Principles of Macroeconomics Chapter 10 – Financial Markets and the Economy
The Federal Reserve Board of Governors: Review of Money and its Functions
Marginal Revolution University: Quantity Theory of Money
Marginal Revolution University: Fractional Reserve Banking and the Money Multiplier
Money and Finance: Crash Course Economics Video #11
FRED – M1 Money Multiplier
Money: Course Map & Recommended Resources
This is an introduction to money and its functions. It explains the role of the central bank in money supply and the money creation process. Money demand and its determinants are essential to an understanding of equilibrium interest rates, when combined with a discussion of money supply. An alternative explanation of bond demand and equilibrium interest rates is introduced through a discussion of the bond market.
Define money and its functions (6)
Define and determine the money supply (6)
Demonstrate the money creation process (6)
Explain the role and makeup of central banks (and the Fed) (7)
Explain the quantity theory and its implications for inflation (6)
Explain the relationship between money demand and interest rates (6)
Utilize the money market to indicate equilibrium and analyze shifts (6)
Explain and demonstrate how the bond market works and discuss the relationship with interest rates and money (5, 6)
NOTE: This Module meets Ohio TAG's 5, 6, 7 for an Intro to Macroeconomics Course
Recommended Textbook Resources
Principles of Macroeconomics
Authored by: University of Minnesota (2016). Provided by: University of Minnesota Libraries. CC BY-NC-SA 4.0
This resource covers content for Learning objectives 1, 2, 3, and 4. An introductory presentation on the concepts of money, money supply, money creation, and the structure of the Fed in one chapter.
This resource covers objectives 6, 7, and 8. Demand and supply applications in the money market and bond market are covered. The discussion on the foreign exchange market may be skipped without loss of content for this chapter.
Supplemental Content/Alternative Resources
This starts a short review of money. Under FAQs to the left, the sections on "About the Fed" and "Currency and Coin" provide more detailed and updated information more relevant to the textbook resources. They supplement content for Learning Objectives 1, 2, 3, and 4.
In this video (also read brief notes), Alex Tabarrok explains the quantity theory of money. This supplements content for Learning Objective 5 and could serve as the primary resource for the quantity theory of money.
In this video, Alex Tabarrok explains fractional reserve banking and the money multiplier.
This provides a discussion on money with emphasis on the financial system. It introduces a discussion of a cryptocurrency (Bitcoin) that will be of interest to students. A portion of it discusses various financial instruments which may be important since a connection between the financial sector and the real economy.
The time series graph presents the value of the M1 money multiplier from 1984 to the present. Answer the following questions based on the time series graph:
Explain why the money multiplier declined significantly in 2009 and 2010. How does a low oney multiplier affect money creation?
What are the values for the money multiplier in September 1988, 1998, 2008, and 2018? Given these values, how much total deposits would have been created with an initial increase of $1 million in excess reserves in each of those years? Show all work.
Discuss two explanations from your assigned readings why the money multiplier may increase or decrease in certain periods.
These are FRED data on M1 and M2 money stock. What is the percentage change in M1 and M2 over the periods 2000 to 2010, and 2010 to present? Conduct research to find information from the Federal Reserve Banks that explains why there has been such differences in the growth of M1 and M2. Students may also deduce the reasons for these changes by reviewing their recommended readings.
Active Learning Exercise
Find and read two articles that discuss changes in interest rates in the bond markets. According to the articles, explain the determinants of bond interest rates. How do bond interest rates track overall movements of interest rates in the U.S. economy? Explain the potential impacts of changes in interest rates on the consumption, C, and investment, I, components of gross domestic product (GDP).
For data on interest rates go to FRED, https://fred.stlouisfed.org/, and search for interest rates. Select various interest rates and describe how they track or correlate with each other. Which interest rates have shown the most significant up and down movements, and which have shown the least up and down movements? How can we explain the differences in interest rate movements?