Monday, March 30, 2015

Unit 4


This unit mainly covers money: The Demand for Money. Demand for money has an inverse relationship between nominal interest rate, and quantity of money demanded.

  • When interest rates increase, the demand for money decreases. 
  • When interest rates decrease the demand for money increases.

Fiscal Policy includes:
  • Congress/President
  • Taxing or spending $
Monetary Policy: 
  • the FED
  • Open Market Operations
  • Federal Funds Rate
  • Reserve Requirement
Key Principles: 
-a single bank can create money through loans, by the amount of excess reserves. 
-banking systems as a whole can create money by a multiplier. 

  • When the initial deposit in a bank is in cash, the money supply has no change because only the composition of money changed. 
  • When the initial deposit is by the FED purchase of a brand from the public, the money supply will immediately increase because money coming from the FED is new money in circulation.
  • When the initial deposit is a bank purchase of a bond from the public, the money supply will immediately increase because monkey coming from bank reserves is new $.
Factors that affect the deposit multiplier:
  • if banks fail to loan out all ER
  • if bank customers take their loans in cash rather than in new checking account deposits. 
Open Market Operations- Expansionary: buy bonds, increase the money supply
Contractionary: Sell bonds, lower the money supply
Discount Rate- Expansionary: decrease money supply Contractionary: increase money supply
Reserve Requirement- Expansionary: decrease RR(bc theres not enough $) Contractionary: increase RR, increase $ supply.

Prime Rate- the interest rate thats given to a bank's most credit worthy customers from 0-4%. 
Loanable Funds Market- the market where savers and borrowers exchange funds at the rate of interest. 

Changes in Demand:

  • More borrowing=more demand for loanable funds
  • Less borrowing=less demand for loanable funds
Changes in Supply:
  • More saving= more supply of loanable funds
  • less saving= less supply of loanable funds
What the Graph looks like: 



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1 comment:

  1. Arthur G.March 30, 2015 at 9:30 PM

    Short and to the point. the notes are just enough to be what readers need particularly. i recommend going into more details with certain things such as the effects of certain policy changes and such so as not to leave the notes too concise

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