Unit 4 - Monetary Policy Video Notes

March 27, 2016

Video Summaries

1. Part 1 types and functions of money - There are three different types of money commodity money, representative money, and fiat money. Fiat money is used today and it is identified as a "legal tender". It is backed by the word of the government and used as an item in exchanges. Money also has three different functions: medium of exchange, store of value, and a unit of account. 
2. Part 3 money market graphs - The supply of money is fixed and set by the Fed and will not move unless the Fed does something to move it. To graph an increase you have to shift DM toward the right away from zero. To graph a decrease you shift the DM toward the left closer to zero. If there is too much upward pressure on interest rates and the Fed wants to lower it they have to increase the money supply. 
3. Part 4 the Fed's Tools of Monetary Policy - There are two policies the Fed uses in regards to money supply. The expansionary policy can be referred to as easy money and the contractionary policy can be referred to as tight money. The Fed has control over the reserve requirement, discount rate, and buying/selling bonds. if the Fed wants to increase the money supply they would decrease reserve rates, decrease discount rates, and buy bonds. If the Fed wants to decrease the money supply they would increase reserve rates, increase discount rates, and sell bonds. 
4. Part 7 Loanable Funds Market - Loanable funds is money in the banking system that is available for people to borrow. Demand for loanable funds is downward sloping because when the interest rate is lower people demand more money. Supply of loanable funds comes from the amount if money that people have in banks (dependent on savings). If the government is running a deficit that means the government is demanding money in order to spend it (an increase in the demand for money). 
5. Part 8 Money Creation and Multiple Deposit Expansion - Banks create money by making loans. The money multiplier formula is one over the reserve requirement. The potential total increase is the initial loan times the multiplier. For example if you are looking to find how much money a $500 loan will produce in the banking system you multiply the multiplier by the amount of the loan. So, a $500 loan with a 20% reserve requirement would yield the potential of a $2500 increase in the banking system, but that is assuming there are no excess reserves. 
6. Part 9 -  In deficit sepnding the government is borrowing money.The equation of exchange is MV=PxQ.The increase in DM causes the change in the loanable funds by demanding more loans so Dm shift to the right which increases AD.  This can be used to show as pl increases the interest rates increase.