Video 1
There are three different types of money: Commodity money, Representative money, and Fiat Money. Commodity money is a good that has multiple purposes that also functions as money. When cows are traded in other countries, cows are being used as commodity money. This is not the most durable type of currency, but it is the oldest type of money in history.
Representative Money means whatever is being used as currency represents a specific quantity of a precious metal. Using a gold standard is a representative system. Dollar bills represented a quantity of silver or gold. The problem with this system was that when the value of the metal changes, the value of the currency that represents that metal will fluctuate as well. It is an unstable system.
Fiat money is legal tender that is backed by the word of the government that it has value. Because the government said it has value, it becomes worth something. The dollar bill today is fiat money.
There are three functions of money: as a medium of exchange, store of value, and as a unit of account. Through money, exchanges happen. When you buy something, an exchange is happening. Money functions as a store of value because when it is stored, it is expected to still have value and be stable while it is in the bank. Money is a unit of account because when we look at price, we see it as a value of worth. Something that is more expensive is usually seen as higher quality.
Video 2
Money Market graph is one that will pop up often on the AP Exam. To draw it, the first thing one must do is label your axis. The Y axis of the money market graph is Interest rate (I). Interest is the price incurred when one borrows. The axis is Quantity of money ( Qm). Demand (Dm) will always slope downward because when the price is high, the quantity demanded is low. That is the Law of Demand. When the interest rate is low, people will borrow more. The supply of money is verticle because it does not vary based on the interest rate. Demand for money is based on interest rate, supply of money is fixed and does not move unless the Fed moves it. If there is an incentive for people to want more money, like a tax credit or some other subsidy, that would increase demand for money. An increase of Demand is a shift to the right, a decrease is a shift to the left. If the demand of money fluctuates, that would put upward pressure on interest rates. The fed can counteract that upward pressure by increasing the money supply. The fed will try to stabilize interest rates because if they are unstable, you cannot predict the level of investment, you cannot predict the level of consumer spending, and you cannot manipulate aggregate demand to give the right level of economic change that the time demands.
Video 3
The Fed has 3 tools of monetary policy. With those three tools, the Fed can use Expansionary technique ( Easy $) or Contractionary technique ( tight $) The Fed can manipulate the reserve requirement which is the percentage of the banks total deposits that they must keep. This could be volt cash or on reserve with a Federal bank. If the Fed wants to increase the money supply, they will lower the required reserves so that banks can use that money as excess reserves and lend it out. If they want to decrease money supply, banks will raise the required reserves, thus having less money to loan out. The second tool is the Discount Rate. This is the rate at which banks can borrow money from the Fed. This is the interest rate that the Fed charges banks to borrow money. The Fed is a Lender of Last resort because banks borrow from the Fed if they are in serious trouble. If the Fed wants to increase the money supply, the Fed will lower the discount rate. If the Fed wants to decrease the money supply, they will increase the discount rate. This is not that affective because just because the rate is lowered, does not mean the banks have to borrow money. The third tool the Fed has to control monetary policy is the ability to buy and sell bonds and treasury securities. This is specifically government bonds and government issued securities. To increase the money supply, the Fed will buy bonds. To decrease the money supply the Fed will sell bonds because then the public will buy the bonds and the Fed will take the money and keep it, thereby decreasing the amount of money in circulation. The part of the FED that makes decisions involving the Fed in open market operations is the FOMC. The Federal Funds rate is the rate that banks borrow money from one another. When the fed buys bonds, it put downward pressure on the Federal Funds rate and vice versa.
Video 4
The Loanable Funds graph must be tied to the money market and show the results in Aggregate Demand and Aggregate Supply. Loanable funds is the money that is available in the banking system for people to borrow. The first step is to label the axis. The Y axis is interest rate and the X axis is quantity of loanable funds. Demand of loanable funds is downward sloping because when the interest rate is higher, people have a disincentive to borrow and vice versa. Supply slopes upward on the graph. Supply of loanable funds is dependent on savings because it comes from the amount of money people have in banks. The more people save, the more money banks have available to loan out to businesses and whatnot, creating business. If people have incentives to save more, we increase the supply of loanable funds with a shift to the right. If people have disincentives to save, we decrease the supply of loanable funds with a shift to left. When the government runs a deficit, they are demanding money in order to spend it. On the graph we would show this as an increase in the demand for loanable funds. You could also show it by decreasing the supply because that would be reducing the national supply of money.
Video 5
The money creation process is how banks add more money into the money supply. Banks create money by making loans. One of the banks tools is the reserve requirement. The money multiplier is used in conjunction with the reserve requirement to find the total amount of money created in a system. The formula for this is 1/ RR. You then multiply that by the amount of the loan, thus finding the total amount of money created in the system. We got this increase of the money from the loan through the process of multiple deposit expansion. One loan to a person goes into their bank and the money will continue to be loaned out to new people, with multiple banks taking out a required reserve percentage thus creating an estimated total amount of money. If any of the banks hold excess reserves, that will decrease the total amount of money created.
Video 6
One must show the connection between the Money Market, Loanable Funds Market, and the Aggregate Demand/Aggregate Supply market. For example if the government running a deficit, they will borrow money from the citizens. When citizens buys a government security, that is a person loaning their money to the government. In the money market, this would be shown as an increase in the demand for money, a right shift on the demand . Interest rate would increase and quantity remains the same because supply is fixed. On the loanable funds graph, the government would be demanding more loanable funds so demand shifts to the right. which would increase interest rates. This causes an increase in government spending, which would increase aggregate demand on the Aggregate Demand/ Aggregate Supply graph, thus increasing price level and an increase in GDP. A change in the supply of money causes a change in the price level. The Fisher Effect says that interest rates and price level have to be equivalent.
