Unit 4 - Video Notes

Part 1: Types and Functions of Money.

Three Types of Money 
1. Commodity - goods that has other purposes. Not as durable as coins, primitive type of money. (ex: Native Americans uses cows)
2. Representative - whatever you are using as currency represents a specific quantity; (ex: Gold/silver)

3. Fiat - money not backed by metal. Money that must be accepted by transactions; backed by government. 

Functions of Money
1. Medium of Exchange - through money that exchanges happen. (Buying things)
2. Store of Value - when you store money, you expect it to be stable and still have value.
3. Unit of Account - price implies worth (something expensive, it is said to have a higher quality).

Part 2: Money Market Graphs.

Negative slope because demand for money slows down (rate is high, quantity is low and vice versa).

Supply for money is vertical because it does not various based on the interest rate.

To stabilize interest rates, increase the money supply.

If the interest rate is unstable, it is not possible to predict the level of investment, manipulate AD, and predict the level of spending. 

Part 3: Fed’s Tools of Monetary Policy.

1. Expansionary (Easy $)

• RR : lowered.
• Discount Rate (rate that banks can borrow from the FED): lowered. Used to give banks incentive, doesn't mean it will work.
• Buy/sell government bonds/securities: FED buys bonds (public gets money, which causes the money supply to go up).

2. Contractionary (Tight $)

• RR : raised.
• Discount Rate : raised.
• Buy/sell government bonds/securities: sell bonds (federal open market committee makes open market decisions).

• RR - the percentage of banks total deposits that they must hang on to.
• Federal Funds Rate - rate that banks can borrow money from each other. A downward pressure is put on to the rate, when the FED buys bonds.

Part 4: The Loanable Funds Market.

The graphs shows the effect of government deficit.

•  SLF - comes from the amount of money in banks. (Dependent on savings).
•  Government deficit in loanable funds market can shown two ways: increase in demand or decrease in supply.

Part 5: Money Creation and Multiple Deposit Expansion.

• Banks create money by making loans.
• One of the Feds tool is adjust and control RR.
• Ex.)The RR is 20% and the bank makes a loan of $500. How much money will be created?
• 1 / .20 = 5(500) = $2500. We got from $500 to $2500 due to multiple deposit expansion 
• Example of how multiple deposit expansion works - Bob gets $500 to bank. The bank loans $400 to Joe and then Joe puts that money in his bank. The bank then makes a loan of $320 to Susie and so on. This process can go on until nothing is left. If all of these loans are added, it would total $2500 (RR is 20% and no excess reserves). 
• If banks hold excess reserves (banks keeping more than the 20%), the total of $2500 is reduced.

Part 6: Relating Money Market, Loanable Funds Market, and AS & AD Model.

• Change in supply of money is equivalent to change in price.
• Fisher Effect - interest and price level are connected. As interest goes up, price level also goes up. 
• Ex.) 1% increase in interest = 1% increase in price level.

Graphs show the impact of deficit spending