AP Macroeconomics Unit 4 - Part 1: Types and Functions of Money
There are 3 different types of money: Commodity Money is a good that has other purposes that also functions as money - an example would be tribes in Africa using cows as money. Representative money is whatever you are using as currency represents a specific quantity of a precious metal (gold, silver) - the drawback is when the value of the metal changes, it affects the value of your national currency. Fiat Money is not backed by a precious metal - it is money that must be accepted for transactions and is backed by the word of the government that it has value.
Functions of money include the Medium of Exchange, the Store of Value (put money away in hopes to retain its value), and the Unit of Account (Price implies Worth (quality)).
Functions of money include the Medium of Exchange, the Store of Value (put money away in hopes to retain its value), and the Unit of Account (Price implies Worth (quality)).
AP Macroeconomics Unit 4 - Part 3: Money Market Graphs
When the price is high, the quantity demanded is low and when the price is low, the quantity demanded is high. When the interest rate is low, people have an incentive to borrow more for transactions, to hold assets, transaction demand, asset demand. The supply of money does not vary based on the interest rate - demand for money is tied to the interest rate, supply of money is not. The supply of money is fixed, it is set by the Fed - it doesn't move unless the Fed does something to move it.
AP Macroeconomics Unit 4 - Part 4: The Fed's Tools of Monetary Policy
Reserve Requirement is the percentage of the bank's total deposits that they must hang on to, either as vault cash or on reserve w/ a Fed branch. Discount Rate is the rate at which banks can borrow money from the Fed. For Expansionary Policies (easy $), the RR decreases; the DR decreases (for banks to borrow more money); and if the Fed wants to expand money supply, it buys bonds. For Contractionary Policies (tight $), the RR increases; the DR increases (to discourage banks form borrowing money); and if the Fed wants to contract or reduce the money available, it sells bonds.
Reserve Requirement is the percentage of the bank's total deposits that they must hang on to, either as vault cash or on reserve w/ a Fed branch. Discount Rate is the rate at which banks can borrow money from the Fed. For Expansionary Policies (easy $), the RR decreases; the DR decreases (for banks to borrow more money); and if the Fed wants to expand money supply, it buys bonds. For Contractionary Policies (tight $), the RR increases; the DR increases (to discourage banks form borrowing money); and if the Fed wants to contract or reduce the money available, it sells bonds.
AP Macroeconomics Unit 4 - Part 7: The Loanable Funds Mar
Loanable Funds is money that is available in the banking system for people to borrow. When the interest rate is lower, people demand more money and when the interest rate is higher, people have a disincentive to borrow. Supply of Loanable Funds comes from the amount of money that people have in banks, it is dependent on savings. The more money people save, the more money banks have available to make loan. If people have an incentive to save more, then you increase the supply of loanable funds. If people have incentives to save less, you decrease the supply of loanable funds.
AP Macroeconomics Unit 4 - Part 8: Money Creation & Multiple Deposit Expansion
Banks create money by making loans. One of the FED's tools for monetary policy is the ability to control the Reserve Requirement (RR).
Money Multiplier = 1/RR RR = 20% Loan amount = $500
What is the total money created? 1/0.2 = 5 × 500 = $2,500. We got $2,500 by using the process of Multiple Deposit Expansion.
AP Macroeconomics Unit 4 - Part 9: Relating the money Mkt., Loanable Funds Mrk., and AD - AS
Banks create money by making loans. One of the FED's tools for monetary policy is the ability to control the Reserve Requirement (RR).
Money Multiplier = 1/RR RR = 20% Loan amount = $500
What is the total money created? 1/0.2 = 5 × 500 = $2,500. We got $2,500 by using the process of Multiple Deposit Expansion.
AP Macroeconomics Unit 4 - Part 9: Relating the money Mkt., Loanable Funds Mrk., and AD - AS
In the money market, the governemnt is borrowing money from Americans. A change in the money market will carry through the loanable funds graph, and the aggregate demand and supply graph. In this case of a government deficit, the increase in demand, results in an increase in the interest in the money market applies to the loanable funds graph. The aggregate demand is an increase, causing a rise in the price level and GDP. According to the equation of exchange, MV = PQ, a change in the supply of money causes a change in price, shown as an increase in interest rates will increase the price level. All three graphs are related by the Fisher Effect, a 1:1 direct ratio.
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