Unit 4- video summary blogs

#1 blog video
 This video was very useful, and informative about general uses of money. There is three types of money which is commodity, representative, fiat money; commodity money is money that can be used in varies ways, representative money is money that has back up such as gold and silver coins, but we do not use anymore in today's uses, also fiat money which is money that we use today and is not backed up by anything, it is money that we are able to apply through transactions. As there is three types of money, there is also three functions of money! Three function of money is medium of exchange, store of value and unit of account. Money of medium is when you buy something you receive something, such as when you go to the store to get a item(s) you will exchange it with money, Store of value is money that is being saved, such as when you store in the bank account, but as you store in the bank the money begins to have less purchasing powers as years pass by, also Unit of account which is to judge the more money it cost the better the quality which isn't always true

#2 blog video
Money Market is a review of what we have done before in class, with the graph, labeling and also graphing with equilibrium. In reference she mentioned how interest rate always goes on the y-axis and the quantity goes on the x axis, also how supply money is vertically in the middle as the original graph. SM which means supply money does not very from interest rate, but can move left or right in order to stabilize the interest rate. supply money is a fixed line that does not change, unless the FED changes it. FED will change the supply money in order to not have a high interest rate during a recession so they increase the supply money by moving it to the right and it will stabilize interest rate to the original equilibrium. Having a stabilized interest rate can fix many problems such as determining investment, also to manipulate the aggregate demand (AD) to find the right economy changes.

#3 blog video
 The FED: Tools of Money Policy includes 2 main components which is expansionary known as "easy money" and contractionary known as "tight money". Usually they are the opposite such as when the required reserves (RR) decrease under expansionary, the contractionary increases. Required reserves is the money the bank must hold on to and cannot loan out to the public, or anyone. Excess reserves is part of the money that the bank can loan out from what is kept of the required reserves. Also such as the discount rate which isn't really effective, but represents the rate banks can borrow from the FED. When banks are low on loans they borrow from the FED for at least a day and pay them back which the FED will charge them interest rate for what they borrowed. As discount rate can sell or buy bonds, under expansionary they buy bonds and under contractionary they sell bonds.  When they say "buy bonds" they really mean the FED buys the bond and the public receives the money, as you can remember it as "Buy bonds= Big bucks" shown in the video. When they say "sell bonds" they really mean  the public are buying the bonds and the FED is receiving the money. What controls the FED is known as Federal Open Market Comity (FOMC) which makes all the FED's decision. There is also something known as the Fed Fund Rate which is when banks borrow money from each other.

#4 blog video
Loan able Funds have the same/ similar graph as all others just representing different shifts of the money market and the the loan able funds market. The money market deficit means that the government wants more money which will increase the interest rate. Increasing loan able funds also increases interest rates, which is taking a demand for both which will also increase the interest rate. Decreasing the supply money government will demand for a great value of money which will cause the supply to decrease and interest rate to increase.

#5 blog video
Money creation process are such as money multiplier, and multiplier deposit expansion. Money creation process is when it is creating money by making loans. In this video they have used required reserves (RR) which is the percentage that banks must keep in the reserves from someones deposit. They also mention about excess reserves (ER) which is what the bank can loan out frrom someones deposit, which is the part that is not in the required reserves. There is equations to figure out how much for required reserves, excess reserves, and demand deposits. Wording of questions are very tricky on what exactly that they are asking. Money being re deposited is the multiplier deposit expansion.

#6 blog video
American money is not only used for our use, but also for the government to borrow from us. If there is an increase in government spending, there will be an increase in demand of money due to the amount of money the government is borrowing. US has the most debt, from borrowing so much from us, Americans, Aggregate Demand (AD) can increase just how it can in many other scenarios, but in this specific scenario it caused it because government is increasing their spending which will increase the demand of money. Government can either help or hurt us, but in this video it caused aggregate demand to increase. In this video they mention about the fisher effect which is the increase in interest rate so it can be equivalent to the increase in price level, an example is such as when interest rate increases by 1% also will the inflation rate increase by 1%.

The Reserve Requirement- Only small percent of your bank deposits is in the safe. The rest of your money has been loaned out. This is called "Fractional Reserve Banking."

