Unit 4 Monetary

Money

Medium of exchange - 

• Used to barder our trade 
• Unit of account = what its worth
• Store of value - dosent fluctuate

Representative money -

• Paper money back by tangable product
• Commodity money 
• get the value from the material is made of.

Fiat Money - government sais so that its money

• Durability - 
• Portability carry money anywhere
• Divisibility - 
• Uniformity -all money is identical
• Scarcity - 
• Acceptability - everywhere you go

M1 currency                                                           M2 savings accounts

Paper, dollars, coins                                                Money market accounts

Traders checks                                                        Accounts held by banks outside the US

Checable deposists - Demand deposits                    Adding M1 money  

75%                                                                       25%

More liquid

Reserve requirnments 

                                        

Reserve Ratio - banks required reserves of money

Excess reserves = actual reserves - required reserves 

Control lending ability thus controlling how much banks make by makeing out loans.

Excess Reserves x Monetary Multiplier = Max checkable deposit creation.

Monetary multiplier = 1/required reserve ratio

Monetary Policy - is influenceing the economy that changes in reserves which influences the money supply and available credit.

• The reserve requirment % is set by the FED of the minumum reserve a bank must keep 
• Discount rate - rate of interest that the FED charges for overnight loans to banks. 
• Federal fund rate rate at which FDIC members charge each other for loans 
• OMO - Open Market aoperation - buy or sell securities.
• Fed buys bonds to expand money supply
• Prime rate - interest rate at which banks charge their most worthy borrowers = low rate 
• Discount Rate and federal fund rate decrease - decrease Expansionary = Monetary policy, Increase Contrationary = monetary policy.

OMO                        Buy Bonds                                    Sell Bonds

Discount rate                         v                                                  ^

Federal fund rate                   v                                                   ^

regulated reserve                   v                                                   ^

Recession = Increase money supply, 

Tight money policy goes up in value, 

Easy Money goes down in value  

AP Macroeconomics Unit 4 - Part 9

Money Market, Lonable funds, AD-AS

AP Macroeconomics Unit 4 - Part 8

Money Creation Process- by makeing loans

-Money Multiplier

-Multiple Deposit Expansion

Reserve Requirnment- RR 

Multiplier- 1/rr

Money Created = Mulitiplier x Loans 

Loanable Funds

Money available in the banking system for people to borrow

                   Price = Y

Quantity of Funds = X 

Supply Slopes Upward

Demand Slopes Downward

Supply of lonable funds- Dependant on savings

Government deficit- government is demanding money = shift demand to the right(increase Demand of lonable funds)

When deficit- you have an increase in demand for lonable funds the intrest rate goes up.

AP Macroeconomics Unit 4 - Part 5

Equation of exchange

MV=PQ

Money Velocity(GDP expenditures) = Average price of goods(GDP Income)

If velocity is stable- changes in m are going to impact the prices

DeltaM > DeltaP

AP Macroeconomics Unit 4 - Part 4

Fed Tools of Monetary Policy

Expancionary Policy-Easy- Vault cash or on reserve,

• To expand they lower the reserve. 
• To expannd buy, Bonds = Big Bucks.

Contractionary Policy-Tight-

• To contract raise the reserve requirement.
• To contract sell bonds.

Discount rate-Interest rate at which banks can borrow money from the FED.

Bonds and securities- Federal fund rate at which banks borrow money from each other.

AP Macroeconomics Unit 4 - Part 3

Money Market Graph

    Axis
          Y- intrest rate
          X-Quantity of money
    Slope Downward
          Price is low = demand is high
          Price is High= Demand is high
   Suply of money is vertical, fixed by the FED, tied to the interest rate
   When you increase demand you put upward pressure on interest rates
    
Quantity or interest rates, Fed tries to stabilize your interests rates, can increase the money supply.