Week Three Learning Team Reflection
Week three topics included the Multiplier Model, The Financial Sector and the Economy, and Monetary policy. Most of our team was comfortable with the financial sector and the economy, especially with understanding how the interest rates work. Learning how the Federal Reserve works and controls the money supply and interest rates in our economy was an interesting point for many of us as well. Appendix A. contributes valuable information about assets and liabilities along with information about stocks and bonds. Understanding about the Federal Reserves and how they control money and bonds, the effect it has when they sell and buy bonds, and what it does to the economy when they do either one to try and stimulate the economy or slow the economy were comfortable for most of our team. However, many of us had difficulty understanding the multiplier model and how it is used to determine the equilibrium of aggregate income. Aggregate production and expenditures as part of the Multiplier Model were not comfortable subjects for most of us. One team member helped by describing bank deposits and loans as money multipliers. Someone deposits money in their bank account and receives a printout that states how much in the account. The person is allowed to get the money back on demand. However, the bank is allowed to borrow out 90% of that money, only holding 10% in reserve. That 90% is where the money begins multiplying because more money will be in the economy, and more money will come back to the bank. Here is the formula that is used to show how this works: 1/r = 1/.10 = 10 Simple money multiplier
If the reserve rate is too high, then the money multiplier is smaller and less money will be created. In 2008, banks became afraid the loans were not safe and kept the excess reserves, which crushed the money multiplier. Here is another formula that is used to figure out the money...