Uses of Money Include..
- Medium of Exchange
- Unit of account
- state of value
- Representative money- paper money that is backed by tangible product
- Commodity money- gold and silver coins
- Fiat Money- money because the govt said so
M1 money is currency in circulation
M2 is savings accounts, money market account, checkable deposits
Demand for money slopes down because the when the price is high the quantity demanded is low.
When the price is low then the quantity demanded is high.
When interest is low, people will want to borrow more.
Supply of money is not based upon the interest rate, it stays vertical because the fed decides the SM and it is fixed.
Incentives for People to want more money is making them want more money to get a better incentive like, lower taxes.
4 Feds Tools of Monetary Policy
Expansionary and Contractionary Policy
Expansionary(easy money) is
- Lower Reserve Requirement then money that has been required reserves becomes excess reserve makes more money available
- Discount Rate is lowered to make banks borrow more.
- Fed Fund Rate is lowered to have banks borrow from each other.
- Buy Bonds to make more money
Contractionary(tight money) is
- Raise Required Reserve to take banks excess reserve and make them RR.
- Discount Rate is raised to make borrow less.
- Fed Fund Rate is raised to have banks not borrow from each other.
- Sell bonds to contract the money supply.
Loanable Funds
Supply of loanable funds is dependent on savings, the amount people have placed in their banks.The more money people save, the more money banks have to loan out to people.
If Demand for loanable funds is increased then interest rate is also increased.
Money creation process
banks make money by loans
- Monetary Multiplier. ( 1/ required reserve)
- Multiple deposit expansion- money being deposited over and over again.
Hey, your blog is very helpful and simple. I just wanted to add more information on monetary policy.
ReplyDeleteMonetary Policy - involves Fed
OMO (Open Market Operations) buy or sell bonds (securities)
Required Reserves
Discount Rate--Interest Rate changed by the Fed for overnight loans to commercial banks. Does not change the money supply directly
Federal Funds Rate - it is the interest rate charged by one commercial bank for overnight loans to another commercial bank. FOMC sets a federal fund rate, then uses Open Market Operations to guide the effective rate to the targetrate (Commercial to commercial borrowing is better).
Great organization and layout of text and graphs. Might I add that money as a commodity would not be gold or silver, but rather something that serves other uses, such as crops or livestock, and that money as a representative, it is backed by a precious metal (i.e. gold/silver). I also like your background. It gives it that universityesque feel to it. Good job!
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