Dude you came in clutch for my micro exam, so im definitely gonna have to use these videos for my macro exam!!! Best econ teacher on the Internet for sure
At 13:52 , you said all three of these tools (Open Market operations, discount rate, and reserve requirement) were used to target the policy rate, but I thought only the tools in an ample reserve system would be used to target the policy rate since banks with ample reserves use the reserve market graph, which has the policy rates. How can the tools of a scare reserve system be used to target policy rate if it's not working on a graph with policy rates? Wouldn't it just target interest rates since scarce reserve systems are working on the money market? I hope that question made sense lol
The policy rate is the federal funds rate in the US. Before we had ample reserves, the Fed used these tools to target the policy rate in the money market.
Very clear video on these concepts! I learn many things I didn’t know or understand before ❤ thanks for your video. Hope I can have good score on coming AP test 🎉😊
Thank you always for your amazing videos! I'd like to ask a question, though -- it's said here that bond prices and interest rates have an inverse relationship, presumably because people seek higher rates of return and will desire bonds less when interest rates are higher. But if that is the case, why is it that in the loanable funds market, when real interest rate increases, gross investment decreases? Do people desire higher interest rates or not?
"Gross investment" or ”investment" is purchases of physical capital by businesses. These businesses pay the interest, so they buy more physical capital when interest rates are low and less physical capital when it just straights or high. This gross investment is the demand curve in the loanable Funds market. Purchasers of bonds, are the suppliers in the loanable funds market. In unit 6, we refer to foreign investment. Foreign investors are essentially people in other countries who save their money in our bond markets. They are suppliers in loanable funds market as they purchase bonds. I hope that helps!
do we use the money market graph in a market with ample reserves as well? Becuase if there is ample reserves would the Money supplied be vertical or do we only use that when there are scarce reserves?
10:39 in this context, interest is the money that consumers pay to banks. so if those interest rates are higher, people demand less money from the banks, and if those rates are lower, then people demand more money. is this logic correct? i feel like im mixing this up with the loanable funds market
Actually in the money market, the interest rate (in regards to the demand curve) is the money people earn (not pay). When we hold our wealth as cash, (money), we lose the nominal interest rate we could have earned if we purchased a bond. When interest rates are high, people will hold (demand) less money because they would rather buy interest bearing assets. When interest rates are low people would rather hold (demand) money because the liquidity money provides is better than the small amount of interest they could earn. Side note. All interest rates are connected, so this is also the rate people pay when borrowing. But the demand for money isn't about borrowing. It is about holding wealth as cash for transactions or as valuable assets. I hope that helps!
okay so my teacher taught loanable funds market very differently 19:30 my teacher taught it as just demand for loanable funds and supply for loanable funds. shifters of demand are changes in investment spending (due to changes in perceived business opportunities) and changes in government borrowing. i don't think you mentioned changes in government borrowing. shifters of supply are changes in private savings or changes in capital inflow. 21:04 does crowding out just refer to the case where government deficit increases?
Your teacher is in line with the AP exam. There are lots of ways to do Loanable funds, and I do my best to not outright contradict any of them. To ensure you understand, play the loanable funds game on ReviewEcon.com. The only thing your really missing for the shifters is foreign investment (really foreign savings in domestic banks). Tat is a supply shifter. Yes, crowding out is about changes in the deficit (government borrowing). Increases in the deficit cause higher interest rates in the LF market and decreases in the deficit cause lower interest rates in the loanable funds market.
9:28 i'm a bit confused on what the difference is between new loans and new money. my teacher just taught that this value would be the change in money supply
New Loans are always excess reserves x the money multiplier. New money can be bigger (adding the origin amount back in) if it was new money (like if the central bank buys bonds on the open market). This game may help you understand further. Good luck! www.reviewecon.com/games-activities/money-multiplier
If you understand 1-4 well, I believe you can totally make it. Watch my unit 5 and 6 play list, play the games on ReviewEcon and make sure you can draw the Phillips curve and ForEx market. Good luck!
That is correct. You can show limited reserves on the reserves market by having the supply intersect the demand on the downward sloping portion. But so far, released AP questions I've seen only deal with the reserves market when there are ample reserves.
