Unit 4: question 3 monetary policy the federal fund rate

unit 4: Final notes

March 29, 2016

Single bank
- loan money from excess reserves (ER)

Banking system
- ER x multiplier
*total money supply ER x multiplier x DD

IT ONLY CHANGES 

1. the composition of money 
2. excess reserves 
3. required reserves

*when a customer deposits cash or withdraws cash from their demand deposit act. It has NO effect on money supply.

FED- when the FED buys or sells bonds, ER is created

unit 4: Reserve Requirement

March 21, 2016

I. Reserve requirement
-only a small percent of your deposit is in the safe. The rest of your money has been loaned out.
-The FED sets the amount that banks must hold.
-The reserve requirement is the % of deposits that banks must hold in reserve and not loan out.

1. If there's a recession we should decrease reserve ratio.

-banks held less money and have more excess reserves
-banks create more money by loaning out excess

-money supply increases interest rates fall, AD goes up

  2. If there's inflation increase in RR
-banks hold more money and have less ER
-banks create less money
-money supply decreases, interest rates goes up, AD goes down

II. Discount rate
-the interest rate that the FED charges commercial banks.
-To increase the MS, the FED should decrease the discount rate.
- To decrease the MS, the FED should increase the discount rate.

III. Open market operations
-The FED buys/sells government bonds (securities)
- This is the most important and widely used monetary policy.
-To increase the MS, the FED should buy government securities.
- To decrease the MS, the FED should sell government securities.

unit 4: Reserve requirment

March 10, 2016

Reserve requirment
-The fed requires banks to always have some money readily available to meet consumers demand for cash
-around,set by the fed is required reserve ratio
-RRR is the % of the demand deposits (checking account balances) loaned out
-typically the required reserve ratio = 10% 

3 types of multiple deposit expansion

• type 1- calculate initial change in excess reserves (amount single bank can loan from initial deposit)
• type 2- calculate the change in loans in banking system
• type 3- calculate the change in the money supply (sometimes 2 and 3 will have the same result) IF NO FEDS IS INVOLVED 

I. bank can lend ER

II. total change

III. owner equity

unit 4: Feds and function

March 10, 2016

FEDS and the functions

1. control money supply
2. issue paper currency
3. set the reserve requirements and hold reserved of banks
4. lend money to banks and change interest
5. they are a check clearing service for banks
6. acts as a personal bank for government
7. supervises member banks

unit 4: Time value of money

March 9, 2016
Time value of money

• Is a dollar worth more than a dollar tomorrow? yes, inflation and opportunity cost. This is the reason for charging ad paying interest.

V= future value of money
P= present value of money
r= real interest rate (nominal rate- inflation rate)
expressed as a decimal
n=years
k= # of times in interest is credited per year

• The simple interest formula 

v= (1+r)^n*p

• v=(1+r/k)^nk*p

Demand for money has an inverse relationship between nominal rate and the quantity of money demanded.

Money demand

Increase in money supply

increase $ supply > decrease interest rate > increases investment > increases AD

or

Decrease $ supply > increase interest rate > decrease investment > decrease AD

Assets= what you own (when you die the rest of the stuff is an asset)

Liability= what you owe (groceries, clothes)

Stocks- ownership (owner of a company)

*not actual owner

Bond- loaning  money to government hoping you get it back.

What banks do

- A bank is a financial intermediary 

• uses liquid assets (i.c. bank deposits) to finance the investments of borrowers.
• A process is known as fractional reserve banking

-a system which depository institutions hold  liquid assets less than the amount of deposits

-can take form of:

1. currency in bank vaults
2. bank reserves- deposits held at a federal reserve

Basic accounting review

T-account (balance sheet)

-statements of assets and liabilities

UNIT 4: Money

March 3, 2016
Money:
I. Uses for money

• money of exchange 
• unit of account
• store of value

Unit of account
-economic worth in the exchange process.
-store of value- money holds its value over a period of time where as products may not.

II. Types of money

• Commodity money- gets its value from type of material from which it is made (silver coins, gold coins)
• Representative money- paper $ that is backed by something tangible that gives it value.
• Flat money- money because the government says so.

III. Characteristics of money

• durable
• portable
• $ is scarce 
• divisible  (able to use coins, half dollars etc.)
• acceptable (cash is acceptable)
• uniform

IV. Money supply

• M1 money- 1. Currency (coins and cash) 2. Checkable deposits or demand deposits 3. traveler's checks. *75% M1 money is mostly liquid and is easy to convert into cash*
• M2 money- consists of M1 money + savings account + money market accounts + deposits held by banks outside of the U.S.
• M3 money- M2 money + certificate deposit (cd's) *penalized from your own money*