3 uses:
- Medium of exchange
- Unit of account: how to compare prices
- Store value: how money can be stored
3 types of money:
- Commodity money
- Has money within itself
- Salt
- Olive oil
- Gold
- Representative money
- Represents something of value
- An IOU
- Fiat money
- It is money because the government said so
- Paper currency
- Coins
6 characteristics of money
- Durability
- Portability
- Divisibility
- Uniformity
- Limited supply
- Acceptability
Money supply is the total value of financial assests available in the US economy
M1
|
M2
|
Liquid assets = east to convert to cash
|
M1 money + savings acct or money market account
|
Purpose of financial institutions
- Store money
- Save money
- Loan money
- most loan for credit cards/mortgages
4 ways to save money
- Savings
- Checkable accounts
- Money market account
- Certificate of deposit (CD)
Loans
- Banks operate on a fractional reserve system
- Which is where they keep a fraction of funds and loan out the rest
Interest rates
- Principle amount of money borrowed
- Interest: price paid for use of borrowed money
- Simple interest: paid on the principle
- Compound: paid on the principle + accumulated interest
Types of financial institutions
- Commercial banks
- Savings and loans
- Mutual savings banks
- Credit unions
- Finance companies
Investments
- Redirecting resources you'd use now for the future
- financial assets: claims on property or income of borrowers
- financial intermediary: institution that channels funds from savers to borrowers
- Purpose of these
- Sharing risk, by diversification: spread investment to reduce risk
- Providing information
- Liquidity returns: amount investors receive above and beyond the sum of money invested
Bonds you OWN -- Stocks you LOAN
Bonds: loans or IOUs that represent debt that govt. or corporations must repay to an investor; a relatively low risk investment
- Coupon rate: interest rate the issuer pays the bond holder
- Maturity: time which payment to bond holder is due
- Par value: amount an investor pays to purchase an bond and that would be paid to investor at maturity
- Yield: annual rate of returns on a bond if bond is held to maturity
- Is a dollar today worth more than tomorrow?
- Yes, because inflation topp. cost
- This is the reason for charging and paying interest
- Let V = future value of money
- P = present value of $
- r = real interest rate (nominal - inflation rate)
- n = years
- k = # of times interest is credited per year
- Simple interest formula: V = (1 + r) ^n * p
- Compound interest rate: V = (1 + r/k)^nk * p
FUNCTIONS OF THE FED
- issue paper currency
- set reserve requirements and hold reserves of banks
- lend money to bank and charge interest
- they are a check clearing service for banks
- act as personal bank for government
- supervise member banks
- control money supply in the economy
- Types of multiple deposit expansion:
- Type 1: calculate initial change in excess reserves: amount single bank can loan form initial deposit
- Type 2: calculate change in loans in banking system.
- Type 3: calculate change in money supply.
- Type 4: calculate change in demand deposit
How banks work
Assets
|
Liabilities + equities
|
|
|
|
|
|
|
|
|
- Creating a bank:
- transaction #4
- depositing reserves in a FED. reserve banks
- required reserves
- reserve ratio
Reserve ratio = commercial bank required reserve / commercial bank checkable deposit
- Reserve requirements
- Excess reserves
- Actual reserves - required reserves
- Required reserves
- checkable deposits * reserve ratio
Key principle:
- A single bank can create money (through loans) by the amount of excess reserves
- Banking system as a while can create money by a multiple (deposit on money multiplier) of the initial excess reserves.
Factors that weaken effectiveness of deposit multiplier
- If banks fail to loan out excess reserves
- if banks customers take their loans in cash rather than i nnew checking acct deposit, creates a cash/ currency drain
Money market
- inverse between money demand and the interest rates
- money demanded is downward sloping
- money supply is vertical
- fed buy bonds then interest rate is low
- decrease money supply by selling bonds
Fiscal
|
FED
|
|
|
|
|
| |
| |
|
- Federal fund rate: the interest rate that commercial banks charge each other for overnight loans
- Will always be opposite of bank reserves & money supply
- Money & bank increase, this decreases
- Prime rate: interest rate banks charge to their most credit worthy customers
- if higher than 4%. not prime rate
Loanable funds market
- market where savers and borrowers exchange fund (Qlf) at the real rate of interest
- demand for loanable funds or borrowing comes from households, firms, government and the foreign sector
- the demand for loanable funds is infact the supply of bonds
- supply of loanable funds is also the demand for bonds
Changes in demand for loanable funds
- Demand for loanable funds = borrowing (i.e supply bond)
- more borrowing = more demand for loanable funds shifts to the right
- less borrowing = less demand for loanable funds shifts to the left
- Ex. Govt. deficit spending = more borrowing
- Less investment demand = less borrowing, ir decrease
Changes in supply
- Supply of loanable funds = saving
- more saving = mor supply of loanable funds, shift to the right
- less saving = less supply of loanable funds, shift to the left
- Ex. Govt. budget surplus = more saving = more supply of loanable funds
- Decrease in consumer MPS = less saving = less supply of loanable funds
No comments:
Post a Comment