Unit 4: Money

Use of Money:
- Medium of exchange: Borrow and trade
- Unit of Account: Establishes economic value
- Store of Value: Money olds value over period of time whereas products may not

Types of Money:
-Commodity Money: gets vale from type material from which it is made. Ex. Gold
- Representative Money: paper money backed by something tangible that gives it value.
- Fiat Money: money because the gov. says so.

Characteristics of Money:
- Divisible
- Portable
- Uniform
- Acceptable
- Scarce
- Durable

Money Supply:
- M1 Money: 75% of money in circulation and easy to convert.
  >Currency: Cash and coin
  >Checkable Deposit: Check-in account
  >Travelers Check: very liquid
- M2 Money: M1 money, Savings accounts and deposits held by banks outside the US.
- M3 Money: M2 money certificate of deposits AK CAs

Video

Monatary Policy/ Money supply videos

Video 1: There are 3 types of money; Commodity Money, Representative Money, and Fiat Money. Fiat money is the type of money we use today. It is an object, usually paper or coins, that has value because the government says it has value. There are also 3 functions of money It a can like a Median Exchange, stores value, and a unit of account.

Video 2: Money market graph is very similar to the supply and demand graph. The only difference is it is interest rate and quantity being measured instead of price and quantity. This is because Interest rate is the price to borrow money.

Video 3: There are tools to which the FED and manipulate money supply. These are called Expansionary and Contractionary. Expansionary is used to battle a recession. Contractionary is used to battle inflation.

Video 4: The loanable funds graph is also very similar to the supply and demand graph. The only difference is that the quantity of loanable funds instead of goods. Also, in this graph, savings are considered a plus. This is because savings in the bank mean more loanable money.

Video 5: Money creation is done by making loans. This is because when a bank loans out money, they charge interest. The money being loaned with increases with the money multiplier. The money multiplier is 5.

Interest Rate and Investment Demand

Inflation= Implication/ Output independent of changes in the price level

Investment: Money spent on
- Factories
- Equipment/ Machinery
- Technology (Hardware and software)
- New homes
- Inventories (goods sold by producers)

Expected rate of return
- Cost analysis
- Benefits of rate of return
- Interest cost
- Amount of investment

Nominal is the observable rate of interest. Real subtracts out of inflation and is only known ex post facto.
 r%= i%- pi%

*Real interest rate= r%

Wages

Nominal Wages: Amount of money received by worker per unit of time

Real Wages: Amount of goods and services a worker can purchase with their nominal wage.
*Real Wages= purchasing power of nominal wages

Sticky wages: the nominal wage level that is set according to an initial price level. Does not very due to labor contracts or other restrictions.

Employment

Full Employment: 
When equilibrium exists where AD intersects SRAS and LRAS at the same point.
























 Recessionary Gap: 
exists when equilibrium occurs below full employment


Inflationary Gap:
When equilibrium occurs beyond full employment output

Aggregate Supply

Aggregate Supply: is the level of real GDP that firms will produce at each price level.

Long- Run:
- Period of time where input prices are completely flexible and adjust to change.
- In long run, the level of real GDP, supplies is independent of the price level.

Short- Run:
- Period where input prices are sticky and do not adjust to changes in the price level.
- In short- run, the level of real GDP supplied is directly related to the price level.

Long Run Aggregate Supply:
- Mark the level of full employment
- Vertical at full employment
- Input prices are flexible

*Per unit production cost= total input cost/ total output cost

Determinants of SRAS:
- Input price
- Productivity
- Legal- Institutional environment.




Input Prices:
- Domestic Resource Prices
   - Wages (75% of all business cost)
   - Cost of capital
   - Raw materials
- Foreign Resources
- Market Power


*Productivity= total output/total input
*Legal Institutional Environment= Taxes/ subsities