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$Money$

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Group One

on 10 December 2013

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Transcript of $Money$

"Buy big, sell small"
Money Supply and GDP
Functions of Money
Components of the Money Supply
Supply and Demand of Money
Unit 4: Monetary Policy
Legal Tender
Government assurance that paper money is a valid and legal means of payment of debt
Relative Scarcity
Value of money depends on its supply and demand
with constant demand of money, its supply will determine the purchasing power on the monetary unit
Medium of Exchange
Money is usable for buying and selling goods and services
Money is readily acceptable as payment
Money allows society to escape complications of barter
Money enables society to gain the advantages of geographic and human specialization
Unit of Account
Society uses monetary units as a yardstick for measuring the relative worth of a wide variety of goods, services, and resources
Enables buyers and sellers to easily compare the prices of various goods, services, and resources
Price of each item stated in terms of monetary unit
Types of Money
Commodity Money: Performs the functions of money and has alternative uses
Federal Funds Rate
Store of Value
Enables people to transfer purchasing power from the present the future
Money is most liquid or spendable of all assets
Money is still predictively useful when retrieved
You can just hold onto the money, rather than having to buy something right away
M1
M2
M3
Currency (Coins and Paper Money)
Checkable deposits
Savings deposits, including MMDA
Time deposits less than $100,000
Money Market Mutual Funds held by individuals
M1
M2
Time deposits over $100,00
Interest rate that commercial banks charge one another for one day loans of reserves
Money Multiplier
m = money multiplier
R = Reserve ratio
Shifters of Money Demand
Change in Price Level
Change in income
Change in taxation that affects investment
Shifters of Money Supply
Monetary Policy
The ways in which the Fed regulates the money supply.
Open Market Operations
When the FED buys or sells government bonds
Discount Rate
The interest rate charged to commercial banks for loans from the Federal Reserve Bank.
Reserve Requirement
The required percentage of money that the bank must hold after a deposit
The rest of the money is called excess reserves and can loaned out
Selling bonds to the public shrinks the money supply
People must pay for the bonds using cash
That cash is removed from circulation
MS 1
Money Demand
Interest rate
Actions by the FED
Quantity of money
MS 2
Buying bonds to the public shrinks the money supply
The government pays people with cash
That cash is returned to circulation
MS 1
Money Demand
Interest rate
Quantity of money
MS 2
Buying bonds from the public expands the money supply
The Reserve ratio is 10%
Taylor deposits $100 in the bank
Sam deposits that $90 into another bank
Carrie deposits the money into another bank
The bank holds onto $8.1 and loans out $72.9 to Sebastian
The bank holds onto $10 and loans out $90 to Sam
Starting point: $100
That bank holds onto $9 and loans out $81 Carrie
Expansion: $90
Practice
Expansion: $81
Sebastian deposits the money into another bank
Expansion: $72.9
Created By:
Kimiko Hurst
Josh Sinolinding
Jake Valdez
Christian Navarro
The bank holds onto $7.3 and loans out $65.6 to Miranda
The trend continues until $900 is created from the original $100
Expansion: $ 65.6
A lower reserve ratio results in a bigger multiplier
A bigger multiplier means more money in circulation
More money in circulation means a bigger money supply
Affects the money supply through the money multiplier
A higher reserve ration means a smaller multiplier
Smaller multiplier means a smaller money supply
Fiat Money: Only serves as money
Higher discount rates discourage banks from borrowing
Discourages banks from lending to people since they don't have the money
Changes in the money supply reflect on the Aggregate Supply/Aggregate Demand graph
A Shrinking Money Supply
MS 1
Money Demand
Interest rate
Quantity of money
MS 2
This raises the interest rates
Investment Demand
Interest rate
Quantity of investment
Higher interest rates reduce investment
AD 1
Price Level
rGDP
Reduced investment shifts AD to the left (CIGXn)
AS
Aggregate Demand/Aggregate Supply Curve
AD 2
An Expanding Money Supply
MS 2
Money Demand
Interest rate
Quantity of money
MS 1
This lowers the interest rates
Investment Demand
Interest rate
Quantity of investment
Lower interest rates increase investment
AD 2
Price Level
rGDP
Increased investment shifts AD to the right (CIGXn)
AS
Aggregate Demand/Aggregate Supply Curve
AD 1
Investment Demand Curve
The most important and widely used monetary policy
Full transcript