Part 1-
There are three types of money and those are: commodity money, representative money, and fiat money. The one in use by the United States today is fiat money and this is basically just money that is backed by the word of the government, it is not backed by any kind of precious metal. There are three functions of money: medium of exchange, store of value, and a unit of account. The functions of money are, in a more simplified explanation, the ability for you to buy something with it, the ability to save with it, and the ability to use it to judge how much something is worth.
Part 3-
On the money market graph, your vertical axis is the interest rate and your horizontal axis is quantity of money. You then have demand of money which will slope downwards since when the price is high, the quantity demanded is low. When the interest rate is low, people will invest more therefore increasing demand. The supply of money is vertical and this is because it is fixed, but the Fed can alter the supply of money. An increase is toward the right and a decrease is toward the left.
Part 4-
The Fed uses it's tools of monetary supply to manipulate the money supply. There are two situations that these tools are used in, contractionary and expansionary. The three tools that the Fed can use are the reserve ratio, the discount rate, and the buying and selling of securities. Under the expansionary or "easy money" policy, the Fed would decrease the RR, decrease the discount rate, and buy bonds. Under the contractionary or "tight money" policy the Fed would increase RR, increase the discount rate, and sell bonds.
Part 7-
On the Loanable Funds graph, your vertical axis is the interest rate and the horizontal axis is the quantity of loanable funds. Loanable Funds is the money available in the banking system for people to borrow. The demand is again downward sloping and the supply is upward sloping. The supply is the amount of money people have in banks so it is dependent upon savings. When the demand for loanable funds is increased, the interest rate goes up. The interest rate also goes up when the supply of loanable funds decreases.
Part 8-
Banks play a vital role in the process of creating of money by making loans; this increases the money supply. All banks must keep the required ratio set by the Fed which means they must keep a certain percentage of demand deposits aside and they cannot loan out this money. To calculate the amount of money created in the banking system by a loan, you must first find the monetary multiplier. This is simply one divided by the reserve ratio. You then take this number and multiply it times the loan amount. This will equal the amount of money created in the banking system. It is important to remember that after every loan, each bank must keep the percentage of demand deposits aside to fulfill the reserve requirement. Also, if banks keep excess reserves and do not loan out all that they possibly could then this will reduce the total amount of money created in the banking system.
Part 9-
The money market, loanable funds, and AD-AS graphs are all related. If there is an increase in the demand for money on the money market graph, then there is an increase in the interest rate. An example of this would be if the government is borrowing money so it needs more money. On the loanable funds market, the demand would also increase since the interest rate has increased. Since the demand of loanable funds has increased, so will the quantity of loanable funds. On the AD-AS graphs, AD will increase because of an increase in government spending. This would also make the price level increase in AD-AS graphs. In this whole situation, the government is in deficit spending.
There are three types of money and those are: commodity money, representative money, and fiat money. The one in use by the United States today is fiat money and this is basically just money that is backed by the word of the government, it is not backed by any kind of precious metal. There are three functions of money: medium of exchange, store of value, and a unit of account. The functions of money are, in a more simplified explanation, the ability for you to buy something with it, the ability to save with it, and the ability to use it to judge how much something is worth.
Part 3-
On the money market graph, your vertical axis is the interest rate and your horizontal axis is quantity of money. You then have demand of money which will slope downwards since when the price is high, the quantity demanded is low. When the interest rate is low, people will invest more therefore increasing demand. The supply of money is vertical and this is because it is fixed, but the Fed can alter the supply of money. An increase is toward the right and a decrease is toward the left.
Part 4-
The Fed uses it's tools of monetary supply to manipulate the money supply. There are two situations that these tools are used in, contractionary and expansionary. The three tools that the Fed can use are the reserve ratio, the discount rate, and the buying and selling of securities. Under the expansionary or "easy money" policy, the Fed would decrease the RR, decrease the discount rate, and buy bonds. Under the contractionary or "tight money" policy the Fed would increase RR, increase the discount rate, and sell bonds.
Part 7-
On the Loanable Funds graph, your vertical axis is the interest rate and the horizontal axis is the quantity of loanable funds. Loanable Funds is the money available in the banking system for people to borrow. The demand is again downward sloping and the supply is upward sloping. The supply is the amount of money people have in banks so it is dependent upon savings. When the demand for loanable funds is increased, the interest rate goes up. The interest rate also goes up when the supply of loanable funds decreases.
Part 8-
Banks play a vital role in the process of creating of money by making loans; this increases the money supply. All banks must keep the required ratio set by the Fed which means they must keep a certain percentage of demand deposits aside and they cannot loan out this money. To calculate the amount of money created in the banking system by a loan, you must first find the monetary multiplier. This is simply one divided by the reserve ratio. You then take this number and multiply it times the loan amount. This will equal the amount of money created in the banking system. It is important to remember that after every loan, each bank must keep the percentage of demand deposits aside to fulfill the reserve requirement. Also, if banks keep excess reserves and do not loan out all that they possibly could then this will reduce the total amount of money created in the banking system.
Part 9-
The money market, loanable funds, and AD-AS graphs are all related. If there is an increase in the demand for money on the money market graph, then there is an increase in the interest rate. An example of this would be if the government is borrowing money so it needs more money. On the loanable funds market, the demand would also increase since the interest rate has increased. Since the demand of loanable funds has increased, so will the quantity of loanable funds. On the AD-AS graphs, AD will increase because of an increase in government spending. This would also make the price level increase in AD-AS graphs. In this whole situation, the government is in deficit spending.
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