Unit IV Blog Response: Video Summaries

AP Macroeconomics Unit 4 - Part 1- Types and Functions of Money

          There are three types of money: commodity, representative, and fiat. Commodity money is the most primitive, using objects as money, such as cows, that can serve other purposes. Representative money is backed by the value of the precious metal, such as gold and/ or silver, however, the fluctuation of the gold or silver from a day to day basis causes the currency to be unstable. Fiat money is backed by the government’s words that it has value.  

          Money serves three functions, the first being a medium of exchange, in which the transaction of purchasing an item represents this exchange. The second function, store of value, is represented by saving money in a savings account, however, inflation combats this function, as the saver will instead spend it rather save it since inflation diminishes the purchasing power. Lastly, money serves as a unit of account, accounting for worth that is usually associated with quantity.

AP Macroeconomics Unit 4 – Part 3- Money Market Graphs

         

          The price in terms of money is the interest rate, usually represented by “i” goes on the y-axis, while the quantity of money is on the x-axis noted by QM. Demand for money (DM) is downward sloping, according to the law of demand. The supply of money (SM) is vertical and is fixed, set by the FED and does not vary unless the FED increases the money supply to stabilize the interest rate when demand has increased. However, if the demand has increased without the FED increasing the money supply, the interest rate will be increasing in the result of demand increasing. Although the FED usually tries to stabilize interest rates since an unstable does not allow one to predict the level of investment to manipulate aggregate demand for the wanted economic change.

AP Macroeconomics Unit 4 - Part 4- The FED’s Tools of Monetary Policy

          The FED’s three tools of monetary policy are required reserves, the discount rate, and buying and selling bonds and securities. Required reserve is the mandated percentage of a bank need to reserve of deposits; the discount rate is the interest rate banks can borrow money from the FED though it is not used quite often. Buy and selling bonds and securities is one used most often.

  For the expansionary policy, required reserves are decreased, increasing the excess reserves, which can become loans and increases the money supply. The discount rate is lowered, wanting banks to borrow more money that increases the money supply in the economy overall. Bonds are bought by the FED to expand the money supply. Under the contractionary policy, required reserves are increased, the discount rate is raised, and bonds will be sold to reduce the money supply.

 

  AP Macroeconomics Unit 4 – Part 7- Loanable Funds Graph

 

The y-axis remains to be “i” or the interest rate, and the x-axis becomes the quantity of loanable fund.  Demand for loanable is downward sloping, and supply is upward sloping. The supply of loanable funds is dependent on savings, as the more savings, there is the more money banks can use for loans, contributing to the loanable funds. A government deficit is first shown on the money supply graph as an increase in demand, resulted in an increase in interest rates and quantity. This is shown on the loanable funds graph as an increase in the demand for loanable funds increasing and shifting to the right causing the interest rate and quantity increase as a result of.

 

AP Macroeconomics Unit 4 – Part 8- Money Creation and Money Deposit Expansion

 

          Banks create money by loaning out money. The total money created is taking the money multiplier (one divided by the required reserve ratio) and multiplying it by the amount of the loan, however, this is only a potential amount of money created under the assumption that there are no excess reserves. The reason why the total money created is a potential amount is due to the assumption that the loan will be deposited and loaned out to another person following the required reserves percentage. The total of all the potential loans will equal to the potential amount of created money. Having excess reserves will reduce the initially calculated amount of potential money created.

 

AP Macroeconomics Unit 4 – Part 9- Relating the Loanable Funds Market, the Money Market, Aggregate Demand and Aggregate Supply

 

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. This concept is known as the Fisher Effect; it can be seen as a one-to-one direct ratio.