Unit 4 - Money & Banking / Monetary Policy (3-21-16 - 3-27-16)

Unit 4 Video Summaries

Unit 4 Part 1: Types/Functions of $

There are three types of money, they are commodity, representative, and fiat money. Commodity money is money that can be used and is available. Representative money represents the quantity of a precious metal. Fiat money doesn't represent anything but the promise that the government says it has value. There are three functions of money. First is as a median of exchange (trade), second as a store of value(savings), and a unit of account(quality).

Unit 4 Part 3: Money Market
The money market graph is labeled interest on the y-axis, and labeled quantity of money on the x-axis. The money demand is always downward sloping, and is tied into the interest rate. The money supply is fixed and is set by the FED, meaning it only moves if told to move. When demand increases, it puts pressure on interest rates. If the FED wants to bring the rate back down, they increase the money supply.

Unit 4 Part 4: Tools of Monetary Policy
In regards to the tools of monetary policy, the FED uses expansionary, also known as easy money, and contractionary policies, also known as tight money. In the expansionary policy, the reserve requirement decreases. The lower the money in RR, it makes the incentive for the banks to be irresponsible with money. On the contractionary policy, the reserve requirement increases. Also for the expansionary policy, the discount rate goes down, but increases for the contractionary policy. Easy money policy buys bonds, and tight money policy sells bonds. The FOMC makes all decisions.

Unit 4 Part 7: Loanable Funds
The demand for loanable funds is always downward sloping. The y-axis is labeled interest, and the x-axis is labeled quantity of loanable funds. The supply is loanable funds is dependent on savings, meaning the more money people save, the more banks have to loan out. If there's an incentive to save more, the supply of loanable funds increases, shifting right. If there's a deficit, the government is demanding more in order to spend it.

Unit 4 Part 8: Money Creation Process
Banks make money by making loans. If the reserve requirement is 20%, and the loan amount is $500, how much $ is created? To find that, you must find the money multiplier by (1/RR). So, (1/0,2) = 5. Once you find the multiplier, you multiply that by the loan amount, which is $500. $500 multiplied by 5 is $2500, which is the answer to the problem. When the bank keeps loaning out money, the total amount of loanable funds will be $2500.

Unit 4 Part 9: Money Market, Loanable Funds, AS/AD
The money market, loanable funds, and as/ad graphs are all connection with one another. When the money demand increases, interest rate increases as well as AD. There a rightward shift that goes along for all three graphs.The fisher effect connects the increase in interest rates with the increase in price level.