Unit 4 Video Summaries

Part 1:
There are three different types of money in the money market, commodity, representative, and fiat. Commodity money is goods that has other purposes but still functions as money. Representative money is whatever you are using as currency represents a specific quantity of a precious metal, typically gold and silver. Fiat money is money that is not backed by a precious metal, it is a legal tender, it is money that must be accepted for transaction, and it is backed by the word of the government that it has value.

Part 3:
Demand for money slopes downwards because when the price is high, the quantity demanded is low. The supply of money is vertical because it does not vary based on the interest rate. The supply of money is set by the Fed. If the Fed wanted to bring the interest rate down than they increase the money supply. If they shift the money supply to the right they stabilize the interest rate.

Part 4:
The Fed has control over reserved requirements, which is the percentage of total deposits the banks must hang on to either as vault cash or be on reserve on a fed branch. If the fed wants to expand the money supply they will lower required reserves and that money will become excess reserves. If they want to contract the money supply they will raise the require reserves so you have less to deploy with. The discount rate is the rate of money in which the bank can borrow from the Fed. The fed buys bonds if they wants to expand the money supply, and if they want to contraction the money available they sell bonds.

Part 7:
Loanable funds is money available in the banking system for people to borrow. Demand is downward sloping because when the interest rate is lower the people demand more money. Supply of loanable funds comes from the amount of money that people have in banks, dependent on savings. If the government is running a deficit it means that the governmnt is demanding money in order to spend it. This will be shown with a shift of demand to the right which increases interest rate.

Part 8:
In the money creation process, banks create money by making loans. To find the money multiplier you use one over the reserve ratio. With a loan of $500 it does not necessarily mean that you get a total of $2500. It is only an assumption based on the bank not hold any excess reserves. The potential total increase is the initial loan times the multiplier. If any of the banks hold excess reserve in this process it will decrease the total it will reduce the total.

Part 9:
In the money market it shows an increase in demand because the government is borrowing money. As a result it demands more loanable funds which shifts the demand graph to the right. An increase in government spending will also increase aggregate demand, price level, and GDP. The change in the supply of money causes a change in price. This change is called the Fisher effect.