Macroeconomic Theory

Lecture 1

• Money is anything that is generally accepted in payment for goods and services or the repayment of debts

• Wealth is the set of properties that serve to store value

• Income is the flow of wealth accumulation per unit of time

• The oldest form of exchange is barter, which requires a double coincidence of wants

• The oldest form of money is commodity money: money is made out of a valuable commodity, like gold for example

• We now use fiat money: paper money decreed by governments as legal tender

• M0: the most liquid form of money and it exclusively includes currency in circulation

• M1: includes M0 (currency), checkable deposits, and traveler's checks

• M2: includes M1, savings deposits, time deposits, and money market mutual fund shares

• The monetary base is defined as the total amount of liabilities of the central bank, and it includes (1) currency and (2) reserves

• Nash equilibrium: if no one accepts money then you won't either

Lecture 2

D = 100 + 80 + 64 + . . . or equivalently
D=100+.8×100+.82 ×100+...
D=100(1+0.8+0.82 +...)
Say, x=1+0.8+0.82 +... then multiply both sides by 0.8 to obtain
0.8x=0.8+0.82 +0.83 +... now subtract the last equation from the second-to-last one: x−0.8x=1+0.8+0.82 +... −0.8−0.82 −...
(1−0.8)x=1→x=1/(1−0.8)=5
If r=1-0.8…
D = 1/r(MB)
Ms=1/r(MB)

c=C/D= currency ratio e=ER/D= excess reserve ratio r= RR/D = require reserve ratio

MB = R+C = RR+ER+C = (rD)+(eD)+(cD)

Lecture 3

• The interest rate represents the opportunity cost of excess reserves

• The excess reserve ratio is negatively related to the market interest rate, and it is positively related to the expected deposit outflows

• The Fed acts as a lender of last resort for the banking system, and therefore it has to lend to the banking system all the money that banks need

• The Fed can partially control the amount that banks will decide