Types of Money
1. Commodity Money is a good that functions as money. It is the most primitive.
2. Representative Money is the thing you're using as money that represents another metal. The major drawback of this is that when the value of the metal changes, the value of the currency changes as well.
3. Fiat Money is money that is not backed by precious metal. Money that must be accepted for transaction that is backed by the word of government.
Functions of Money
1. Medium of exchange is using money to buy things.
2. Store of value is putting money away and expecting it to be stable.
3. Unit of account is its price implies its worth. Doesn't always imply quality.
Video 2
People will tend to borrow more for transactions and hold assets when the interest rate is low. The supply of money is vertical in the money market because it does not vary based on the interest rate as opposed to the demand of money because the supply of money is set up by the Fed. When you increase demand, you put pressure on interest rate. To counteract interest rates from increasing during a recession, the Fed can increase the money supply. The Fed always try to stabilize the interest rate because if it is not stable, then you cannot predict level of investment consumer spending and manipulate aggregate demand.
Video 3
Reserve Requirement is the total amount the bank is required to hold. It can be in a vault or held by the Fed. This was one of the problems that led to the Great Depression because banks would not lend out money for people because they were scared to go under the reserve requirement.
Discount Rate is the interest rate at which banks can borrow money from the Fed.
Buy/Sell Bonds/Securities is if the Fed buys the bond, the public gets money and the other way around.
Open Market Operations is the entity of the Fed that makes decisions about selling and buying bonds
Federal Funds Rate is the rate at which banks borrow money from each other. When the Fed buys bonds, it puts downward pressure on the Federal Funds Rate and the other way around.
Expansionary (easy money)
Lowers Reserve Requirement is the money that suddenly becomes excess reserves.
Lowers Discount Rate
Buys Bonds/Securities
Contractionary (tight money)
Raises Reserve Requirement is the excess reserves that are turned into required reserves.
Raises Discount Rate
Sells Bonds/Securities
Video 4
The supply of loan-able funds comes from the amount of money people have in banks. The more money people save, the more money banks have to loan out and create more money. It is a leakage, but helps the banks. Showing the government's deficit spending, the government has to be demanding money in order to spend the money. When you increase the demand for money, you increase the demand for loan-able funds. The other way to show an increase in interest in the loan-able funds graph is to decrease supply because when the government demands money, which is decreasing the supply of the nation's supply of funds.
Video 5
Making loans is how banks create money.
Money Multiplier is 1/ (Required Reserve/Reserve Ratio).
Multiple Deposit Expansion is when you add up all the potential loans, you get the money you multiply with the money multiplier and the initial amount of loans. It does not guarantee that you get that much because we're making the assumption that in this process, there are no excess reserves left. If the bank holds excess reserves, it will reduce your total. When you're asked how much "additional" money, you would subtract your initial amount.
Video 6
The majority of debt of the United States is held within the country. When the government is running a deficit, it borrows money from the money market. There will also be an increase in demand for loan-able funds. In the AD/AS graph, this will increase Aggregate Demand which will increase the price level. The Fisher Effect says that an increase in interest rate has to be equal to the increase in inflation. It is a 1 to 1 direct ratio.
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