we inject more money into the economy. You’ll have high cyclical unemployment and money is pumped into the economy, nothing will happen to P but Q will go up. Q – when we are moving closer to full employment and fed continues to pump money. What happens to the right side? The 2 elements, P and Q. PQ is going to go up. Price and Q will both increase. Q – We are near that breaking point and we are getting very close or even beyond what NAIRU is. You continue to increase inflation. -

Severe Demand Pull Inflation. P will rise but we are choking so Q won’t go up.

At this point, the unemployment rate is beyond what NAIRU is. This equation reviews many days of our review. Q – We messed up, and we wound up with severe demand pull inflation? -

Decrease the Money Supply and hopefully create a soft landing and not a recession.

Q – What would happen if we neglected to take V into account. V is a crucial element in this formula, we are assuming that V has a constant value, in recession it shall change though. What would happen if we didn’t take V into account? Q – You want to increase GDP by 100, how much should you increase M. Q – which definition of the money supply, page 225 in your reading, is appropriate for M? -

You have 3 different definitions, which do you think is appropriate for this equation.

Chapter 13 . In chapter 13, you shall see T accounts being used and equations. We shall be avoiding the equation and learning via storytelling. Assets/Liabilities $1000 Cash

$1000 Demand Deposits

Given that this is a healthy bank. There is no government to impede your activity, you have the money sitting in cash, you have the money deposited, sitting idle. It’s not going to earn you any income. The question is Q – how much would you lend out that million dollar cash....