Unit Four: Money (Part Two)

Money

Notes from 3/9/16

QUESTION: Is a dollar today worth more than a dollar tomorrow?

ANSWER: YES

WHY: Inflation and Opportunity Cost

VARIABLES:

v= future value of money

p= present value of money

r= real interest rate (nominal interest rate - inflation, expressed as a decimal)

n= years

k= # of times interest is credited per year

Simple Interest Formula

v= (1 + r) ^n x p

Compound Interest Formula

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

Example: Inflation is expected to be at 3% and nominal interest rate on simple interest savings is 1%. Calculate the future value of $ after one year.

r%= i% - ∏%

r%= 1 - 3 

r%= -2% or -0.02

v= (1 + r)^n x p

v= (1 + -0.02)^1 x 1

v= (.98)^1 x 1

v= $0.98

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Unit Four: Money

Money

Notes from 3/4/16

Uses of Money

-Medium of Exchange: To trade or barter

-Unit of Account: Establishes economic worth in the exchange process

-Store of Value: Money holds its value over a period of time, whereas products do not

Types of Money

-Commodity $: Gets its value from the type of material from which it is made

    -Example: Gold and Silver Coins

-Representative $: Paper money backed by something tangible that gives it value

-Fiat $: It is money because the government said so

    -Used in the United States

Characteristics of Money

a. Portable- Can fold, move, etc.

b. Durable-Can leave money in your pocket, wash clothes, and the money will be fine

c. Scarce- Only having cash is rare

d. Divisible- How many ways can you break a dollar?.....A LOT

e. Acceptable- No where cash is not allowed

f. Uniform- Dollar is same no matter where you go

Money Supply

a. M1 $

   -Consists of currency

   -Currency:

    +Cash and Coins

    +Checkable Deposits/Demand Deposits (Checking Accounts)

    +Travelers Checks

   -75% of money currently in circulation

   -Most liquid- Easy to convert to cash

b. M2 $

   -Consists of M1 $ along with savings accounts, money market accounts, and deposits held by private institutions

   -Not as liquid

   -Money Market: Earn interest while in checking account

c. M3 $

   -Consists of M2 $ plus certificates of deposits (CDs) held by private institutions

   -If money here is withdrawn early, there is a penalty 

    +Example: Taking money out of your 401k plan

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Unit Four Video Summaries: Video Six

Blog Video Summaries

3/26/16

6th Video Summary

The last video combined a few of the concepts we learned earlier and showed the relationship between the Loanable Funds Market, the Money Market, and Aggregate Demand-Aggregate Supply.

If the government runs a deficit, then everything is affected.

• Demand for Money shifts RIGHT, Interest Rate goes UP, Supply of Money stays the same
• Demand for Loanable Funds shifts RIGHT or Supply of Loanable Funds shifts LEFT
• Aggregate Demand shifts RIGHT, Price Level goes UP, and GDP goes UP

If you'll notice, everything increased when the government ran a deficit. This is called the Fisher Effect.

Fisher Effect- The change in the interest rate must equal the change in price level. They must have a 1:1 direct ratio.

It is important to be able to explain the relationship between all of the graphs. 

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Unit Four Video Summaries: Video Five

Blog Video Summaries

3/16/16

5th Video Summary

This video talked about Money Creation and Multiple Deposit Expansion (all those sample problems we've done in class with RR and ER and all that jazz. One point that was made: Banks make money by making loans!!!

Money Multiplier: 1/ RR (Reserve Requirement)

EXAMPLE: Bobs puts $500 into the bank. The reserve requirement is 20%. What is the amount of money that is created in the banking system?

RR= 20% so 1/.2=2. ----------------> Money Multiplier= 5

5(Loan Amount) --------------> 5 x 500= 2,500 

Answer: $2,500

(This answer is implied that there are no ER- Excess Reserves. If there were, our $2,500 would be decreased.)

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Unit Four Video Summaries: Video Four

Blog Video Summaries

3/26/16

4th Video Summary

This video talked about the Loanable Funds Market.

Loanable Funds- Amount of money available in the banks for people to borrow.

Demand for Loanable Funds is downward sloping because when the interest rate is low, people demand more money to spend. A high interest rate discourgaes people from borrowing money.

Supply of Loanable Funds comes from the amount of money people have in banks. It is dependent on SAVINGS. The more people save, the more money banks can loan out.

If the government is running a deficit, then they are demanding more money to spend. Demand for Loanable Funds shifts RIGHT and interest rate goes UP or Supply of Loanable Funds shifts LEFT and interest rate goes UP. 

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Unit Four Video Summaries: Video Three

Blog Video Summaries

3/26/16

3rd Video Summary

The third video talked about the three monetary tools of the Fed. There are two directions the Fed can take: Expansionary (Easy Money) or Contractionary (Tight Money). The three tools the Fed can use are the Reserve Requirement, the Discount Rate, and Open Market Operations (OMO). 

Reserve Requirement- Percent of total deposits banks must keep in vault cash or on reserve with a Fed branch. This money CANNOT be loaned out.

Discount Rate- The rate at which banks can borrow money from the Fed.

Open Market Operations (OMO)- Buying or selling bonds or securities: Used most often

Federal Funds Rate- The rate at which banks can borrow from other banks

Under an Expansionary Policy, the Fed is trying to increase the Money Supply. In order to do so, they can: DECREASE the Reserve Requirement, DECREASE the Discount Rate, or BUY BONDS.

Under a Contractionary Policy, the Fed is trying to decrease the Money Supply. In order to do so, they can: INCREASE the Reserve Requirement, INCREASE the Discount Rate, or SELL BONDS/SECURITIES.

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Unit Four Video Summaries: Video Two

Blog Video Summaries

3/25/16

2nd Video Summary:

The second video was the introduction to money market graphs. 

Dm stands for Demand of Money. It is downward sloping because when interest rates are low, people tend to want to borrow more. Sm stands for Money Supply. This is a vertical line because it doesn't vary based on interest rates because it is fixed and set by the Fed, unless they do something to change it. They may shift it to the right, or increase the Money Supply to stabilize interest rates. A increase in Demand of Money causes it to shift  to the right and and an increase in interest rates. A decrease in the Demand of Money causes it to shift to the left and a decrease in interest rates.

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