Video Summaries

Video 1:
In the video, it discusses that there is three types of money. They are commodity money, representative money, and fiat money. Commodity money is allowing goods to be accepted as money. Then representative money is currency that is backed up by something, usually its metal like gold and silver. Lastly, fiat money is currency that isn’t backed up by metal but it is backed up by the government by giving it a value. There is also functions of money, they were medium of exchange, store of value, and unit of account. Medium of exchange is “through money that exchange happens” and store of value is money that is saved in the bank and people thinking that it will have the same value as before.

Video 2:
This video was about the Money Market Graph. The women draws out the graph and labels them. The y axis is the interest rate (i) and the x-axis is quantity of money (QM). She also tells us why the demand of money slopes downward. When the price is high, the demand is low but when the price is low then the demand is high and the interest rate people borrow more. Then the supply of money is fixed and set by the Fed. It does not change by the interest rate.

Video 3:
In video three, it talks about the tools of the monetary policy. During expansionary the reserve requirement is lowered so they can have more excess loans to lend out and for contractionary it is being raised. The discount rate is increased to stop the amount of borrowing. Then the federal fund rate is rates that are charged to other banks when they receive overnight loans.

video 4:
This video talks about the loanable fund rate and how that when there is more money saved then more money will be lend out. The women also talked about how the interest rate is affected by the Money Market and the Loanable fund market. The interest rate is hurt in the money market when is low and its vice versa in the loanable fund market.

video 5:
The video talks about how there is two ways to create money. One way is through the money multiplier and the other is the multiple deposit expansion. However money is always created by making loans.

video 6:
In video 6, the women shoes the graphs of the money market, the loanable fund market, and the AD-AS graph. She explains how if the government is in a deficit, then they borrow money to run the deficit. When they are borrowing money, it is from the public. The women also explains that when MV is increasing so is PQ because MV has to equal PQ.

Loanable Fund Market

• the market where saver and borrowers exchange funds (Qlf) at the real rate of interest (r%)

• the demand for loanable funds, or borrowing comes from households, firms, govt, and the foreign sector. The damns for loanable funds is in fact the supply of bonds

• the supply of loanable funds, or saving comes from households, firms, govt, and the foreign sector. The supply of loanable funds is also the demand for bonds

Changes in the demand for loanable funds

• remember that demand for loanable funds = borrowing (supply bonds)

• more borrowing = more demand for loanable funds ->

• less borrowing = less demand for loanable funds (<-)

• example 

     - government deficit spending = more borrowing = more demand for loanable funds 

    -Dlf -> r%^

    -less investment demand = less borrowing = less demand for loanable funds 

Changes in the supply of loanable funds

• remember that supply of loanable funds = savings ( demand for bonds)

• more saving = more supply of loanable funds ->

• less saving = less supply of loanable funds <-

• examples 

     - government budget surplus = more saving = more supply of loanable funds

     - Slf -> r%^

     -  decrease in consumers' MPS = less Savings = less supply of loanable funds

Final thoughts of loanable funds 

• when the government does fiscal policy it will affect the loanable funds 

• changes in the real interest rate (r%) will affect gross private investment 

Tools of Monetary Policy

Fiscal policy 

• Congress and president 
• Tax or spend  

Monetary policy 

• The fed  
• Omo 
• Discount rate  
• Federal found rate 
• Reserve requirement 

Expansionary  

• Easy money 
• Recession 
• Open markets operation buy bonds  
• Icrease money supply 
• Decrease dicount rare 
• Decrease reserve requirements  

Contractionary 

• Tight money 
• Inflation 
• Open market operations sells bonds 
• Increase discount rate 
• Increase reserve requirement  

Discount rate: interest rate that the fed charges commercial banks for borrowing money 

Federal fund rate: Interest rates that commercial banks charge one another for an over night loan 

• Inderect relationship of the two 

Prime rate: interest rate that banks charge their most credit worthy customers

Key Principles

Key principles:

• a single bank can create money (through loans) by the amount of ER

• the banking system as a whole can create money by a multiple (deposit on money multiplier) of initial ER

Initial deposit

• cash

     -Existing money

     - increase bank reserves 

     - no immediate change in ms because the composition, is in circulation 

     - change in the banking system

• FED purchase of a bond from public

     - new money

     - increase bank reserves 

     - yes immediate change in ms because money coming from the FED, puts new money in circulation

