Economic growth, financial system and business cycle

1. Investment and productivity

2. Factors that determine investment: Saving and investment.

    a. National saving

    b. Private saving

    c. Public saving: budget surplus, budget deficit

3. How are funds available for investment? The financial system: What does it do?

A.     Financial system and long-run economic growth

a.       Direct finance: financial markets

b.      Indirect finance: Financial intermediaries

4. The equality of saving and investment in the closed economy

5. What does equate saving and investment in the closed economy?

     A. Market for loanable funds

         a. What are the loanable funds?

         b. Demand for loanable funds

         c. Supply of loanable funds

         d. Equilibrium real interest rate.

6. Change in national saving, and its effect on the equilibrium real interest rate, quantity of loanable funds (saving and investment)

           a. Change in private saving

b. Change in public saving

               - Government budget deficit

               - Government budget surplus

 Chapter 12:  Aggregate Demand and Aggregate Supply Analysis.

1. Short-run macro-equilibrium: Recessionary gap, inflationary gap, graphical presentation

2. Changes in the short-run equilibrium

3. Long-run equilibrium

4. Short-run instability:

 a. Recessions: supply and demand shock recessions

 b. Expansions with inflation

5. Automatic adjustment to the full employment (potential Real GDP) when the economy is in recession. (self- regulating economy)

6. Automatic adjustment to the full employment (potential Real GDP) when the economy is in inflationary gap (self- regulating economy)

7. Relationship between natural and actual unemployment rate when the economy is in recessionary gap.

6. Relationship between natural and actual unemployment rate when the economy is in inflationary gap.

9. Conditions for automatic (self-correcting) adjustment to potential (full employment) Real GDP

10. Government action and adjustment to the long-run equilibrium

Chapter 13: Money, Banking and the Federal Reserve

1. Defining money, types of money.

2. Functions that money serves.

3. How do we measure money supply and why?

4. Components of M1 and M2

5. Fractional banking system: total reserves, required reserves and excess reserves

6. How does banking system create money (increases or decreases the money supply)?

7. Simple deposit multiplier (simple money multiplier).

9. Federal Reserve structure, functions, goals and targets, the Fed balance sheet

10. Central bank independence from the government

11. The Fed as lender of the last resort: benefit and cost

12. Federal Reserve monetary policy tools:

  a. Open market operations,

  b. Discount rate,

  c. Required reserve ratio

  d. Interest rate on reserves

13. Open market operations, their impact on the monetary base, the level of reserves in the banking system and the money supply.

 14. Change in the discount rate and its effect on the level of reserves in the banking system and the money supply

 15. Change in the required reserve ratio and its effect on the level of reserves in the banking system and the money supply

16. Change in the interest rate on reserves and its effect on the level of reserves in the banking system and the money supply

Chapter 14: Monetary Policy

1. Monetary policy goals and targets.

2. Types of monetary policy

 a. Expansionary monetary policy

 b. Contractionary monetary policy

3. Money market: demand for money and supply of money.

4. Factors that change demand for money.

5.Equilibrium in the money market.

6. The money market, the bond market and the open market operations: 

 a. Open market purchases and their effect on the money supply and the equilibrium interest rate

 b. Open market operations and their effect on the bond market

 c. Open market sales and their impact on the money supply and the equilibrium interest rate

 d. Open market sales and their effect on the bond market

7. Federal funds rate as a monetary policy target: setting the target for the federal funds rate: Taylor rule

 a. Setting the target FFR when the economy output falls and unemployment increases and achieving the new FFR

  b. Setting the target for the FFR when inflation accelerates and achieving the new FFR

8. What components of AD are affected by interest rates and how?

9. Monetary policy and its impact on the economy in the short-run

10. Monetary policy fighting recession: setting the target for the FFR, the monetary policy tool, the bond market, the money market and the real economy: benefit and cost

11. Monetary policy fighting inflation: setting the target for the FFR, the monetary policy tool, the bond market, the money market and the real economy: benefit and cost