Intermediate Macroeconomics Week 2

Study Notes

The Money Market

Interest rates determine key economic factors: inflation, business investment, mortgages, and consumer spending.
The demand for money (Md) comprises two components: L1 (transaction money for goods/services) and L2 (idle balances for speculative purchases).
As interest rates decrease, demand for money increases; conversely, higher rates lead to decreased demand.
Demand for money is proportional to nominal income and inversely related to interest rates; as interest rates rise, the demand for money falls.

Demand for Money Curve

The demand for money can be plotted with money on the x-axis and interest rates on the y-axis, resulting in a downward-sloping curve.
A specific nominal income level shows a negative correlation between the quantity of money demanded and the interest rate.

Money Supply Dynamics

The money supply is exogenous and controlled by the central bank, depicted as a vertical line on a graph.
Equilibrium in the money market occurs when money supply equals money demand.
An increase in money supply lowers the interest rate, while an increase in nominal income raises the interest rate.

Central Bank Operations

Central banks modify money supply through open market operations:
- Expansionary operations involve buying bonds to increase supply.
- Contractionary operations involve selling bonds to reduce supply.
The central bank may follow the Taylor rule to set appropriate interest rates based on economic conditions.

Fisher Effect

The Fisher effect indicates that higher inflation correlates with higher nominal interest rates.
The equation r = i - π illustrates the relationship between real interest rates, nominal rates, and inflation.

Characteristics of Money

Money primarily refers to cash and checkable deposits, which allow immediate withdrawal with minimal interest.
Bonds offer positive interest but are not immediately liquid for transactions.

Monetary Policy Instruments

Key components of monetary policy include:
- Policy rates
- Open market operations (expansionary and contractionary)
- Reserve requirements, mandating banks to retain a specific amount in reserves.

Goals of Central Banks

Policymakers aim to combat recessions and ensure price stability.

The Labor Market

Focus areas in the labor market include total employment (part-time and full-time) and unemployment (those seeking work but not employed).
The labor force participation rate measures the percentage of adults (16+) actively participating in the labor force.
Unemployment rate calculations can be derived through claimant counts or labor force surveys; they can vary by region.
Historically, the unemployment rate has remained in double digits for the past 30 years, with spikes during recessions and decreases during expansions.
The Organization for Economic Cooperation and Development (OECD) notes that unemployment trends typically follow economic cycles.

Description

This quiz covers key concepts from Week 2 of an Intermediate Macroeconomics course, focusing on the money market and the determination of interest rates. Topics include the impact of interest rates on inflation, investment, mortgages, and consumer spending, as well as the demand for money.