     - deposit change in the banking system

• bank purchase of a bond from public

     - new money

     - increase

     - yes because money coming from actual reserves puts new money in circulation

     - deposit change in the banking system 

Factors the weaken the effectiveness of the deposit multipliers

1. If banks fail to loan out all their ER 

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

The money market 

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

     -money demand ^ interest v

Functions of the FED

Function of the FED

• it issues paper currency

• sets reserve requirements and hold reserves of banks

• it lends money to banks and charges then interest 

• they are a check clearing service for banks

• it acts as personal bank for the government 

• supervises member banks

• controls the money supply in the economy 

Three types of multiple deposit expansion 

1. Calculate the initial change in excess reserves 

    - xaka the Amount a single bank can loan from the initial deposit 

2. Calculate the change in loans in the banking system 

3. Calculate the change in the money supply

   - sometimes type 2 and type 3 will the same result (I.e. No Fed involvement)

4. Calculate the change in demand deposits 

Creating a bank 

• transaction #4

• depositing reserves in a federal reserve bank

   - required reserves 

   - reserve ratio 

• reserve ratio = commercial banks required reserves/ commercial banks Checkable-deposit liabilities

Reserve requirements

• excess reserves 

    - actual reserves - required reserves

• required reserves 

    -checkable deposits x reserve ratio

How banks work

• assets 

    - reserves:

         . Required reserves (rr) - % required by fed to keep on hand to meet demand 

         . Excess reserves (er) - % reserves over and above the amount needed to staidly the minimum reserve ratio set by fed

   - loans to firms, consumers and other banks (earns interest)

   - loans to govt. = treasury securities 

   - bank property - (if blank fails, you could liquidate the building/property)

• liabilities + equity 

    - demand deposits ($ put into bank)

    - timed deposit (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 banks success or failure) 

•Bonds are loans are I o u that represent debt that the government or corporation must repay to an investor

• they are literally low risk investments 

3 components

• coupon rate - it is the interest rate that a bond issuer is to pay to a bond holder

• maturity - the time at which payment to a bond holder is due 

• par value - it is the amount that an investor pays to purchase a bond that will be repaid to an investor at maturity 

Time value of money

• is a dollar today worth more than a dollar tomorrow?

    - yes

• why? 

    - inflation and opportunity cost 

    - this is the reason for charging and paying interest 

• let v = future value of $

       p = present value of $

       r = real interest rate (nominal rate - inflation rate) expressed as a decimal

      n = years 

      k = number of times interest is credited per year 

• simple interest formula 

    v = (1 + r)^n x p

• the compound interest formula 

    v = (1 + r/k)^nk x p

Fiscal Policy

Fiscal Policy

·     Changes in the expenditures or tax revenues of the federal government.

o  2 tools of fiscal policy: controlled by congress

§  Taxes – government can increase or decrease taxes

§  Spending – government can increase or decrease spending

Deficit, Surpluses, and Debt

·       Balanced budget

o   Revenues = Expenditures

·       Budget deficit

o   Revenues < Expenditures

·       Budget Surplus

o   Revenues >Expenditures

·       Government Debt

o   Sum of all deficits – sum of all surpluses

·       Government Borrows money when it runs a budget deficit from:

o   Individuals

o   Corporations

o   Financial Institutions

o   Foreign entities or foreign governments

Discretionary Fiscal Policy (action)

·       Expansionary fiscal policy – think deficit

·       Contractionary fiscal policy – think surplus

Non –Discretionary Fiscal Policy (no action)

Discretionary vs. Automatic

·     Discretionary

o  Increasing or decreasing government spending and/or taxes in order to return economy to pull full employment.

o  Involves policy makers doing fiscal policy in response to an economic problem

·     Automatic

o  Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate effects of a recession and inflation

o  Automatic fiscal policy takes places without policy makers

Contractionary Fiscal Policy – policy designed to decrease aggregate demand

·     Strategy for controlling inflation

·     Inflation is countered

o  Government spending decrease

o  Taxes increase

   Expansionary Fiscal policy – policy designed to increase aggregate demand

·       Strategy for GDP combating recession and reducing unemployment

·       Recession is countered with expansionary policy

o   Government spending increases

o   Taxes decreases

Automatic or Built in stabilizers

·       Anything that increases the government’s budget deficit during a recession and increases its budget surplus inflation without requiring explicit action by policymakers

Automatic Stabilizers

1.   Transfer Payments

a.   Welfare Checks

b.   Food Stamps

c.   Unemployment Checks

d.   Corporate Dividends

e.   Social Security

f.     Veteran’s benefits

2.   Progressive income taxes

a.   Automatic stabilizers take 33-50% out

   Progress Tax System

·       Average tax rate (tax revenue/ GDP) rises with GDP

   Proportional Tax System

·       Average tax rate (remains constant as GDP changes)

    Regressive tax System

·       Average tax rate fall with GDP