Week 3 Critique

Week Three Learning Team Reflection
ECO/372

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 multiplier for the economy:
(1 + c) / (r + c) r = the percentage held in reserve c = the money held by the people
The more money people hold, the smaller the money multiplier.
Another member explained that the Multiplier Effect can be defined as the expansion of a country's monetary supply that has resulted from banks being able to lend. The size of the multiplier effect actually depends on the percentage of deposits that banks are required to hold as reserves. Money is used to create more money. This is calculated by dividing total bank deposits by the reserve requirement. Another of the objectives this week was to assess the factors that contribute to the establishment of general and specific rates of interest. Quite a few factors determine general and specific interest rates. For example, the Federal Reserve raises or lowers short-term interest rates in effort to maintain a stable economy. In addition, interest rates are strongly influenced by the state or condition of our economy and the supply and demand for credit. When the demands for funds are high, interest rates will rise and put a ceiling on the funds that are available. Lastly, inflation also affects rates of interest. The higher rate of inflation, the more interest rates have a tendency of rising. The material in week three was a little hard for most of us to comprehend at first. However, after going over the material a few times, and participating in discussions, it was a little clearer. Now, as one team member suggests, we can use the information to help understand how 401k and bonds are affected when interest rate is either lowered or increased. We can apply this information to our borrowing habits. We can make better decisions by understanding the state of our economy and how the Federal Reserve will affect our investments.