Finance Note

‭4.1‬ ‭financial assets‬ ‭●‬ f‭inancial sector: network of institutes that link borrowers and lenders. Includes banks,‬ ‭mutual funds, pension funds, and other financial intermediaries‬ ‭●‬ ‭assets: anything tangible or intangible that has value‬ ‭●‬ ‭interest rate: the amount a lender chargers borrowers for borrowing money. “price” of a‬ ‭loan‬ ‭●‬ ‭interest-bearing assets: assets that earn interest over time, e.g. bonds‬ ‭●‬ ‭Personal finance = way individuals and families budget/save/spend‬ ‭●‬ ‭“investment” → always refer to business spending on tools and machinery‬ ‭●‬ ‭bonds = loans; IOUs‬ ‭○‬ ‭represent debt to repay to lenders‬ ‭○‬ ‭NO Ownership of company; paid interest‬ ‭●‬ ‭stocks = equities‬ ‭○‬ ‭represent ownership of a corporation and stockholder is entitled to a portion of‬ ‭profit paid out as dividends‬ ‭●‬ ‭4.2‬ ‭Nominal interest rate = real interest rate + inflation‬ ‭time value of money: $ X in N years = $X (1+ir)^N‬ ‭4.3‬ ‭barter system - goods/services directly traded‬ ‭issues:‬ ‭‬ d ● ‭ ouble coincidence of wants → traders needed to have something the other wanted‬ ‭●‬ ‭some goods cannot be split‬ ‭money‬ ‭●‬ M ‭ oney is anything generally accepted as payment for goods and services; NOT the‬ ‭same was wealth or income‬ ‭○‬ ‭wealth = total collection of assets‬ ‭○‬ ‭income = flow of earnings per unit of time‬ ‭●‬ ‭commodity money → performs function of money with intrinsic value outside the label‬ ‭(gold, silver, cigarettes)‬ ‭●‬ ‭fiat money → something that serves as money but has no other value or uses (paper,‬ ‭digital)‬ ‭●‬ ‭three functions of money‬ ‭○‬ ‭medium of exchange‬ ‭○‬ ‭unit of account (measure of value)‬ ‭○‬ ‭store of value (store purchasing power)‬ ‭●‬ ‭bond and interest are inverse! if interest go up, bond prices will fall‬ ‭●‬ ‭money’s effectiveness: collective belief of value‬ ‭○‬ ‭generally accepted by buyers and sellers‬ ‭○‬ ‭scarcity as money cannot be reproduced‬ ‭○‬ ‭portable and dividable‬ ‭●‬ ‭purchasing power of money is the amount of goods/services an unit of money can buy‬ ‭●‬ ‭inflation DECREASES purchasing power‬ ‭●‬ ‭hyperinflation DECREASES acceptability‬ ‭●‬ ‭liquidity → ease with which an asset can be accessed and used as a medium of‬ ‭exchange‬ ‭○‬ ‭M1: highest liquidity‬ ‭1.‬ ‭currency in circulation‬ ‭2.‬ ‭checkable bank deposits‬ ‭3.‬ ‭traveler’s checks‬ ‭4.‬ ‭saving accounts‬ ‭○‬ ‭M2 (near-money): M1 along with the following‬ ‭1.‬ ‭saving deposits (money market accounts)‬ ‭2.‬ ‭time deposits (certificates of deposit CDs)‬ ‭3.‬ ‭money market funds‬ ‭●‬ ‭M2 = mostly savings‬ ‭●‬ ‭M1 and M2 hold little to interest‬ ‭●‬ ‭therefore opportunity cost of holding liquid money is the interest you COULD be earning‬ ‭●‬ ‭stocks, equity = nc‬ ‭4.4‬ ‭money multiplier = 1 / reserve ratio‬ ‭ new money” = initial loan/excess reserve x multiplier‬‭= (money multiplier x initial amount) -‬ “ ‭initial deposit‬ ‭fractional reserve banking‬ ‭●‬ w ‭ hen a bank holds a portion of deposits to cover potential withdrawals and then loans‬ ‭the rest of the money out‬ ‭●‬ ‭“portion of deposits” = reserve ratio‬ ‭●‬ ‭bank balance sheets‬ ‭○‬ ‭shows money deposited and how bank is using it‬ ‭○‬ ‭liabilities VS. assets‬ ‭○‬ ‭liabilities: financial obligations‬ ‭■‬ ‭demand deposits, account invest, equity‬ ‭○‬ ‭assets:‬ ‭■‬ ‭required reserves, excess reserves, outstanding loans, investment‬ ‭securities‬ ‭●‬ ‭important:‬ ‭○‬ ‭liability total = asset total‬ ‭○‬ ‭change made on one side is an equal change in the other side‬ ‭○‬ ‭reserve ratio is key!‬ ‭ ‬ ‭deposits‬ ● ‭○‬ ‭deposit becomes liability‬ ‭○‬ ‭creates assets in forms of reserve and loans‬ ‭○‬ ‭liability: initial demand deposits - $1000‬ ‭○‬ ‭assets: required reserves - $100; loans - $900‬ ‭■‬ ‭1000=1000 both sides‬ ‭4.5‬ ‭‬ q ● ‭ of money VS nominal interest rate‬ ‭●‬ ‭MS money supply = vertical‬ ‭●‬ ‭MD money demand is downward sloping linear‬ ‭○‬ ‭people demand money to make it easier to buy stuff‬ ‭○‬ ‭as nominal interest rate decreases, opportunity cost of holding money decreases‬ ‭●‬ ‭opportunity cost of holding money is interest we could earn but have forgone‬ ‭●‬ ‭shifters‬ ‭○‬ ‭changes in price level (direct relationship)‬ ‭○‬ ‭4.6‬ ‭monetary policy and federal reserve‬ ‭three shifters:‬ ‭1.‬ ‭reserve requirements ratio‬ ‭1.‬ ‭percent of deposits that banks must hold in resere‬ ‭2.‬ ‭percent that they cannot loan out‬ ‭3.‬ ‭interest rate low = consumers buy items = gdp rises‬ ‭4.‬ ‭interest rates high = gdp falls‬ ‭5.‬ ‭feds set this amount‬ ‭1.‬ ‭buy big = bonds bought = supply increase‬ ‭6.‬ ‭federal funds rate‬ ‭1.‬ ‭interest rate that banks charge one another for one day loans of reserves‬ ‭2.‬ ‭influenced by the Fed by setting target rate and using open market‬ ‭operations to hit target‬ ‭2.‬ ‭discount rate‬ ‭1.‬ ‭central bank can’t dictate private/commercial banks‬ ‭ .‬ r‭ ate that central bank charges other banks for loans‬ 2 ‭3.‬ ‭decrease discount rate → more loans to banks → loan out more money to‬ ‭consumers → increase MS‬ ‭3.‬ ‭open market operations‬ ‭1.‬ ‭assets outside of monetary base and supply‬ ‭2.‬ ‭gov buys bonds from commercial banks and puts more in bank reserves‬ ‭3.‬ ‭money supply doesn’t increase until banks actively loan out money from sold‬ ‭bonds (selling bonds to gov for money)‬ ‭4.‬ ‭the money received by banks goes to excess reserves‬ ‭video‬ ‭‬ m ● ‭ onetary base = bank reserves and currency in circulation‬ ‭●‬ ‭money supply = checkable deposits and currency in circulation‬ ‭○‬ ‭money supply > base; multiplier increases the dollars that come out of bank‬ ‭reserves‬ ‭●‬ ‭initial change in money supply when Fed buys $1000 of bonds?‬ ‭○‬ ‭bank reserves=+1000; checkable deposits=NOT CHANGED‬ ‭○‬ ‭on bank balance:‬ ‭■‬ ‭the +1000 will contribute to excess reserves → immediately be loaned out‬ ‭without subtracted the required reserves‬ ‭■‬ ‭100% of that money can go into excess reserves‬ ‭○‬ ‭all $1000 can max change $10,000 in deposits/loaned out‬ ‭○‬ ‭all change in required reserves for all banks: $1000 each bank‬ ‭4.7‬ ‭video:‬ ‭ ‬ i‭f a gov does “more borrowing” → supply decrease and demand increases‬ ● ‭●‬ ‭assume nominal interest rate is 5% and inflation is 2% → real interest rate is 3%‬ ‭○‬ ‭real + inflation=nominal‬ ‭●‬ ‭real interest rate of 50% → bad for borrowers; good for lenders‬ ‭●‬ ‭loanable funds market → shows supply and demand of loans and equilibrium real‬ ‭interest rate‬ ‭●‬ ‭graph: quantity of loans vs. real interest rate‬ ‭●‬ ‭(Qloans, Re) → equilibrium‬ ‭●‬ ‭national savings = public + private savings‬ ‭○‬ ‭change in priv/public = shift supply curve‬ ‭●‬ ‭net captial inflow = inflow - outflow‬ ‭○‬ ‭change in capital in/outflow = shift supply‬ ‭●‬ ‭government borrowing = deficit spending when government spending > tax revenue‬ ‭●‬ ‭private investment = business/customer borrowing‬ ‭○‬ ‭change that affects borrowing shifts demand‬ ‭●‬ ‭SHIFTERS of loanable funds market‬