Unit 4 Blog Video Summaries

1. The most primitive type of money nowadays is known as Commodity Money, Representative Money, and Fiat Money.  Each of these types of money serves as a different method of payment. Commodity (goods that serve different purposes), Representative (gold, silver), Fiat (money that is legal tender, must be accepted from transactions, backed by Gov.). There are three main functions of money which are known as medium of exchange, store of value, and unit of account. The main function of money considered nowadays is medium of exchange.

 

2. The Money Market Graph’s Label of Axis’s are Vertical (i-interest rate) and Horizontal (Quantity of Money). Demand of Money on the graph is sloping downwards because when the price is high the quantity demand is low and vice versa. Supply of Money is on the middle of your graph, in between the DM. The supply of money is set by the FED. 

  

3. The FED’s two major tools of policy are known as Expansionary and Contractionary. The FED controls the RR either as vault cash or on reserve with a Fed branch. If the Fed wants to increase the money supply they decrease the RR, which increases ER. The FOMC (Federal Open Market Committee) makes decisions on Open Market transactions. 

4. Loanable Funds (money that is available in the market for people to borrow) gets tied with the Money Market. Label of Axis’s are Vertical (i-interest rate) and Horizontal (Quantity of Loanable Funds). The demand of loanable funds is downwards sloping because when the interest rate is lower people demand more money and vice versa. The supply of  loanable funds comes from the amount of money people have in banks which depends on savings.

5. In the Money Creation Process banks make money by creating loans. The money multiplier formula is  one divided by reserve requirement. We can get from $500 loan to a $2500 increase through the process of Multiple Deposit Expansion. If any banks in a question have excess reserves your total will be reduced.

6. Most of Government's deficit is due to its owning of the United States population. This video basically summarizes the relation between the various markets such as Money market, Loanable Funds, and AD-AS graphs. Fisher Effect states that the inflation and interest rate have to be the same.

Unit 4 Banks

Creating a Bank

- A single bank can create money through loans by the amount of excess reserves
- The banking system as a whole can create money by a multiple deposition money multiplier of the initial excess reserves. 

 How banks work

Assets

Liabilities and Equity

demand deposits: money put into bank 

timed deposits (CD's)  

loans from: Federal Reserve and banks

shareholder's equity: (to set up a bank must invest own money in to to have a stake in the banks success or failure)

Factors that weaken the effectiveness of the deposit multiplier

1. If banks fail to loan out all of their excess reserves
2. If bank customers take their loans in cash rather than in new checking account deposits it creates a currency or cash drain.

Unit 4 Functions of the FED

Unit 4 Money Market

 

The money market graph allows us to essentially compare the money supply of the economy to the money demanded. The money demanded is the most liquid forms of money. Essentially, it’s the cold hard cash–the dollar bills and the silver in our pockets. The money market graph allows us to evaluate the effects of money demand and money supply and their relation to the nominal interest rates of an economy.

Unit 4 Loanable Funds Market

Loanable Funds Market

- The market where savers and borrowers exchange funds at the real rate of interest
- The demand for loanable funds or borrowing comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds.
- The supply of loanable funds or saving comes

 

Changes in the demand for loanable funds

- Remeber that demand for loanable funds equals borrowing
- More borrowing equals more demand for loanable funds
- Less borrowing equals less demand for loanable funds
Examples, government deficit spending equals more borrowing equals more demand for loanable funds
Less investment

Changes in the supply of loanable funds

- Remember that supply of loanable funds equals saving

Unit 4 Fiscal Policy

Fiscal Policy

- Changes in the expenditures or tax revenues of the federal government.

2 tools of fiscal policy

1. Taxes - gov can increase or decrease taxes
2. Spending - gov can increase or decrease spending

Deficits, Surpluses, Debt

- Balanced budget
  Revenues equals expenditures
- Budget deficit
  Revenues is less than expenditures
- Budget Surplus
  Revenues is greater than expenditures
- Government Debt
- Government must borrow money when it runs a budget deficit
- Government borrows money from individuals, corporations, financial institutions, foreign entities, foreign governments.

Two options in Fiscal policy

- Discretionary fiscal policy
  Expansionary fiscal policy
  Contractioanry fiscal policy

Discretionary v. Automatic fiscal policies

Discretionary is increasing or decreasing  gov spending and or taxes in order to return to the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem
Automatic unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation.
Contractionary vs. Expansionary fiscal policy

Contractionary fiscal policy- policy designed to decrease aggregate demand
   - Strategy for controlling inflation

 Expansionary fiscal policy

 

Policy designed to increase aggregate demand
    - Strategy for Increasing GDP, combats a recession, reduces unemployment
Expansionary increases government spending and decrease taxes
Contractionary decrease government spending and increase taxes
Automatic or built in stabilizers is anything that increases the governments budget deficit during a recession and increases it's budget surplus during inflation without requiring explicit action by

Transfer payments

1. Welfare checks
2. Food Stamps
3. Unemployment checks
4. Corporate dividends
5. Social security
6. Veteran's security

Progressive tax system
   Average tax rate rises with GDP

Proportional tax system
   Average tax rate remains constant as GDP changes

Regressive Tax system
   Average tax rate falls with GDP