Thursday, April 7, 2016
Tuesday, April 5, 2016
UNIT IV
UNIT IV
Financial Sector
Financial Assets (what's owned)
Stocks or bonds that provide expected future benefits
It benefits the owner only if the issuer of the asset meets certain obligations
vs.
Financial Liabilities (what you owe)
It is insured by the issuer of a financial asset to stand behind the issued asset
Interest Rate- price paid for the use of a financial asset
Stocks
Financial assets that convey ownership in a corporation
Bonds
Promise to pay a certain amount of money plus interest in the future
What Banks Do
A bank is a financial intermediary
Uses liquid assets (bank deposits) to finance the investments of borrowers
Process known as fractional reserve banking
System in which depository institutions hold liquid assets less than the amount of deposits
Can take the form of:
Currency in bank vaults
Bank Reserves- Deposits held at Federal Reserves
T-Account (Balance Sheet)
UNIT IV
Money Supply/ Demand for Money Graphs
Demand for money has an inverse relationship between nominal interest rates and the quantity of money
When interest rates increase, quantity demand of money falls
When interest rates decrease, quantity demand of money increases
Money Demand Shifters
Changes in price level
Changes in income
Changes in taxation that affect investment
Money Supply
Decrease in money supply=Increased interest rates=Decreased investment= Decrease in AD
Increase in money supply=Decreased interest rates=Increased investment= Increase in AD
UNIT IV
Time Value of Money
A dollar today is worth more than it is tomorrow
This is due to inflation and opportunity cost
This is the reason for charging and paying interest
Let v=future value of $
p=present value of money
r=real interest rate (nominal rate-inflation rate) expressed as a decimal
k=number of times interest is credited per year
The Simple Interest Formula
v=(1+r)^n x p
The Compound Interest Formula
v=(1+(r/k))^nk x p
UNIT IV
Uses of Money: Just remember S.U.M.
Store of Value- money holds its value over a period of time, whereas products do not
Unit of Account- establishes economic worth in the exchange process
Medium of Exchange- to barter or trade
Types of Money:
Commodity money- gets its value from the type of material from which it is made; Ex. Gold and silver coins
Representative money- paper money backed up by something tangible that gives it value
Fiat money- it is money because the government says so; Ex. American dollars
Characteristics of Money: Just remember S.U.P. D.A.D
Scarce- many people use credit cards over cash
Uniform- money doesn't change and can still be used anywhere
Portable- can take money anywhere
Durable- hard to physically destroy
Acceptable- just about everywhere takes cash
Divisible- you can make change from money in many different ways
Money Supply:
M1 Money- currency(cash and coins), checking deposits(checking accounts), demand deposits, travelers checks; make up 75% of money in circulation; most liquid(easy to convert to cash)
M2 Money- consist of M1 money and saving accounts, money market accounts and deposits held by banks outside of the U.S.; not very liquid
M3 Money- consists of M2 money plus certificates of deposits (CD's) held by private institutions; penalty for withdrawing early
Financial Sector
Financial Assets (what's owned)
Stocks or bonds that provide expected future benefits
It benefits the owner only if the issuer of the asset meets certain obligations
vs.
Financial Liabilities (what you owe)
It is insured by the issuer of a financial asset to stand behind the issued asset
Interest Rate- price paid for the use of a financial asset
Stocks
Financial assets that convey ownership in a corporation
Bonds
Promise to pay a certain amount of money plus interest in the future
What Banks Do
A bank is a financial intermediary
Uses liquid assets (bank deposits) to finance the investments of borrowers
Process known as fractional reserve banking
System in which depository institutions hold liquid assets less than the amount of deposits
Can take the form of:
Currency in bank vaults
Bank Reserves- Deposits held at Federal Reserves
T-Account (Balance Sheet)
UNIT IV
Money Supply/ Demand for Money Graphs
Demand for money has an inverse relationship between nominal interest rates and the quantity of money
When interest rates increase, quantity demand of money falls
When interest rates decrease, quantity demand of money increases
Money Demand Shifters
Changes in price level
Changes in income
Changes in taxation that affect investment
Money Supply
Decrease in money supply=Increased interest rates=Decreased investment= Decrease in AD
Increase in money supply=Decreased interest rates=Increased investment= Increase in AD
UNIT IV
Time Value of Money
A dollar today is worth more than it is tomorrow
This is due to inflation and opportunity cost
This is the reason for charging and paying interest
Let v=future value of $
p=present value of money
r=real interest rate (nominal rate-inflation rate) expressed as a decimal
k=number of times interest is credited per year
The Simple Interest Formula
v=(1+r)^n x p
The Compound Interest Formula
v=(1+(r/k))^nk x p
UNIT IV
Uses of Money: Just remember S.U.M.
Store of Value- money holds its value over a period of time, whereas products do not
Unit of Account- establishes economic worth in the exchange process
Medium of Exchange- to barter or trade
Types of Money:
Commodity money- gets its value from the type of material from which it is made; Ex. Gold and silver coins
Representative money- paper money backed up by something tangible that gives it value
Fiat money- it is money because the government says so; Ex. American dollars
Characteristics of Money: Just remember S.U.P. D.A.D
Scarce- many people use credit cards over cash
Uniform- money doesn't change and can still be used anywhere
Portable- can take money anywhere
Durable- hard to physically destroy
Acceptable- just about everywhere takes cash
Divisible- you can make change from money in many different ways
Money Supply:
M1 Money- currency(cash and coins), checking deposits(checking accounts), demand deposits, travelers checks; make up 75% of money in circulation; most liquid(easy to convert to cash)
M2 Money- consist of M1 money and saving accounts, money market accounts and deposits held by banks outside of the U.S.; not very liquid
M3 Money- consists of M2 money plus certificates of deposits (CD's) held by private institutions; penalty for withdrawing early
Monday, April 4, 2016
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