21 March 2016 (Unit 4)

3 Tool of Monetary Policy

The Required Reserve

1. The RR : Only a small percent of your bank deposit is in the safe.
1. The fed set the amount that bank must hold.
1. When the FED increase the money supply it increase the amount of money held in the bank deposit.
2. If there is in a recession, what should the FED do to the resserve requirement?
1. Decrease in the RR
2. MS increase, interest rate decrease, AD increase

1. If there is inflation, what should the FED do to the reserve requirement?
1. Increase in the RR
2. MS decrease, interest rate Increase, AD decrease

The Discount Rate

• The discount rate is the interest rate that the FED charge commercial banks.
• EX : If bank of America need $10 million, the borrow it from the U.S. Treasury (which the FED controls) but they must pay it back with interest.
• To increase the money supply, the FED should Decrease the discount rate (Easy money)

The open market Operations

• The FED buys & sells government bonds (securities)
• To increase the money supply, the FED should buy bond.
• To decrease the money supply, the FED should sell bond.

•  Federal Fund Rate : The rate at which member of bank loan each order over night loan.
• prime Rate : Interest that bank gives to there most credit wordy customer.

• When a customer deposit cash or withdraws cash from there deposit account, it has no immediate effect on money supply.
• Single Bank - loan money from Excess reserve
• Banking System - ER * MM = Total money supply
• It only changes- The Composition of the money, Excess Reserve, and Required Reserve.
• When the FED buys or sells bonds, ER is credited.

11 March 2016 (Unit 4)

• When the FED buys bond, it increases the money supply.

• When the FED sells bond, it decreases the money supply.

10 March 2016 (Unit 4)

Function of the FED

1. Issue paper currency 
2. Set reverse requirement
3. Lend money bank & charge them interest 
4. Check clearing service for bank
5. Act as personal bank to government 
6. supervise member banks 
7. Control money supply in the economy

• The Required reserve ratio in the % of demand deposit ( Checking account balances) that must not be loaned out.
• Required Reserve Ratio = 10% (when is set by the government).

Multiple Deposit

• Type 1 : Calculate the intial change in excess reserve.
• Type 2 : calculate the change in loans in the banking system.
• Type 3 : Calculate the change in the money supply 

9 March 2016 (Unit 4)

Time Value of Money 

• Is a dollar today worth more than a dollar tomorrow?
  • Yes
   
• Why? 
• Because of inflation & opportunity cost 

• Let V = future value of money 
• P = Present value of money 
• r = real inflation rate (nominal rate - inflation rate)
• N = years
• K = number of times interest is credited per year.

• The simple interest formula 
• V = (1 + r)^n * P

• The compound interest formula
• V = (1 + r/k)^nk * P  

• Demand have an inverse relationship between nominal interest rates and the quantity of money demanded.
• When the interest rate increase, the money demand decrease.
• When the interest rate decrease, the money demand increase.

The Demand for money

 

• Money demand shifter 
• Change in price level
• Change in income
• Change Taxation that affect investment 

the money supply

•  How does this affect AD
  • Money supply Increase - Interest rate decrease - Investment increase - AD increase 
  • Money supply decrease - Interest rate increase - Investment decrease - AD decrease  
  Financial Asset
  Stocks & Bond 
  Future benefit
  What you own
  
  
  • Stock - financial asset that convey ownership in company.
  • Bond - promise to pay a certain amount of money + interest in the future

  What Bank Do 

  • A bank is a financial intermediary
  • Uses liquid assets (i.e. bank deposit) to financial the investment of borrowers.

  • Process is known as Factional Reserve Banking.
  • A system in which depository institution hold liquid assets less than the amount of deposits
  •  Can take the form of (currency in bank vaults & Bank reserve)
   
   
  Basic Accounting Review
  • T - Account (Balance sheet)
  • Assets (Amounts owned)
  • Liabilities (Amount hole)

4 March 2016 (Unit 4)

• Uses of money
• Medium of exchange: is what people trade for goods and services.
• Unit of account: It establish economic worth in the exchange process.
• Store of value: Money hold is value over a period of time, where as product may not

• Type of Money
• Commodity Money: Involves the use of an actual good in place of money.
• EX: Gold coin, Silver coins

• Representative Money: its a paper money back by something tangible that give it value.
• EX: I    O   U

• Fiat Money: there money because the government sad so.

• Characteristic of Money 
• Durable 
• Portable
• Divisible
• Uniform
• Acceptable

• M1 money supply: currency (coin & cash), check-able deposit (demand deposit), traveler check.
• 75% money will come from M1
• It the most liquid able (easy to break down)

• M2 money supply: M1 money + saving account + deposit held by banks out side of the U.S.
• Not really liquid able (easy to break down)

• M3 money supply: M2 + certificate of deposit they held by private institution.
• If you put your money out to early, you be penalize.

Video

Video

Video over unit 4 - Monetery policy

Video 1

Type of money

• Commodity money - involves the use of an actual good in place of money.

• Representative money - is money that can be exchanged for a commodity at a fixed rate.

• Fiat money - is money that has no value except as the medium of exchange; there is no inherent or intrinsic value to the currency. 

Three function of money

• Medium of Exchange - is what people trade for goods and service.

• Store of value - is a means for holding wealth.

• Unit of Account - is the measure in which prices are quoted. 

Video 2

Money Market Graph

 

• Shift the supply curve (always vertical ) when the FED changes the money supply to change nominal
• As the interest rate increase, the quantity of money demand decrease.
• As the interest rate decrease, the quantity of money demand increase.

 

• The money supply curve only move to the left and right.

• The money demand line only move up and down.

Video 3  

Tools of Monetary policy

•  Expansionary monetary policy - occur when a central bank acts to increase the money supply in an effort to stimulate the economy. When the FED buys bonds, it injects new funds directly into the loan-able funds market. this action increases the supply of loan-able funds and decreases the interest rate.

• Contractionary monetary policy - occurs when a central bank acts to decrease the money supply. When the FED sells bonds, which pulls funds out of the loan-able funds market. This action decrease the supply of loan-able funds and increase the interest rate.

Video 4

The loanable funds market

 

• Supply loanable funds depend on savings.
• An increase in the supply loanable funds means the quantity will increase and the interest rate will decrease.
• A decrease in the supply loanable funds means the quantity will decrease and the interest rate will increase.
• The supply loanable funds only move to the right or left.
• An increase in the demand loanable funds means the interest rate will decrease.
•  A decrease in the demand loanable funds means the interest rate will decrease.

 

Video 5

Money Creation process

*Banks create money buy making loans.

• Reserve Requirement (RR) -  is the amount of money that is required by the FED that banks should keep on any deposit. 

RR = 20%                                                                                            Loan amount = $500

Question: Total $ created

$ multiplier =1/RR               1/0.2  = 5                         5*500=   2500

Video 6

Relating the money market graph, Loanable graph, AD - AS Graph

• An increase in the demand, will increase the interest rate and the price level.

* The supply line on left graph can only move left and right.

* The supply line on the middle and right graph move up and down.