Patricia's AP Macroeconomics Blog: April 2017

UNIT 4- MONEY AND MONETARY POLICY

MONEY AND MONETARY POLICY

The barter system – goods and services are traded directly. no money.
What is money? Anything generally accepted in payment for goods and services
Money is not the same as wealth
Wealth – total collection of assets that store value.
Income – flow of earnings per unit of time
Money can be used as:

Medium of exchange – buying goods and services
Unit of account – measuring the value of goods and services
Store of value

There are 3 types of money:

Representative that represents something of value
Commodity that something that performs the functions of money and has an alternative use
Fiat– money because the government says so

6 characteristics of money:

Durability
portability
Visibility
Limited supply
Uniformity
Acceptability

Liquidity – ease with which an asset can be assessed and converted into cash:

M1(high liquidity)- coins, currency, and checkable deposits (personal and corporate checking accounts which are the largest component of M1) A.k.a. demand deposits. MONEY SUPPLY
M2(medium liquidity)- M1 plus savings deposits. (Money market accounts), time deposits (CDs=certificates of deposits), & mutual funds below $100K
M3(low liquidity)- M2 plus time deposits above $100K

UNIT 4- 4/3/17

4/3/17

Loanable funds market

Private sector supply and demand of loans
Brings together the lenders and borrowers
Shows real interest rate
When demand, it is an inverse relationship between real interest rate and quantity loans demanded
When supply, it is direct relationship between real interest rate in quantity loans demanded
Not the same as Money Market

Federal funds rate – interest rate that banks charge one another for overnight loans
Prime rate – interest rate that banks charge their most credit worthy customers

UNIT 4- 3/31/17

3/31/17

Tools of monetary policy and three shifters of money supply:
The Fed adjusting the supply by changing any one of the following:

Setting reserve requirements
Lending money to banks and thrifts (discount rate)
Open market operations (buying and selling bonds)

The reserve requirements

The Fed sets the amount the banks must hold
The RRR is the percent of deposits that the banks must hold in reserves
Bank deposits – when someone, public or private, deposits money in the bank
There is a recession what should the FED do to the reserve requirement? It should decrease the reserve ratio
If there is inflammation, increase RR

Open market operation

When the Fed buys or sells government bonds
Most important and widely used monetary policy
If the Fed buys bonds it takes bonds out of the economy and replaces them with money
If the Fed sells bonds it takes money and gives the security to the investor
To increase money supply the fed should buy government securities
To decrease money supply the fed should sell government securities

The discount rate:
The interest rate that the Fed charges commercial banks for short term loans
The DR is generally not used by the Fed to effect monetary policy. This is not the rate you hear about in the news

monetary policy: expansionary policy contractionary policy
open market operation: buy bonds sell bonds
reserve requirement: decrease increase
discount rate: decrease increase

UNIT 4- 3/23/17

3/23/17

Demand deposits are created through the fractional reserve system
The fractional reserve system is the process by which banks hold a small portion of their deposits in reserve and loan out the excess
Thanks keep cash on hand to meet depositors needs (required reserves)

UNIT 4- 3/22/17

3/22/17

Bonds are loans, stocks you own
Bonds are loans or IOUs that represent debt that the government or a corporation must repay to an investor. The bondholder has no ownership of the company.
If a corporation issues and then sells a bond, it is a liability for the corporation. It is an asset for the buyer.
If nominal interest decreases, the value of bond increases
If the nominal interest increases, the value of bond decreases
Stock owners can earn a profit in two ways:

Dividends- are portions of the corporation’s profits, are paid out to stockholders
Capital gain – is earned when a stockholder sells stock for more than they paid. Capital loss is when a stockholder sells a stock for lower than they paid.

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.
The money demand curve slopes downward and to the right because higher interest rates increase the opportunity cost of holding money, thus leading public to reduce the quantity of money it demands.

UNIT 4- 3/21/17

3/21/17

Purpose of financial institutions:

Store $$$
Save $$$

Savings account
Checking account
CD
Money market account

Loan $$$

House
Car
Business

Principal-amount of money that you borrow
Interest – price paid for use of borrowed money
Types of financial intermediaries:

Commercial bank
Credit unions
Savings and loans institutions
Mutual fund companies
Finance companies

Assets- anything of monetary value owned by a person/business. What you OWN. There are two types:

Physical- claim on a tangible object
Financial- paper claim that entitles the buyer to future income from the seller

Liability- A requirement to pay money in the future (usually with interest). What you OWE.
If you go to the bank and take out a loan, the bank has created a financial asset, you have created a liability.
There are five major financial assets

Loans
Stocks
Bonds
Loan-backed securities
Bank deposits

The time value of money – a dollar is worth more today than it is tomorrow, you are losing money every second you are not investing it.
Future value – if you invest or lend money to someone, it will compound according to the following equation: