Unit 4

March 3, 2015

Ø Money is used in any asset

Ø  Use of money:

·         Medium of exchange- is used to determine value, when you trade you know how much the product is

·         Unit of account, how to compare prices

Ex. How much is the hamburger compare

Store of Value- How money can be stored. Saving accounts, shoe boxes, safe, ect. Does not draw interest

3 types of money

Commodity money- value in itself

3 ex. Salt, olive oil, gold

Representative money- represents something in value

Ex. IOU

Fiat money- it is money because the government says so. Paper currency and coins.

Not backed up by gold.

Ø  6 characteristics of Money

·         Durability

·         Portability

·         Divisibility

·         Uniformity

·         Limited supply

·         Acceptability

Ø  Money supply

·         M1 Money

o   Liquid assets (Liquidity) – easily convert to cash

-          Ex. Cash, paper currency, coins, checkable deposits or Demand Deposits (Checks or checking accounts), and traveler’s checks.

·         M2 Money

o   Consists of M1 Money

-          Savings Acct.

-          Money Market Acct.

-          Total asset available in the economy

Ø  3 reasons of Financial institution

·         To store money

·         Save money

-          4 ways to save money

o   Savings

o   Checking acct.

o   Money market accounts(Have a certain amount each year)

o   Certificate of Deposit (CD) (Locked for a certain time, earning interest, if the inflation rises the money will grow)

·         Loan money (Credit cards, because of mortgages)

Ø  Loans

·         Banks operates on a fractional reserve system is which is where they keep a fraction of the funds and loan out the rest. (Federal Reserve banks do the same)

Ø  Interest Rates:

·         Principal- The amount of money borrowed (Pay more on the principle, and pay for another month) P= Ix 100/ R x T

·         Interest- Price paid of the use of borrowed money R= I x 100/ P x T

-          Simple Interest- Paid on the principle I=P (principal) R (Interest rate) T (time)

-          Compound Interest- paid on the principle and the accumulated interest

Time (T) = I x 100 / P x R

Ø  5 Types of Financial Institution

·         Commercial banks

·         Savings and loans institutions

·         Mutual saving banks

·         Credit Unions

·         Finance Companies

Ø  Investment

·         Redirecting resources that you consume now for the future (EX.

·         Financial Assets

-          Claims on property or income of borrower

·         Financial Intermediaries

Institutions that channels funds from savers to borrowers

Savers -> Financial Institutions -> Investors

Ø  Purposes of financial Intermediaries

·         Sharing Risks

·         Number 1 way diversification

·         Spread the investment in order to reduce risks

·         Providing information

·         Liquidity (Returns- amount an investor receives above and beyond the sum of money initially invested)

Bonds and Stocks

·         Bonds you loan

·         Bonds- loans or IOUs that represent debt that the government or a corporation must repay to an investor that the government, low risk investments

·         3 components of a bond

-          Coupon Rate: Interest rate issuer pays the bond holder

-          Maturity: The time at which payment to a bond holder is due

-          Par value: amount that the investor pays to purchase a bond and that will be repaid at maturity

-          Stocks you own

-          Yield it is the annual rate of return on a bond if the bond were held for maturity

March 4, 2015

Ø  Time Value of Money

·         Is a dollar today worth more than a dollar tomorrow?

-          Yes

·         Why?

-          Opportunity cost and Inflation

-          This is the reason for changing and paying interest.

·         Let v=future value of $

-          p= present value of $

-          r= real interest rate (nominal rate- inflation rate) expressed as a decimal

-          n= years

-          k= number of times interest is credited per year

Ø  The Simple Interest Formula

·         v= (1+r) ^n + p         

Ø  The Compound Interest Formula

·         v= (1+ r/x) ^nk =p

Ø  Multiple Deposit Expansion and the Federal Reserve (Chapter 14)

·         Functions of the FED

·         Issues paper currency

·         Sets reserve requirements and holds reserves of banks

·         It lends money to banks and charges them interest

·         They are a check clearing service for banks (Goes to the bank, then FED, it travels)

·         It acts as personal bank for the government

·         Supervises member banks

·         Controls the money supply in the economy

March 5, 2015

Ø  The Three Types of Multiple Deposit Expansion Question

·         Type 1: Calculate the initial change in excess reserves

-          a.k.a the amount a single bank can loan from the initial deposit

·         Type 2: Calculate the change in loans in the banking system

·         Type 3: Calculate the change in the money supply

-          Sometimes type and type 3 will have the same result (i.e. no Fed)

·         Type 4: Calculate the change in demand deposits

March 6, 2015

Ø  How Banks Work

·         Assets

-          Reserves:

o   Required reserves (rr)-% required by Fed. To keep on hand to meet demand

o   Excess reserves (er) - % reserves over and above the amount needed to satisfy the minimum reserve ratio set by Fed.

-          Loans to firms, consumers, and other banks (earns interest)

-          Loans to govt. = treasury securities

-          Bank property- (if bank fails, you could liquidate the building/property)

·         Liabilities + Equity

-          Demand Deposits ($ put into bank)

-          Timed Deposits (CD’s)

-          Loans from: Federal Reserve & other banks

-          Shareholders Equity- (to set up a bank, you must invest your own money in it to have a stake in the banks success or failure)

Ø  Creating a Bank

-          Reserve ratio= Commercial bank’s Required reserves/ Commercial banks checkable- deposits

Ø  Reserve Requirements

-          Excess reserves

o   Actual reserves- required reserves

-          Required reserves

o   Checkable deposits x reserve ratio

March 17, 2015

Ø  The Money Market

·         (Supply and Demand for Money)

·         Inverse relationship between money demand and the interest rates.

o   DM increases iR decrease

o   DM MD decrease iR increase

o   Demand for money is downward sloping