Module 24-27

Time Value of Money

\( FV = PV\times(1+i)^n\)

\(PV = \frac{FV}{(1+i)^n}\)

Where:

• FV = Future Value
• PV = Present Value
  
• i = interest/discount rate
• n = number of periods (based on the time units of the interest rate).
  

Structure of Fed

Chair - Appointed by the President. Serve 4-year terms.

Board of Governors - 7 members; also appointed by the President. Serve 14-year terms.

• Conduct monetary policy based on economic conditions.

District Banks - 12 members; numbered 1-12 from east to west coast. 

• Provides liquidity for regional banks.
• Has Presidents

Commercial Banks  - Owners of the Fed (own stock in the Fed).

Federal Open Market Comity

5 Presidents of the 12 district banks + the 7 members of the Board of Governors.

• Meet at the NY Fed; 4 times a year
• Should we raise, lower, or keep interest rates the same?

Test Question:

What did the Fed do during the Great Depression?

• Does not Handel the stock market, therefore "not their fault."
  • But did intervene with the FDIC
    • Shut down banks to prevent bank runs.

Insured up to $250,000.

Fed Actions

• Would increase the money supply if there is a recessionary trend.
  • Helps increase aggregate demand.
    

Tools of Monetary Policy

1. Reserve Requirement
   1. Percentage of a deposit banks must keep.
2. Discount Rate - Second most commonly used
   1. The interest rate the Fed charges banks to borrow from the Fed.
3. Open Market Operations - Most commonly used
   1. The buying and selling of government securities to and from commercial banks
      
   2. All comes down to excess reserves.
      • You add excess reserves 
        1. Buying bonds = increase excess reserves

Monetary is the preferred method!

• Because they are felt very quickly.

Money Demand and Interest

Holding Money Opp. Cost

• Hold money because they need money on a day-to-day basis.
• Opportunity Cost
  • What you give up.
  • Interest!
  • Short term interest rates
    • Interest rates that are 6 months or less.

Money Demand/Money Market Curve:

Real interest rates on the y-axis

Quantity of Demand on the x-axis.

Downward sloping (label MD)

y-pts are notated \(IR_n\)

x-pts are notated \(Q_n\)

Shifters

• Rightwards shift
  • Interest rate is the same, but the demand for money has increased.
• Changes in the aggregate price level
  • If goes up
  • Shift towards right
• Changes in GDP
  • Positive
  • Shift right
• Changes in technology
  • Easier to get money
  • Shift left
  • ATMs!
• Lefwards shift
  • Less demand but same interest rates.

Money Supply Curve

• Determined by the Fed Rserve
• Intersection is called the equilibrium, and is where the interest rate is set.