Christian's AP Macroeconomics Blog

The  balance of payments  is the measure of money inflows and outflows between the United States and the Rest of the World (ROW).  Inflows  are referred to as  credits  and  outflows  are referred to as  debits . The balance of payments is divided into three accounts:  current account ,  capital/financial account , and  official reserves account . Current Account Balance of trade or net exports exports of goods/services - import 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 U.S. assets ex: interest payments on U.S. owned Brazilian bonds - interest payments on German-owned U.S. Treasury bonds Net transfers (tend to be unilateral) foreign aid -> a debit to the current account ex: Mexican migrant wo...

Monetary policy  is always conducted by  the Fed  and only affects  AD  through  investment spending . In  open market operations , the Fed can either buy bonds, which increases the money supply, or sell bonds, which decreases the money supply. The  discount rate  is used when FDIC member banks and other eligible institutions may borrow short-term loans from the Fed (banks borrow from the Fed). The  federal funds rate  is used when FDIC member banks loan each other overnight funds (banks borrow from each other). Reserve requirement  is a certain amount of reserves that banks must keep in the vault. The  prime rate  is the interest rate that banks charge to do their most creditworthy customers. If the Fed wants to  fight a recession , it will enact  expansionary monetary policy  to  increase the money supply  by using one or more of the following tools: Buying bonds ...

The  loanable funds market  is where savers and borrowers exchange funds  ( Q LF ) at the real interest rate (r%). The  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 . Remember that  demand for loanable funds = borrowing   (i.e. supplying bonds) .  Changes in the demand for loanable funds  occur when there is: More borrowing = more demand for loanable funds (->) Example: Government deficit spending = more borrowing = more demand for loanable funds, therefore  D LF  -> and r% increases Less borrowing = less demand for loanable funds (<-) Example: Less investment demand = less borrowing = less ...

The  money market  is where the Federal Reserve and the users of money interact, thus determining the nominal interest rate (i%). It is composed of two parts: Money demand (MD)  comes from households, firms, government, and the foreign sector. Money supply (MS)  is determined only by the Federal Reserve. Money demand  is further divided into three parts: Transaction demand  is the demand for money as a medium of exchange (independent of interest rate). Asset demand  is the demand for money as a store of value (dependent of 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  is determined by the Federal Reserve because the Federal Reserve has monopoly control over the supply of money.

There are  three functions of money : medium of exchange, store of value, and unit of account. Medium of Exchange it serves to trade one product for another Store of Value where money holds its value over a period of time Unit of Account establishes economic worth There are  three types of money : commodity money, representative money, and fiat money. Commodity Money gets its value from the type of material from which it is made examples are gold and silver in products Representative Money paper money backed by something tangible that gives it value examples are gold-or-silver-backed money and IOUs Fiat Money money because the government says so There are  seven characteristics of money : Durability Portability Divisibility Uniformity Scarcity Acceptability Limited Supply Money supply  consists of M1 money, M2 money, and M3 money. M1 Money consists of currency in circulation, which can be: currency , which ...