AP macroeconomics part 9 video response

In this video we learned how to relate the money market, loanable funds, and AD/AS graphs.When making the graphs we need to label everything. If the demand for money increases in the money market graph, then the demand for loanable funds will increase which means it will increase AD because of the increase in government spending. MV = PQ means change in supply of money is a change in price, so if one goes up then the other must go up also. Fisher effect is that a 1% increase in interest rate will yield a 1% increase in inflation.

AP macroeconomics part 8 video response

Banks create money by making out loans. Money multiplier is one over the reserve requirement ratio. To find how much money is created by a banking system multiply the money multiplier by the loan amount. Even if it is estimated to be a lot of money it does not mean that is what will happen because we are assuming that the banks are holding no excess reserves. If a bank holds excess reserves the money created will be lower.

AP macroeconomics part 7 video response

We learn about the loanable funds graph. In the vertical axis it is similar to the money market graph because it is interest rate. On the horizontal axis it is the quantity of loanable funds (QLF). Then the demand curve is downward sloping like the others but the supply curve is upward sloping, not vertical like it was in the money market graph. The supply of loanable funds is dependent on savings and how much money there is in the bank. If there is more incentive to save then we increase the supply curve and if there is more incentive to not save, then we shift the supply curve to the left. It is easier to see impact if you put loanable funds graph next to money market graph. An increase in the interest rate in one graph means an increase in the interest rate of the other graph.

AP macroeconomics part 4 video response

The Fed has 3 tools to change money supply. This was the graph represented:

	Expansionary (Easy money)	Contractionary (Tight money)
Required Reserves	Lower	Raise
Discount Rate (rate at which banks can borrow money from the Fed)	Lower	Raise
Buy/Sell bonds/securities (FOMC)	Buy (buy bonds = big bucks)	Sell

The federal funds rate is rate at which banks borrow money from each other. When the Fed is buying bonds it puts downward pressure on the federal funds rate, while when the Fed is selling bonds it puts upward pressure on the federal funds rate.

AP Macroeconomics part 3 video response

In this video we learned about the money market graphs. On the vertical axis there is the price of money or the interest rate. Then on the horizontal axis there is the quantity of money. The line for the demand of money is downward sloped, because as the price of money increases, then the quantity demanded decreases. Then when the price decreases the quantity demanded increases. The line for the supply of money is vertical at the point where the quantity is at equilibrium. When the demand increase the interest rate rises but the quantity stays the same, which begins to destabilize the economy. To stabilize the economy again the Fed can increase the money supply which will bring the interest rate back to equilibrium.

AP macroeconomics part 1 video response

In this video I learned that there are 3 types of money. Commodity money is when things are being used as money that can have other purposes like people in Africa using cows for money because cows can have other uses. Representative money is when the money represents something like gold. The last type is Fiat money which has value only because the government says so. Money also has 3 functions which are as a medium of exchange, as a store of value and as a unit of account. A medium of exchange is what we use money for on a daily basis, which is to exchange it for goods and services. a store of value means that when you save the $1000 today in the next few years it will still be worth the same amount. A unit of account means that people associate the price of an object with its worth or quality.

Monetary Policy

Tools of monetary policy

	Expansionary (easy money) (Recession)	Contractionary (tight money) (Inflation)
Open market operation (OMO)	Buy bonds (Increase money supply)	Sell Bonds (decrease Money supply)
Discount Rate	Decrease	Increase
Reserve Requirement	Decrease	Increase

OMO- buy or sell securities or bonds

Discount Rate- interest rate that the FED charges commercial banks for borrowing money

RR- amount of money that a bank has to keep in their reserves

Fiscal	Monetary
Congress and President Tax or Spend	The FED (Federal Reserve Bank) OMO Discount rate Federal Fund Rate Reserve Requirement

Federal Fund Rate- where FDIC member banks loan each other overnight funds in order to balance accounts each day

Prime Rate- interest rate that banks charge to their most credit worthy customers

key principles of unit 4

Key principles:

A single bank can create money (through loans) by the amount of excess reserves

The banking system as a whole can create money by a multiple (depositor money multiplier) of the initial Excess reserves

Initial deposit	New or existing $	Bank reserves	Immediate change in MS
Cash	Existing	Increase	No, composition of M1 money changes (cash to currency)
*FED purchase of a bond from public	New	Increase	Yes, money coming from the FED puts new dollars in circulation
*Bank purchase of a bond from the public	New	Increase	Yes, b/c money is coming from the reserve which puts new money in circulation

*= Deposit + money created in the banking system

Factors that weaken the effectiveness of the deposit multiplier:

                If banks fail to loan out all of their excess reserves

                If bank customers take their loans in cash rather than in new checking account deposits, it creates a cash or currency drain

Money Market

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded

MD or DM increase then interest rate decrease, DM or MD decreases then interest rate increases

Assets/Liabilities

Vault cash: cash held by banks

Reserve Ratio= Commercial bank’s required reserves / Commercial bank’s Checkable-deposit liabilities

ER= AR – RR (required reserves)

AR= actual reserves

RR= checkable deposits * reserve ratio

Assets	Liabilities + equity
Reserves Required: required by FED. Keep on hand to meet demand Excess: reserves over and above the amount needed to satisfy the minimum reserve ratio set by FED Loans to firms, consumers, and other banks Loans to govt. = treasury securities Bank property: (if bank fails you could liquidate the building/property)	Demand Deposits ($ put into banks) Timed Deposits (CD’s) Loans from: federal reserve and other banks Shareholders’ equity: (to set up a bank, you must invest your own money in it to have a stake in the bank’s success or failure)