  +The FED sets the amount that banks must hold
  +The reserve requirement  (reserve ratio) is the percent of deposits that banks must hold in reserve and NOT loan out.
  + When the FED increases the money supply (MS) it increases the amount of money held in the bank deposits.


#1- If there is a recession what should the FED do to the reserve requirement?
      - decrease reserve ratio
              +banks hold less money and have more excess reserves (ER)
              +banks create more money by loaning out excess
             


(interest rate decrease= AD increases)



#2- If there is an inflation, what should the FED do to the reserve requirement?
      -increase the reserve ration
            +banks hold more money and have less excess reserves
            +banks create less money
            +money supply decreases


(interest rates increases= AD decrease)



The discount rate- the interest rate that the FED charges commercial banks

EX.
 - if Bank of America needs $10 million, they borrow it from the US Treasury, but they must pay it back with interest




 To increase the money supply, the FED should DECREASE the discount rate (easy money policy)
To decrease the money supply, the FED should INCREASE the discount rate (tight money policy)

Open Market Operations (OMO)- the FED buys/sells government bonds (securities)



- this is the  most important and widely used Monterrey policy



To increase the money supply, the FED should BUY government securities.
To decrease the money supply , the FED should SELL government securities.




Monetary policy                            Expansionary                       Contraction
                                                      (easy money)                         (tight money)
                                                       RECESSION                         INFLATION

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OMO                                              buy bonds                                  sells bonds


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Discount Rate                                decrease                                       increase

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Reserve Requirement                       decrease                                    increase

                                                     loans- increase                             loans- decrease                
                                                      AD- increases                              AD- decrease
                                                    GDP- increase                                GDP- decrease
                                                       MS- increase                                  MS- decrease
                                                         i- decrease                                       i- increase



Federal Funds Rate- where FDIC member banks loan each other overnight loans


Prime Rate- interest rate that banks give to their most credit worthy customers

(better interest rate-------------> better deals)
                                 

Banks and the Creation of Money ( Bank balance sheets)

How do banks "create" money?
-by loaning out deposits

Where do loans come from?
-from deposits who take cash and place it in their banks

How are the amounts of potential loans calculated?
-by using a balance sheet or a T- account that shows liabilities and assets

Bank Liabilities (the right side of the T-account sheet)

#1= demand deposits (DD) or check able deposits (CD)

     1)cash deposits from the public
     2)they are liabilities because they belong to the depositors

#2= owners equity- the values of stocks held by the public ownership of banks shares


Key Concept for AP concerning liabilities-
- If DD comes in from someones cash holdings then that DD is already part of the money supply
- If the DD comes in from the purchase of bonds (by the Fed) then this creates new cash then creates new money supply



Bank assets (the left side op=f the T- account sheet)

#1= Required Reserves (RR)- percentages of demand deposits that must be held in the vault so that some depositors have access to their money

#2= Excess Reserves (ER)- source of new loans

DD=RR+ ER 

***************BOTH SIDES MUST BE BALANCED**************

#3= Property

#4= Securities (bonds)- purchased by a bank or new bonds sold to the bank by the Federal reserved. These bonds can be purchased from the banks and turned into cash and immediately becomes available as excess reserves

Fed

Function of Fed-
*issue paper money
*set reserved requirements and hold reserved of banks
* lends money to banks and charge them interest
*they are check cleaning system for banks
*acts like a personal bank to the government
*supervises member banks
*controls money supply in the economy


Reserve requirements
-fed requires banks to always have same money readily available to meet consumers demands for cash
-the amount set by fed, is requires reserve ratio
-the required reserve ratio is the 5 of demand deposits (checking account balances  that must not be loaned out
- typically the required reserve ratio = 10%

3 types of multiple deposit expansion questions

type 1 - calculate the initial change in excess reserves
* a.k.a the amount a single bank can loan from the in initial deposit

type 2- calculate the change in loans in the banking system

type 3- calculate the change in the money supply
*sometimes type 2 and type 3 will have the same result. (i.e no Fed involvement)

Time Value of Money

Time Value of Money- is a dollar today worth more than a dollar tomorrow?
   -yes
Why?
  -opportunity cost & inflation
   -this is the reason for charging and paying interest

How to calculate 
- Let :
     V= future value of money
     P=present value of money
     r= real interest rates (nominal rate- inflation rate)
  **********expressed as a decimal************
     n= years
     k= number of times interest is credited per year

The Simple Interest formula

v= (1+r)^n *P

Compound Interest Formula

v= (1+ r ) ^nk * P
          ---
           k



EXAMPLE PROBLEM

Assume that inflation is expected to be 3% and that the nominal interest rate on simple interest saving is 1%.

