Bernard 's AP Macroeconomics Blog

Balance of Payments Measure of money inflows and outflows between the Unites States and the Rest of the World (ROW) Inflows: are referred to as Credit Outflows are referred to as Debits  The Balance of Payments is divided into 3 accounts  Current account Balance of trade or Net Export Formula: Exports of Goods/Services - Imports of goods/ Services Exports create a Credit to the balance of payments imports create a Debit to the balance of payments Net Foreign Income  Income earned by U.S owned foreign assets - Income paid to foreign held US assets EX. Interest payments on US owned Brazilian bonds - Interest payment on German owned US treasury bonds  Net Transfers (tend to be unilateral) Foreign Aid→ a Debit to the current account EX. Mexican migrant workers send money to family in Mexico  Capital/ Financial account The balance of capital ownership Includes the purchase of both real and financial assets Direct investment in the United States is a credi

Monetary Policy: Expansionary  Used to fight a recession OMO=Fed buys bonds; MS↑ Required Reserves (RR)=↓ Discount rate (DR)=↓  Federal Funds Rate(FFR)=↓ Contractionary Used to fight inflation  OMO=Fed sells bonds;MS↓ Required Reserves (RR)=↑ Discount rate (DR)=↑  Federal Funds Rate(FFR)=↑ Sell bonds = money supply decrease Buy bonds = increase on money supply  Open Market Operations Fed can buy bonds = MS ↑ Fed can sell bonds =MS ↓ Discount Rate FDIC member banks and other eligible institutions may borrow short term loans directly from the Federal Reserve Reserve Requirement Banks must keep this certain amount in vault Federal Funds Rate FDIC member banks loan each other overnight funds Bank borrow from FED = Discount rate Bank borrow from other banks = Federal Funds Rate Prime Rate  Interest rate that banks charge to their most credit worth customers Single Bank  Can create money through loans by the amount of it exc

Loanable Funds Market Market where savers and borrowers exchange funds (Q) at the real rate of interest (r%) 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 of 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 = borrowing (i.e. supplying bonds) More borrowing = more demand for 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 ∴DLF ← r% ↓ Changes in Supply of Loanable Funds Remember that supply of loanable funds = saving (i.e. demand for bonds)

Money Market The market where the FED ad the users of money interact thus determining the nominal interest rate (i%) Money Demand (MD) comes from households, firms, government and the foreign sector. The Money Supply (MS) us determined only by the Federal Reserve Money Demand  Transaction Demand: demand for money as a medium of exchange (independent of the interest rate) Asset Demand: demand for money as a store of value (dependent on the interest rate) Total Money Demand: (MD) is downward sloping because at high interest rates people are less inclined to hold money and more inclined to hold stocks and bonds. At lower interest rates people sacrifice less when they hold money  Money Supply  The money supply is determined by the Federal Reserve because the FED has monopoly control over the supply of money 

Uses of money  Medium of exchange  Serve to trade on product for another.  Unit of Account   Establish economical worth. Store of value  Money holds its value over a period of time where products may not. Type of Money Representative Money  Paper money that is backed by something tangible that gives it values  EX: IOU Commodity Money  Gets its value from the taste of materialized from which it is made  EX: Gold , Sliver  Flat Money  It is money because the government say so.  Characteristics of money  Durability  Is money durable? Yes  Portability You can carry money in different places   Divisibility Money can be broken down in many ways Acceptability Money is accepted anywhere  Uniformity Scarcity and limited supply Money supply  M1  Liquidity: easily convert to cash  Currency(coins & cash ) Checkable deposits/Demand accounts/Checking Account   Traveler's check M2  Consists of M1 money, saving accounts