Unit 4: Money 3/10/9

The Federal Reserve is the personal bank of the government and is the central bank of the Unite States. It controls money supply, the reserve requirement, and member and distric banks.
 The Federal Reserve is the entity that controls monetary policy. They have 4 tools to work with

1. Open Market Operations (buying and selling of bonds)
2. Discount Rate (the interest rate that the Fed charges banks)
3. Reserve Requirement
4. Federal Fund Rate (the rate banks charge other banks for short term loans.

The Fed can employ two policies when using these tools, expansionary to fight a recession, or contractionary to fight inflation.

Under Expansionary Policies, The Fed wants to increase Money Supply, which will increase Ad and decrease interest rate,

To do so, they could 

• Buy bonds
• Lower Reserve, Discount, and Federal Funds Rate

Under Contractionary policy, The Fed want to decrease Money Supply, which will decrease AD and increase interest rates

To do so, they could

• Sell bonds
• Increase Reserve, Discount, and Federal Funds Rate.

Fiscal Policy Vs. Monetary Policy

The government is responsible for Fiscal Policy and the Fed is responsible for Monetary Policy

Expansionary Monetary Policy increases money supply which increase AD and lowers interest rate

Contractionary does the opposite

Expansionary FISCAL Policy increases AD through increasing Government Spending and lowering taxes, this creates a deficit and increases the interest rate. This also lower exports and import because this causes the dollar to appreciate 

Contractionary does the opposite

Unit 4: Money 3/9/16

The future value of money through interest can be determined through two formulas depending on the way the interest is calculated.

v = future value of money     r = real interest rate    n  = inflation rate     p = present value or principal
n = # of years        k  =   interest credited per year (# of times interest is given per year, etc.)

The yearly interest rate formula  that is not compounded is       v = ((1 + r) ^ n ) * 9

The compounded interest rate formula is                                    v = ((1 + r/k) ^n * k) * 9


Demand for money and its effects on AD

The demand for money has an inverse relationship with nominal interest rates and the quantity of money demanded

As the quantity of money demanded goes down, interest rates go up.
As the quantity of money demanded goes up, interest rates go down

The demand of money shifts with changes in taxes, income and price level, or anything that changes investment prospects.

The supply of money affects AD

As money supply goes up, Interest rates goes down, which increases Investment and increases AD
As money supply goes down, Interest rates goes up, which decreases Investment and decreases AD

Financial Sector

Assets are what people and institutions own, and liabilities are what they owe. If a person took a loan out, the loan would be an assets to the bank and a liability to the person.

Banks are financial intermediaries that use liquid assets and sell services to run as a business.

Most  banks today use a fractional reserve system, where banks are required to hold a fraction of their reserves. the rest the banks are able to loan out to people.

Banks and the Creation of Money

Banks create money by lending deposits that people place in banks. Potential loans are measured by T-charts or a balance sheet.
On the banks liabilities side of the T chart are Demand Deposits and Owner's Equity.
On the banks assets side of the T chart are Required reserves and Excess Reserves, Property, Securities and bonds, and Loans.

Reserve Requirement

The Fed requires banks to always have some money readily available to meet consumers’ demand for cash.

The amount , set by the Fed, is the Required Reserve Ratio or RRR.

The Required Reserve Ratio is the % of demand deposits that cannot be loaned out

To find out the amount of money that is created by loans in the entire banking system use the formula:
Amount of Money Created = ER * 1/RRR

ER * 1/RRR is also known as the money multiplier.

The money is created by this multiplier through Multiple Deposit Expansion where one person takes their loan and places it in another bank and that bank loans his deposit out, and so on and so on

Usually, the money created is less than what is calculated because sometimes banks can hold excess reserves instead of loaning it out or people might not deposit their loan

Unit 4: Money 3/7/16

Money has three uses:

• A medium of exchange used for trade and barter
• A unit of account or the economic worth in the exchange process
• a store of value that people can hold to keep value over time

There are also three types of money 

1. Commodity money: the value of the money is determined by the material of the currency: gold and silver coins. This type of money is limited.
2. Representative money: this type of money represents a tangible good that has value, like dollars that can be exchanged for gold. This type is limited and usually more portable
3. Fiat money: This type of money holds value solely because the government "says so" . This type of money is unlimited and portable.

Money also has six characteristics

1. Easy to carry
2.  durable
3. Scarce
4. Divisible
5. Acceptable 
6. Uniform

The Money Supply is split into the levels of liquidity or how easy it is to turn into cash; M1, M2, and M3. M1 is the most liquid and includes all currency in circulation, traveler's check, and checkable and demand deposits. M2 is less liquid than M1 and includes M1 + Savings accounts. M3 is the least liquid and includes M2 + certificates of deposits.