Kingsley'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 in open market operations when the Fed buys bonds, a demand deposit (DD) is created banks can make mo...

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 demand for loanable funds, therefore D LF  <- and r% decreases Re...

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. For more information, please refer to these videos on Khan Academy: Demand ...