Blog Assignment 3/29

Part 1 There are three types of money: commodity, representative, and fiat. Commodity money are backed by commodities that function as money. Representative money isn’t used anymore because the value of the money fluctuates. Fiat money is backed by the word of the government that it is money. It doesn’t represent anything. There are three functions of money: as a medium (substance through which things pass) of exchange – money is used for exchanges when buying things; as a store of value - when you put it away, it will hopefully still have its value; save it; and as a unit of account- price => worth (quality) 
Part 3 Why Demand for money slopes down: when price is high quantity for money is low, quantity is fixed, because it’s set by Fed. If you increase demand for money, you put an upward pressure for interest rates. To stabilize interest rate, increase supply of money.
Part 4 An expansionary (easy money) policy is meant to increase money supply. Reserve requirements-percentage of banks’ total deposits that they must hold onto. They could lower the rr. Contractionary policy is the opposite of expansionary. It is meant to decrease the money supply. You would raise the rr in a tight money policy.
Part 7 Loanable funds are money that is available in the banking system for people to borrow. Supply of loanable funds comes from the amount of money that people have in banks- depended on savings. If people have the incentive to save more, increase supply of LF. When the government is demanding a great deal of money, it’s decreasing the national supply of funds, jacking up the interest rate.
Part 8

Banks create money by making loans. When banks loan, they use the monetary multiplier. The monetary multiplier is =1/rr. Maximum potential money creation in a banking system can be figured out by multiplying the amount of excess reserves in a bank by the monetary multiplier. Maximum potential money creation assumes that the bank has excess reserves to lend out.

Part 9 When the government running a deficit: they borrow money from Americans. Demand for money if increased=> increase interest rate. Increase aggregate demand, increase pl, increase gdp. Change in supply of money= change of price. Fisher effect-interest rate & pl is equivalent.

Step 28: Countercyclical Fiscal Policies (End of Unit 4)

Countercyclical Fiscal Policy

Fighting a Recession :

• Policy Name = Expansionary
• Taxes = cut, decreased, lowered
• Government Spending = increase
• Budget Result = deficit

Aggregate Model :

• C should = increase
• G should = increase
• AD should = increase

Money Market :

• DM will = increase
• i should = increase
• ( Ig on Aggregate Model will ) = go down

Loanable Funds Market :

• The budget issue will cause
• SLF = decrease
• DLF = increase

Fighting a Inflation :

• Policy Name = Contractionary
• Taxes = increase
• Government Spending = decrease
• Budget Result = surplus

Aggregate Model :

• C should = decrease
• G should = decrease
• AD should = decrease

Money Market :

• DM will = decrease
• i should = decrease
• ( Ig on Aggregate Model will ) = go up

Loanable Funds Market :

• The budget issue will cause
• SLF = increase
• DLF = decrease

Monetary Policy ( Recession ) :

- The Fed will :

1. buy bonds ← MS ↑ ( bank reserves will ↑ as  well )
2. lower discount rate
3. lower required reserves
4. lower federal fund rate

• MS ↑
• i ↓
• Ig ↑
• AD ↑
• GDP ↑

International Trade :

- Fiscal Policy :

• D$ ↑
• $ appreciate
• Export ↓
• Net Export ↓
• AD ↓
• GDP ↓

- Monetary Policy ( continuing from the Recession section above ) :

• D$ ↓
• $ depreciate
• Export ↑
• Net Export ↑
• AD ↑
• GDP ↑

Step 27: Rated stuff right here

Federal Fund

• opposite of bank reserves & money supply

Prime Rate

• interest rate that is given to a bank's most credit worthy customers

Loanable Funds Market

• market where savers and borrowers exchange funds (QLF) at real rate of interest (r%)
• demand for loanable funds, or borrowing, comes from households, firms, the government, and foreign sector
• demand for loanable funds is in fact the supply of bonds
• supply of loanable funds, or savings, comes from households, firms, the government, and foreign sectors
• supply of loanable funds is also demand for bonds

Change in Demand for Loanable Funds

• demand for loanable funds equals more borrowing 
• supplying bonds
• more borrowing = more demand for LF ( → )
• less borrowing = less demand for LF ( ← )
• i.e.
• government deficit spending = more borrowing = more LF
• less investment demand = less borrowing = less demand LF

Change in Supply of Loanable Funds

• supply of LF = saving
• demand for bonds
• more saving = more supply of LF ( → )
• less saving = less supply of LF ( ← )
• i.e.
• government budget surplus = more saving = more supply of LF ( SLF → r % ↓ )
• decrease in consumers MPS = less savings = less supply LF ( SLF ← r % ↑ )
• Loanable Funds Market determines real interest rate
• ∆ in real interest will affect Ig
• when the government does fiscal policy, it will affect the LF Market
• ∆ in savings/borrowing creates a ∆ in → r % ∆
• LF Market relates savings and borrowing

Step 26: Tools of Monetary Policy

Tools of Monetary Policy

Fiscal Policy

• controlled by Congress and the President
• tax created by spending

Monetary Policy

• controlled by the FED and the federal reserve bank
• Open Market Operation
• Discount Rate
• Federal Fund Rate
• Reserve Requirement

Monetary Policies

• Open Market Operations (OMO)

• to buy or sell securities (bonds)
• Expansionary (recession, "easy money")
• buy bonds
• money supply would increase
• Contractionary (inflation, "tight money")
• sell bonds
• money supply would decrease

• Discount Rate

• interest rate that the FED charges banks for taking out loans
• Expansionary
• decrease in interest rate
• Contractionary
• increase in interest rate

• Reserve Requirement

• percentage or amount the bank has to hold and keep in reserve
• Expansionary
• decrease in required reserves
• Contractionary
• increase in required reserves

• Bank Reserves & Money Supply have a direct relationship.