Step 1: Calculate the real interest rate

 r%= i% - π%
r%= 1%- 3%= -2% or -.02


Step 2: Use the simple interest formula to calculate the future value of 1$1.
v= (1+ r)^n *P
v=(1+(-.02))^1 *1
v= (0.98) * 1
v= $0.98

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Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded
1. What happens to the quantity demanded of money when interest rates increase?
  - quantity demanded falls because individuals would prefer to have interest earnings assets instead of borrowed liabilities.
2. What happens to the quantity demanded increases. There is no incentive to convert cash into interest earning assets.

The Demand for Money
- money = downward slope
What causes money to shift?
1. Δ in price level
2. Δ in income

3. Δ in taxation that affects investment


********money supply is always vertical*********

Increase in Money Supply

Increase money supply-->  decrease interest rate-->increase investments--> increase AD


Decrease in Money Supply
Decrease money supply-->increase interest rates-->decrease investment-->decrease AD


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Financial Sector

Financial Assets VS. Financial liabilities


Financial Assets:
- stocks and bonds
-provide an expected future benefits
- it is what you OWN

VS.


Financial Liabilities
- it is simply what you OWE



Interest rate- it is the cost of borrowing money




Stocks VS. Bonds


Stocks:
- financial assets that convey ownership in a company (part owner)

VS.


Bonds:
- a promise to pay a certain amount of money plus interest in the future


What do banks do?

- a bank is a financial intermediary
   +uses liquid assets (bank deposits)to fiance the investments of borrowers
   +process is known as Fractional Reserve Banking\

(Fractional Reserve Banking- a system in which depository institutions hold liquid assets less than the amount of deposits)

-can take the form of
1. currency in bank vaults
2. Bank reserves- deposits held at the Federal Reserve




Basic Accounting Review

*T- account (balance sheet)
     +statements of assets and liabilities


*Assets (amounts owned)
    +items to which a bank holds legal claim
    +the uses of funds by financial intermediaries


*Liabilities (amounts owed)
  +the legal claims against a bank
  + the sources of funds for financial intermediaries

Unit 4 Money

UNIT 4

Money

     I.        Uses of Money

a.       Medium of exchange: it is basically borrow or trade

b.       Unit Of Account: It establish economic value

-EX: Piano lesson and you pay $10 for ever lesson. Instead of paying instead the teacher wanted a cake. So from now on they pay with cake

c.       Store Of Value: money holds its value over a period of time where as products may not ( no matter where you store your money it doesn’t lose its value) Except the purchasing power

   II.        Types of Money

A.)   Commodity Money: It gets its value form the type of material from which it is made

-          EX: GOLD AND SILVER COINS

B.)    Representative money: It is paper money back from something tangible that gives it value

-          EX: IOU MONEY

C.)   Fiat Money: Money basic the government said so

 III.        Characteristics of Money

A.      Divisible: break the dollar bill into many ways.

B.      Portable: Put your money in socks, bra

C.      Uniform: A dollar it’s a dollar, doesn’t matter if you change the president but a dollar is a dollar

D.     Acceptable:

E.       Scare: Money will always be around but it wont

F.       Durable:

 IV.        Money Supplied

A.      M1 Money: 75 percent of money that comes from circulation comes from here (It is liquid- easy to convert)

1.      Cash and coins >Currency

2.      Checkable deposits >Demand deposits 

3.      Traveler’s checks

B.      M2 Money

-          Consist of M1 Money, Savings accounts, and deposits held by banks outside of the USA

-          Saving Account is not a transaction where you can’t pull out ( Only transfer from the saving to checking account)

C.      M3 Money

-          Consists of M2 Money and certificated of deposit money know as CD’s

-          What CD’s are if you keep money in it will grow