Unit 4 video

Loanable Funds Market

The Loanable Funds Market

•The market where savers and borrowers exchange funds (QLF) at the real rate of interest. 

•The demand for Loanable funds, or borrowing comes from households, firms, government, and the foreign sector. The demand for Loanable funds is in fact the supply of bonds. 

•The supply Loanable funds, or savings comes from households, firms, government, and the foreign sector. The supply of Loanable funds is also the demand for bonds. 

-Changes in the demand for Loanable funds

•Remember that demand for Loanable funds= to borrowing or supplying of bonds 

•More borrowing= more demand Loanable funds 

•Less borrowing= less demand for Loanable funds 

•Examples

- Government deficit spending= more borrowing = more demand for Loanable funds 

DLF-> r%

-Less investment demand= less borrowing= less demand for Loanable funds 

Changes in the supply of Loanable funds

•remember that supply of Loanable funds= saving (demand for bonds)

•More saving= more supply of Loanable funds 

•Less saving= less supply of Loanable funds

EXAMPLES 

-Government budget surplus= more saving = more supply of Loanable funds 

-Decrease in consumers MPS= less saving= less supply of Loanable funds 

*When the government does fiscal policy it will affect the Loanable funds market*

*Changes in the real interest rate will affect Gross Private Investment* 

Federal Fund Rate

Federal Fund Rate

• it is the interest rate that commercial banks charge other commercial banks for over night loans.

PRIME rate 

• it is the interest rate that is given to a banks most credit worthy customers 

Anywhere from 0 to 4 % 

AP Macroeconomics Unit 4 Video Series Notes

Part 1:
There are three types of money. The types of money she brings up are commodity money, which has been around and has been used the longest. Then there is representative money which means whatever you are using as currency is representing a specific quantity of metal. And lastly, the type of money we use today, Fiat money. This money is not back by precious metal and must be accepted for transactions. The functions of money consist of is that money is a medium of exchange, money as a store of value, and lastly, money being a unit of account.

Part 3:
Money Market graphs are graphs that we have to become very familiar with and have to be able to master them when it comes to drawing them properly. The Y Axis will always be labeled as the interest rate, and the x axis will be labeled as the quantity of money. The demand for money will slope in a downward direction because when the price is high, demand is low and vise versa. What is different from the supply and demand graphs is that the supply of money is vertical in this case. Demand for money is set by the Fed.

Part 4:
Expansionary policies are also called easy money, and contractionary policies are called tight money. Required reserves is a portion of money that is of the total deposits that they have to hold on to. Money that has been RR will become the excess reserves that the bank can begin to loan out. The discount rate is the rate that banks can borrow money from the fed. This is the interest rate that the fed charges.

Part 7:
Another graph we have to learn to  master is the loanable funds graph. We have to tie it to the money market and show the results in AD/AS graphs. Loanable funds is money that is available for the public to borrow. Demand for loanable funds is downward sloping, while the supply slopes in an upward direction. Supply of loanable funds is dependent on people's savings.

Part 8:
Another concept we have to become familiar with is the money creation process. Banks create money by creating loans, which is a key point in the process of creation. One of the Feds tools is being able to adjust and control the Reserve Requirement. The formula for the money multiplier is 1/RR.

Part 9:
We have to learn how to show the connection of what is actually happening in the economy. Keep everything labeled to show your work. To be consistent, show the same interest rate and the demand will slope downward. Increase in government spending is going to increase aggregate demand. Do not try to change 5 or 6 factors at once because it will get very complicated.

•Demand for money has an inverse relationship between nominal interest rates and he quantity of money demanded. 

1. What happens to the quantity demanded of money when interest rates increase? QD decreases. 

2. What happens when to the quantity demanded when interest rates decrease? QD increases. 

Seven Functions of the FED

*Multiple Deposit Expansion and the Federal Reserve*

•Seven Functions of the FED

1) issue paper currency: paper currency produced everyday

2) sets reserve requirements and holds reserves of banks

3) it lends money to banks and charges them interest

4) they are a check clearing service for banks

5) it acts as personal bank for the government 

6) supervises member banks

7) controls the money supply in the economy