Unit 4: (3/5/2015)

Three Types of Multiple Deposit Expansion:
Type 1: Calculate the initial change in excess reserves. Also known as the amount a single bank can loan from the initial deposit.

Type 2: Calculate the change in loans in the banking system

Type 3: Calculate the change in money supply. (Sometimes Type 2 and 3 will have the same result)                No FED involvement

Type 4: Calculate the change in demand deposits

Unit 4: (3/23/2015)

loanable funds market - market where savers and borrowers exchange funds (Q lf) at real rate of interest (r%)

Demand for loanable funds comes from or borrowing households, firms, govs, and foreign sectors.

supply - or savings comes from h, f, govs, and fs. supply is demand for bonds

demand = borrowing

more borrowing = more demand for loanable funds
less borrowing = less demand for loanable funds

When government does fiscal policy it will affect the loanable funds market
changes in real int rate will affect gross private investment.

Unit 4: (3/19/2015)

Monetary and Fiscal policy

Fiscal policy
-Congress and president controls
-Tax on spend

Monetary policy
-FED
-OMO (open market operation)
-discount rate
-federal fund rate
-reserve requirement

Tools of monetary policy

	Expansionary (easy money)	Contractionary (tight money)
Open market operation	Buy bonds Increase money supply	Sell bonds Decrease money supply
Discount rate	Decrease	Increase
Reserve requirement	Decrease	Increase

bank reserves and money supply have a direct relationship

federal find rate - interest rate that commercial banks charge each other for over night loans. 

Prime rate - interest rates that banks charge to their most credit worthy customers. 

Unit 4: (3/17/2015)

Key principles
- a single bank can create money through loans by the amount of excess reserves
- the banking system as a whole can create money by a multiple (deposition money multiplier) of the initial excess reserves.

Initial deposit	New/existing money	Bank reserves	Immediate change in M.S
Cash	Existing	Up	No; because the composition of M1 money changes cash to currency.
FED Purchase of a bond from the public	New	Up	Yes; because money coming out of the FED is new Money in circulation
Bank purchase of a bond from the public	New	Up	Yes; because money coming from bank reserves is new money in circulation.

Factors that weaken the effectiveness of the deposit multiplier:

1. if bankers fail to loan out all their excess reserves

2. if bank customers take their loans in cash rather than new checking account deposits it creates a cash currency drain.

Money market

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.

Unit 4: (3/6/2015)

How banks work

Right side: Assets

Assets
-Reserves
>required reserves (rr) - percent required by the fed to keep on hand to meet demand
>excess reserves (er) - percent reserves over and above the amount needed to satisfy the minimum reserve ratio set by the fed
-Loans to firms, consumers, and other banks
-Loans to government - treasury securities
-Bank property - if bank fails you could liquidate the bank property.

Left side: liabilities

Liabilities
- Demand deposits
-CD's
-Loans from federal reserves and other banks
-Shareholders equity

Unit 4: (3/4/15)

Time value of money

Is a dollar today worth more than a dollar tomorrow?
-Yes, because inflation and opportunity cost.
- This is the reason for charging and paying interest.
Let
V = future value of money
P = resent value of money
r = real interest rate
n = years
K = number of times interest is created per year

simple interest form

V = (1 + r) ^n  multiplied by p

compound interest form

V = (1 + r/k) ^ nk multiplied by p

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

Unit 4: (3/3/2015)

     Money is any asset that can be used to purchase any goods or services.

3 uses of money
1. The medium of exchange: used to determine value.
2. Unit of account: how do you compare prices.
3. store of value: how money can be stored.

3 types of money
1. commodity money - has value within itself.
EX: salt, gold, and olive oil
2. representative money - represent something of value
EX: I.O.U.
3. Fiat money - it is money because the government says so.
EX: paper currency and coins,




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

M1 money
-Liquid assets - easily to convert to cash

M2 money 
-M1 money plus
      *savings account
      *money market account

3 purposes of financial institutions.
1. store money
2. save money
3. loan money

4 ways to save money
1. savings account
2. checking account
3. money market accounts
4. certificate of deposit

Loans  -  Banks operate on a fractional reserve system. which is where they keep a fraction of the funds and loan out the rest.

Interests rates
- Principle - amount of money borrowed
- Interest - price paid for the use of borrowed money
     > simple interest - paid on the principle
     > compound interest - paid on the principle plus accumulative interest.













And Finance companies are part of the financial institution.

Investment - redirecting resources you would consume now for the future.

Financial assets - claims on property or income of borrower

Financial intermediaries - institution that channels funds from savors to borrowers

Savers ----> financial institution ----> investors.

Purposes of financial intermediaries
1. sharing risks
    diversification - spread out investment in order to reduce risk
2. providing information
3. liquidity
    returns - amount an investor receives above and beyond the sum of initially invested.

Bonds and stocks
Bonds you loan; stocks you own
Bonds - I.O.U.'s or loans that represent that the government/corporation must repay to an investor
   3 components
1. coupon rate: interest rate the issuer pays ti the bond holder
2. maturity: time at which payment to a bond holder is due.
3. par value: amount an investor pays to purchase a bond and that will be repaid to an investor at maturity.

Yield - annual rate of return on a bond if the bond were held at maturity.

video response

In this video i learned about the money making process. The fed makes money by making loans. I learned that the money multiplier is 1/rr (required reserve) and you need this in order to figure out how much  money is created. using this formula you multiply it by what is loaned out and you will get a huge increase in money that is created and this is because of multiple deposit expansion. But that gives you the max amount of money they can make the bank doesn't have to loan out all of the excess reserves.

Video respose

In this video i learned about the loadable funds graph, which is money that is available in the banking system for people to borrow. the Y axis is interest rat (i) and the X axis is quantity of loadable funds. Demand for loan-able funds is downwards sloping and then an upwards sloping of supply loan-able funds. Supply loan-able finds is dependent on savings. When government is running a deficit the demand of money shifts to the right in the money market graph and when you increase demand for money we increase demand for loan able funds. Does this lady ever change?

video response

In this video i learned about what the fed can actually do to manipulate the money supply.
I learned about the tools of the feds. There is Expansionary (Easy money) and Contractionary (Tight money). The fed can change Reserve requirements, Discount rate, and they can buy or sell bonds and securities. Reserve requirement is the percentage of the banks total deposit that they must hold on as vault cash or a fed branch, for expansionary the fed would decrease required reserves and for contraction they would increase. The discount rate is the rate at which banks can borrow money from the FEDs, for expansionary they would decrease the discount rate and increase it for contractionary. Then we have the buying and selling of bonds and securities for expansionary they would buy bonds to increase money supply and sell for contractionary in order to reduce money supply. Do you feel like they go off topic too much? like omg.

video response

In this video i learned about the money market graph, it is very similar to supply and demand but it just has a few things that are different, on the vertical axis we have the interest rate (i) and on the horizontal axis we put the quantity of money. The demand is curved downwards and we also have the supply of money and that is vertical, it is fixed and doesn't changed unless the FED changes it. When demand is lowered it shifts to the left and when it fluctuates it shifts to the right. Even if you shift the curve the quantity is the same because it is set by the FED. The man in the back is so annoying.

Video respnse

In this video i learned about the types of money and the functions of it. There are three types of money and there are three functions of money. The three types of money are commodity money which has been around the longest, representative money for example the gold and silver standard, and then we have fiat money which is the one we use currently. The three functions are medium of exchange which means exchanging money for goods, store of  value  which is storing money and it still having some sort of value later on, and lastly we have unit of account which means we pay th more value it has. This lady's voice is strange though.