Video Notes

Unit 4 - Part 1 - Types and Functions of Money

-3 Types of Money

                1. Commodity money-a good that has other purposes that also stands as a use for money (ex. Cows for tribes in Africa)

*most primitive type

                2. Representative money- whatever is being used as currency represents a certain amount of a specific quantity of precious metal (ex. Gold and silver)

* drawback: when the value of the metal changes, the value of your currency changes

                3. Fiat money- money that is not backed by precious medal, legal tender, money that must be accepted, and backed by the word of the government saying it has value.

-3 Functions of Money

                1. Money is a medium of exchange

                                *medium- a substance through which something is passed

                                *exchanges happen through money

                2. Money as a store of value

                                *When you store money you expect it to be stable and retain its value

                3. Unit of account

                                *We assume that price implies worth (i.e. the more something cost we think we get more for our money)

Unit 4 – Part 3 – Money Market Graphs

-Graph Components

1.                  1. Label your axis

              -vertical axis: Price-in terms of money, the price that is paid to get money is interest rate (i)

              -horizontal axis: Quantity- quantity of money (QM)

2. Demand for money (DM) slopes downward

-Slopes downward because:

                *When price is high the quantity demanded is low

                *When price is low the quantity demanded is high

-When interest rate is low there is an incentive to barrow more for transaction demand and assets demand

3. Supply for money (SM) is vertical:

-Vertical because:

                *Does not vary based on the interest rate (fixed; set by the Fed)

*Side Note add in your Q₁ and i₁ for the equilibriums

-Manipulations

                *If there is an incentive to want more money, the demand for money increases (shifts to the right)

                                -Upward pressure on interest rate

                                -Quantity is the same because supply is fixed (vertical)

                *If there is upward pressure on interest rates, Fed can increase the money supply (shifting curve to the right), stabilizing the interest rate

                                -Vertical curve is shifting to the right

    *2 ways to think about the money supply:

                1. In terms of quantity

    2. In terms of interest rates

                      *Fed tries to stabilize interest rate, because if interest rate is unstable you can’t predict level of investment, consumer spending or manipulate aggregate demand

Unit 4 – Part 4 – The Fed’s Tools of Monetary Policy

	Expansionary (Easy Money)	Contractionary (Tight Money)
Reserve Requirements	Lower RR: puts more available money for loans	Higher RR: less money to loan, more responsibility
Discount Rate: Banks borrow money from FED/ Interest rate	Lower the Discount rate: encourages borrowing	Higher Discount Rate: discourages borrowing
Buying and selling Gov bonds and Securities	FED Buys Bonds: the public get money, money supply goes up	FED Sells Bonds: the FED takes the money and keeps it = less public money

-Reserve Requirements: are not used that often because if you lower money banks hold, they become irresponsible

-Discount rates: the banks do not have to respond

-FOMC: piece of Fed that makes decisions

-Federal Funds Rates: Not actually federal; rate at which banks borrow money from one another

                *When Fed buys = downward pressure on Fed Fund Rate

                *When Fed sells = upward pressure on Fed Fund Rate

Unit 4 – Part 7 – The Loanable Funds Market

       -Loanable funds: money that is available in the banking system for people to barrow

       -Components

                1. Label axis

                                *y axis: price (interest rate); i

                                *x axis: quantity (quantity of loanable funds); QLF

                2. Demand of Loanable Funds (DLF) downward sloping

                                *Downward sloping because:

                                                -when interest rate is lower people demand more money

                                                -when interest rate is higher people have a disincentive to barrow money

                3. Supply of Loanable Funds (SLF) Slopes Upward

                                *Equilibrium (starting point) occurs when Supply of Loanable Funds intersects Demand for Loanable Funds

-Conceptualizing

                *SLF- comes from the amount of money people have in banks (dependent on savings)

                                -more people save the more banks have to loan

                                -people have incentive to save, supply shifts to the right

                                -people have disincentive to save, supply shifts to the left

-Showing Government Deficits

                *Government Deficit-Government is demanding more money

                                -Money Market:

                                                *DM shifts right, interest Rate increases

                                -Loanable Funds:

                                                *Two Ways

                                                                1. Increase Demand for Loanable Funds (shift right); increase in DLF increases interest rate

                                                                2. Decrease Supply of Loanable Funds (shifts left); decreasing SLF increases interest rate

Option 1

Option 2

Unit 4 – Part 8 – Money Creation and Multiple Deposit Expansion

-Money Creation Process: Banks create money by making loans

                *Reserve Requirement = 20%, loan amount = 500

                                Q: How much money is created from the $500?

                                                -Money Multiplier= 1/RR

                                                1/.2 = 5 x 500 = $2500

                *Multiple Deposit Expansion

                                RR = 20%  Money Multiplier = 5   Loan of $500

                                            *Assumption: No Excess Reserves (IF ER exist the total goes down)*

                                                Bob gets $500 -> Bank

                                                Loan to Joe, $400 -> Bank

                                                Loan to Suzie $320 -> Bank

                                                                *Add ALL potential loans ($2500)

    

Unit 4 - Part 9 - Relating the Money Mkt., Loanable Funds Mkt., and AD-AS

-Government in a Deficit: Borrows money from Americans, Dm -> = DLF -> = AD ->

-Better to increase DLF because it is an increase across the three graphs

MV = PQ

Increase in i = increase in PL

-Fisher effect: Interest rates equal inflation

                Ex. 1%   increase in I -> a 1% increase in P