1. The three types of money is commodity money, representative money, and fiat money. Commodity money is the oldest and most basic form of money, and it is composed of goods that act as currency, such as cattle. Representative money is money backed by a precious metal, such as gold or silver. Fiat money,is money that we use today, and is legal tender backed by the word of the government. Money functions as a medium of exchange, store of value, and unit of account.
3. On the Money Market graph; the y-axis is labeled with 'i' which stands for interest rate and the x-axis is labeled as 'QM' which stands for quantity of money. Demand for money slopes downward because, when the price is high, the quantity demanded is low, and vice-versa. The supply of money,which is unlike the demand for money, is vertical and is fixed by the Fed, which means that it is not affected by the interest rate and only the Fed actions can shift it left or right. An increase for the demand of money is shown by a shift to the right; a decrease, is a shift to the left. If the Fed increases the money supply, they will bring the interest rate down, which then stabilizes it.
4. The tools of monetary policy can be divided into two categories: expansionary [easy money] and contractionary [tight money]. In a expansionary policy, the Fed lowers the reserve requirement and discount rate and buys bonds. In a contractionary policy, the Fed raises the reserve requirement for the discount rate and then sells bonds. The discount rate is the rate at which banks can be borrow money from the Fed. Buying bonds results in an increase in the money supply; selling bonds results in a decrease. The Federal Funds Rate is the rate at which banks borrow money from each other.
7. When creating a Loanable Funds graph, the y-axis is labeled as interest rate, and the x-axis is labeled as quantity of loanable funds. Both demand and supply is depicted in this graph. The supply of loanable funds comes from the amount of money that people have in banks. An increase in demand for money can also increases the demand for loanable funds, because both changes increase the interest rate. More demand for money means reducing the supply of money, since the government is demanding more of it; which they are buying more of; which also leaves less in terms of supply.
8. Banks create money by making loans. The reserve requirement is the amount of money that banks must keep in reserves, determined by the reserve ratio. The money multiplier can be calculated by dividing 1 by the reserve ratio. You take this multiplier and multiply it by the amount of the initial deposit in order to figure out how much money the bank can loan out. This is possible due to multiple deposit expansion; however, it is not guaranteed that this exact amount of money will be created, because that would mean that none of the banks hold excess reserves.
9. The relationship between the money market, the loanable funds market, and the AD-AS model is integral to macroeconomics. Using government deficit spending as an example, there is an increase in the demand for money, which also causes the demand for loanable funds to increase and the supply of loanable funds to decrease, and then an increase in aggregate demand. An increase in the interest rate also means an increase in the price level; this is known as the 'Fisher Effect'. It is better to show either an increase in demand or an increase in supply across all three graphs, because it shows consistency and it is easier to understand the concept.
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