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Current time:0:00Total duration:8:54

Video transcript

two words you'll hear thrown a lot in macroeconomic circles are monetary policy monetary policy and fiscal policy and fiscal policy and they're normally talked about in the context of ways to shift aggregate demand in one direction or another and oftentimes to kind of stimulate aggregate demand to shift it to the right and what I want to do in this video is focus on what these two different tools are who are the actors and how do they go about actually shifting the aggregate demand curve so monetary policy this is literally deciding how much money to print so it's literally printing money either deciding to print more of it or deciding to print less printing money it's tends to be done in the United States especially in most large countries it's done by the central bank it's done by the central bank which is sometimes directly part of the government sometimes it's quasi independent in the u.s. it's a quasi the US central bank which is the Federal Reserve is quasi independent and in future videos we'll talk more about the governance structure of the federal of the Federal Reserve most of the major appointees are made by the US government all of its excess profits goes back to the US Treasury so in that way it's part of the US government but it's set up to be also has some influence from private industry the member banks have a have a stake in what's going on it quoted often coordinates amongst member banks so you have your Federal Reserve as a central bank in the United States it's quasi independent but it's been given the right to print money and I'll just draw it here as physical dollars but most of the money that it's going to print actually is electronic money and what the way this affects the aggregate demand curve the Federal Reserve doesn't just print money and go out and start buying things with that money well it does buy things but it doesn't go out and buy goods and services what it does with this is it essentially lends it out so it's essentially buying debt so it buys it buys debt and if buying debt seems like a weird thing to say buying debt is the same thing as lending money lending money if I buy a Treasury bond so if I'm buying debt I'm buying a Treasury bond it means I'm implicitly lending that money if I buy the bond directly from the government that means I'm lending that money to the US government if I buy if I directly buy a bond from a u.s. corporation I'm essentially lending that money the corporation they're going to give me interest payments in the form of coupons and then they're gonna pay back that money at some future date so this is essentially lending money and what this does is it's increasing the supply of money that's out there to be lent and so if we think of the market for money so listen now we're taking micro economic terms for the market for money so the market for money if this is the price of money which is really just the interest rate so interest interest rate as a percentage and this right over here is the supply of money supply of money and I'll just draw so this might be our supply curve that's supply and this is the demand curve this is a demand curve and let's say right over here let's say and let's say this is short term money and we won't focus on the different durations and all of that but let's say we're sitting right over here at a clearing interest rate of 5% so it makes sense this is right here this is our demand our demand curve so all of the people who will get more than 5% benefit out of the money maybe they have an investment where they could get 10% on the money or 8% or 5.1% they're all willing to borrow that money and then invest it in whatever they want to do or this might even be consumption people who are say hey 5% that's worth it for me to go out and buy that thing that makes me whatever happy but from an investment point of view it makes even more sense if I'm gonna get an 8% return on my money that's my benefit it makes sense for me to borrow it at 5% it makes sense all the way up to five point zero zero zero one percent I'd actually borrow it and so in the Federal Reserve or any central bank prints money and it buys debt it goes out into debt markets and advise and usually buys the safest kind of debt but that affects all of the debt markets it goes out and buys debt market they're essentially shifting the supply curve of money to the right they shifted the supply curve to the right and so at any given interest rate you could say that they are there is more money and so the supply curve might look something like that and this is interesting because assuming the demand has not shifted what you now have is a different clearing price a different equilibrium price for the money maybe this is now at 3% this is now at 3% now and you also have more money being lent and borrowed so if this was the old quantity of money that was lent in borrowed let's say that this is I'm just going to make up a number here let's say that this is let's say this is one hundred one hundred billion dollars in some time period and now we're at a hundred and twenty billion dollars one hundred and twenty billion dollars so now by essentially printing money buying debt increasing the supply of money two things happen interest rates went down and so now you have all of these characters out here who before they weren't going to borrow money at 5% because whatever they were their benefit on that money was between 5% and 3% maybe as 4% or 3.5% it didn't make sense for them to borrow at 5% and invested or get and only get a 4% return or a 3% return but now that interest rates have gone down now it does make sense for them to borrow the money all the way down to someone who has some type of project or investment that has a 3% return they also say hey I'm neutral now you could borrow at 3% and then I could invest but definitely the person with three point one percent or three point two percent if they have investments that give them that much they would definitely want to borrow and we could assume that all this incremental borrowings on this little example that I did right over here all this incremental 20 billion dollars of borrowing it's going to be spent people will borrow money not to just like not to just sit but stuff it into their into their mattresses they'll borrow that money to go invest it in some way to spend it and so what this will do all of this will shift aggregate demand to the right right here we're talking in micro economic terms but then if we think about aggregate supply and demand so this is aggregate so this is let me write aggregate aggregate right over here this is price this is real GDP this is our aggregate demand aggregate aggregate demand and then our short-run aggregate supply might look something like this aggregate supply in the short run and so if we're shifting aggregate demand to the right where there's going to be more demand for goods and services these people are gonna borrow this much spend it you're going to essentially stimulate you are going to stimulate the economy so this shifts to the right you have a situation where real GDP will go from this state to this state right over here so it was expansionary and obviously if the Federal Reserve decides to print less money or if they even decide to if they essentially soak up the money that's in the market by selling some of the debt that they own so that they're sucking dollars out of it then the opposite effect would happen now fiscal policy is essentially the government directly going out there and demanding goods and services from the economy so this is essentially you have the government you have the government it has so two sources of revenue that it can spend it has money from taxes it has tax revenue and then it can go out and borrow money and so it also has access to debt markets and the when a government borrows money they're essentially issuing Treasury bills if you talk about the US Treasury bills and Treasury bonds if you were to buy those from the US government you are essentially lending money to the government to finance their debt and so they could take these two sources of money and then if they decide to do if they just have to spend more and let's say that they're gonna hold taxes fixed so they're not gonna take out any demand from the economy they might ratchet up debt and then ratchet up spending ratchet up spending and then that this government is directly going out there and demanding more goods and services so that could also shift the aggregate demand curve to the right so these are two different levers two different tools that have been used in governments all around the world to shift aggregate demand one way or the other or to an attempt to shift aggregate demand one way or the other monetary policy is more indirect printing money using that to increase the supply of money that's out there to be lent that lowers interest rates and then because it lowers interest rates more money there's more willingness to borrow and invest that money fiscal policy you're directly going out there and just buying more goods and services by usually ratcheting ratcheting up your debt or fiscal policy could go the other way if you're trying to restrain the economy you could lower your debt lower your spending or you could do some other combination