Unit 4 - Money & Banking/ Monetary Policy Video Summaries

AP Macroeconomics Unit 4 – Part 1

       There are three common types of money and they have different functions that relate to what they do and how they are used.  The three types of money are commodity money, representative money, and fiat money. Commodity money is money that could have another purpose, representative money means the money represents a quantity, and fiat money is money because the government says its money. The three functions of money are it acting as a medium of exchange (we use it to purchase) store of value (we save it) and as a unit of account (price indicates worth).  

AP Macroeconomics Unit 4 – Part 3

     The money market graph shows the supply of money and how it is set by the Fed and moves only when the Feds actions cause it to move. The graph has interest rate labeled on the vertical line, and the quantity of money on the horizontal line. The demand curve slopes downward on the graph. Price and quantity are inversely related. So, when price is high, the quantity demanded is low, and when the price is low the quantity demanded is high.

AP Macroeconomics Unit 4 – Part 4

      There are three tools of monetary policy that the Fed has. The two discussed are expansionary and contractionary money policy. Expansionary policies are also known as easy money, and contractionary policies are also known as tight money. The Fed has control over the reserve requirement, which is the percentage of the banks total deposits that they must hang on to. In short, if the Fed wants to increase the money supply, they will have to decrease reserve rates and discount rates, and they must buy bonds. If the Fed wants to decrease the money supply, then they would do the complete opposite or inverse action.

AP Macroeconomics Unit 4 – Part 7

      Loanable funds is money that is available in the banking system for banks to loan out so people may borrow. The graph for this concept has the interest rate labeled on the vertical axis, and quantity of loanable funds on the horizontal axis. The demand curve is downward sloping, and the supply curve is upward sloping, because supply of loanable funds depends on savings. If people have the incentive to save more, then supply will shift to the right, and if they don’t, it will shift to the left.

AP Macroeconomics Unit 4 – Part 8

      The money creation process explains that banks create money by making loans. To find the total money created, you have to take the money multiplier and multiply it by the loan amount. The formula for the money multiplier is 1/RR.  This may happen through the process of multiple deposit expansion.  

AP Macroeconomics Unit 4 – Part 9

      The money market, loanable funds, and AD /AS graphs are all related and can be tied in together. The example given to show and represent this relation, is the scenario of if the government runs a deficit. If this happens, then the demand for money shifts to the right, and interest rate increases, as well as the demand for loanable funds. If there is an increase in government spending, there will be an increase in aggregate demand, as well as price level and GDP.  The fisher effect says that a change in the supply of money drives a change in price level because these two have to be equivalent.