Step 25: Three, no, FOUR types of Multiple Deposit Expansion

Type 1: Calculate initial change in excess reserves

-aka:the amount a single bank can loan from initial deposits

Type 2: Calculate change in loans in the banking system (money multiplier)

Type 3: Calculate change in the money supply

-sometimes Types 2 and 3 will have the same results-i.e. no FED involvement

Type 4: Calculate change in demand deposits

Step 24: Nice things to know about the Bank Balance Sheet

Bank Balance Sheet = 

• Assets and Liabilities in a T-Account

Liabilities = 

• DD
• Owner's Equity (Stock Shares)

Assets = 

• RR
• ER
• Bank Property
• Securities
• Loans

Assets must equal Liabilities

-DD = RR + ER

Money is created through the Monetary Multiplier

• ER x 1 / RR (multiplier)= New Loans throughout the banking system

Money Supply is affected

• cash from a citizen becomes DD , but does NOT change the Money SupplyER from this cash becomes "immediate" loan amount
• ER x Multiplier become new loans and DD changes the Money Supply
• The FED buying bonds creates new loans and changes the Money Supply
• IF the FED buys the bonds on the open market, this becomes a new DD amount
• IF the FED buys bonds from the account already held by a particular bank, then the amount only becomes new ER

Supplemental Note about Bonds

• bond "prices" move opposite to the changes in interest rates
• the higher the interest rate will push bond prices down (less money supply)
• the lower the interest rate will push bond prices up (more money supply)

Step 23: Time Value of Money

Time Value of Money

• Is the dollar today worth more than the dollar tomorrow?
• Yes
• Why?
• Opportunity cost and INFLATION

Formulas

v = future value of $

p = present value of $

r = real interest rate ( nominal - inflation rate ) [a decimal]

n = years

k = number of times interest is credited per year

• Simple Interest Formula

v = ( 1 + r ) ^ n * p

• Compound Interest Formula

v = ( 1 + r / k ) ^ nk * p

• Inflation expected at 3 %, nominal on simple interest is 1 %

Function of the Fed

1. issues currency
2. sets reserve requirements and holds reserves of banks
3. lends money to banks and charges them interest
4. a check clearing service for banks
5. acts as a personal bank for the government
6. supervises member banks
7. controls the money supply in the economy

Step 22: Investment

Investment

-redirecting resources you would consume for the future

Financial Assets

-claims on property and income of the borrower

Financial Intermediaries

• institution that channels funds from savers to borrowers
• savers --> financial institutions --> investors
• Purposes for Financial Intermediaries
• Share Risks
• diversification
• spreading out your investment to reduce risk

• Providing Information
• stock broker to help you in the market
• Liquidity, easily converted to cash
• Returns
• amount an investor receives above and beyond the sum of money that was initially invested
• dividends
• check

Bonds

• loans or I.O.U.s that represent a debt that the government or corporation must repay to an investor
• low risk investments
• Bonds, YOU LOAN
• Stocks, YOU OWN

• Components :
• Coupon Rate
• interest rate that a bond issuer will pay to a bond holder
• Maturity
• time at which payment to a bond holder is due
• Par Value
• amount that an investor pays to purchase a bond at that will be repaid to an investor at maturity

Yield

• annual rate of return on a bond if the bonds were held at maturity

Step 21: Money, Money, Money (Start of Unit 4)

Money

- any asset that can be used to purchase any goods & services

Uses

1. Medium of exchange - determine value
2. Unit of account - how to compare prices
3. Store of value - how money can be stored

Types

• commodity - has value within itself, ex: salt, olive oil, gold
• representative - represents something of value, ex: IOU
• fiat - has value because the government says so, ex: paper money, coins

Characteristics

• Durability - how long it lasts
• Portability
• Divisibility
• Uniformity - same money throughout
• Limited Supply - is finite
• Acceptablity

Money Supply

-total value of financial assets available in the U.S. economy

• M1 - Liquid assets, liquidity (easy convergence to cash), coins, checkable deposits or demand deposits, traveler's checks
• M2 - Money not ready to be spent immediately, M1 + savings accounts + money market account

Purposes of financial institutions

Store Money

Save Money

• savings account
• checking account
• money market account
• certificate of deposit

Loan Money

• (banks operate on a fraction reserve system, which is where they keep a fraction of funds, & loan out the rest.)
• credit cards
• mortgages

Interest Rates

• Principal - amount of money borrowed

P=(I x 100)/R x T

• Interest - price paid for the use of borrowed money
• Simple Interest - paid on the principal

I = ( P * R * T ) / 100

P = Principal

R = Rate of Interest

T = Time

• Compound Interest - paid on the principal and accumulative interest

Types of Financial Institutions

• Commercial Banks
• Savings and Loans Institutions
• Mutual Savings Bank
• Credit Unions
• Finance Companies