IV. Financial Sector (15–20%)
A. Money, banking, and financial markets
1. Definition of financial assets: money, stocks, bonds
2. Time value of money (present and future value)
3. Measures of money supply
4. Banks and creation of money
5. Money demand
6. Money market
7. Loanable funds market
B. Central bank and control of the money supply
1. Tools of central bank policy
2. Quantity theory of money
3. Real versus nominal interest rates
Video Lessons
- Part 1 - Types & Functions of Money (9:52)
- Part 3 - Money Market Graphs (7:50)
- Part 4 - The Fed's Tools of Monetary Policy (9:54)
- Part 5 - The Equation of Exchange (3:39)
- Part 6 - Costs of Inflation (6:45)
- Part 7 - The Loanable Funds Market (9:59)
- Part 8 - Money Creation & Multiple Deposit Expansion (7:48)
- Part 9 - Money Market, Loanable Funds, & AD/AS (8:56)
PowerPoints (David Mayer)
From the College Board
Students should have an understanding of financial markets and the working of the loanable funds market in determining the real interest rate. It is also important that students develop a clear understanding of the differences between the money market and the loanable funds market. To understand how monetary policy works, students must understand the definitions of both the money supply and money demand and the factors that affect each of them. Here the course introduces students to the definition of money and other financial assets such as bonds and stocks, the time value of money, measures of the money supply, fractional reserve banking, and the Federal Reserve System. In presenting the money supply, it is important to introduce the process of multiple-deposit expansion and money creation using T-accounts, and the use of the money multiplier. In learning about monetary policy, it is important to define money demand and examine its determinants. Having completed the study of money supply and money demand, the course should proceed to investigate how equilibrium in the money market determines the equilibrium interest rate, how the investment demand curve provides the link between changes in the interest rate and changes in aggregate demand, and how changes in aggregate demand affect real output and price level.
Having an understanding of the financial markets, students should identify and examine the tools of central bank policy and their impact on the money supply and interest rate. Students should understand the distinction between nominal and real interest rate. Students should also be introduced to the quantity theory of money, and examine and understand the effect of monetary policy on real output growth and inflation.