loanable funds market - market where savers and borrowers exchange funds (Q lf) at real rate of interest (r%)
Demand for loanable funds comes from or borrowing households, firms, govs, and foreign sectors.
supply - or savings comes from h, f, govs, and fs. supply is demand for bonds
demand = borrowing
more borrowing = more demand for loanable funds
less borrowing = less demand for loanable funds
When government does fiscal policy it will affect the loanable funds market
changes in real int rate will affect gross private investment.
Sunday, March 29, 2015
Unit 4: (3/19/2015)
Monetary and Fiscal policy
Fiscal policy
-Congress and president controls
-Tax on spend
Monetary policy
-FED
-OMO (open market operation)
-discount rate
-federal fund rate
-reserve requirement
Tools of monetary policy
bank reserves and money supply have a direct relationship
Fiscal policy
-Congress and president controls
-Tax on spend
Monetary policy
-FED
-OMO (open market operation)
-discount rate
-federal fund rate
-reserve requirement
Tools of monetary policy
|
|
Expansionary (easy money)
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Contractionary (tight money)
|
|
Open market operation
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Buy bonds
Increase money supply
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Sell bonds
Decrease money supply
|
|
Discount rate
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Decrease
|
Increase
|
|
Reserve requirement
|
Decrease
|
Increase
|
federal find rate - interest rate that commercial banks charge each other for over night loans.
Prime rate - interest rates that banks charge to their most credit worthy customers.
Unit 4: (3/17/2015)
Key principles
- a single bank can create money through loans by the amount of excess reserves
- the banking system as a whole can create money by a multiple (deposition money multiplier) of the initial excess reserves.
- a single bank can create money through loans by the amount of excess reserves
- the banking system as a whole can create money by a multiple (deposition money multiplier) of the initial excess reserves.
Initial deposit
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New/existing money
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Bank reserves
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Immediate change in M.S
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Cash
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Existing
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Up
|
No; because the composition of M1 money changes cash to currency.
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FED Purchase of a bond from the public
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New
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Up
|
Yes; because money coming out of the FED is new Money in circulation
|
Bank purchase of a bond from the public
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New
|
Up
|
Yes; because money coming from bank reserves is new money in
circulation.
|
Factors that weaken the effectiveness of the deposit multiplier:
1. if bankers fail to loan out all their excess reserves
2. if bank customers take their loans in cash rather than new checking account deposits it creates a cash currency drain.
Money market
Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.
Unit 4: (3/6/2015)
How banks work
Right side: Assets
Assets
-Reserves
>required reserves (rr) - percent required by the fed to keep on hand to meet demand
>excess reserves (er) - percent reserves over and above the amount needed to satisfy the minimum reserve ratio set by the fed
-Loans to firms, consumers, and other banks
-Loans to government - treasury securities
-Bank property - if bank fails you could liquidate the bank property.
Left side: liabilities
Liabilities
- Demand deposits
-CD's
-Loans from federal reserves and other banks
-Shareholders equity
Right side: Assets
Assets
-Reserves
>required reserves (rr) - percent required by the fed to keep on hand to meet demand
>excess reserves (er) - percent reserves over and above the amount needed to satisfy the minimum reserve ratio set by the fed
-Loans to firms, consumers, and other banks
-Loans to government - treasury securities
-Bank property - if bank fails you could liquidate the bank property.
Left side: liabilities
Liabilities
- Demand deposits
-CD's
-Loans from federal reserves and other banks
-Shareholders equity
Unit 4: (3/4/15)
Time value of money
Is a dollar today worth more than a dollar tomorrow?
-Yes, because inflation and opportunity cost.
- This is the reason for charging and paying interest.
Let
V = future value of money
P = resent value of money
r = real interest rate
n = years
K = number of times interest is created per year
simple interest form
V = (1 + r) ^n multiplied by p
compound interest form
V = (1 + r/k) ^ nk multiplied by p
7 functions of the FED
1. issues paper currency
2. sets reserve requirements and holds reserves of banks
3. it lends money to banks and charges them interest
4. they are a check cleaning service for banks
5. acts as a personal bank for the government
6. supervises member banks
7. controls the money supply in the government
Is a dollar today worth more than a dollar tomorrow?
-Yes, because inflation and opportunity cost.
- This is the reason for charging and paying interest.
Let
V = future value of money
P = resent value of money
r = real interest rate
n = years
K = number of times interest is created per year
simple interest form
V = (1 + r) ^n multiplied by p
compound interest form
V = (1 + r/k) ^ nk multiplied by p
7 functions of the FED
1. issues paper currency
2. sets reserve requirements and holds reserves of banks
3. it lends money to banks and charges them interest
4. they are a check cleaning service for banks
5. acts as a personal bank for the government
6. supervises member banks
7. controls the money supply in the government
Unit 4: (3/3/2015)
Money is any asset that can be used to purchase any goods or services.
3 uses of money
1. The medium of exchange: used to determine value.
2. Unit of account: how do you compare prices.
3. store of value: how money can be stored.
3 types of money
1. commodity money - has value within itself.
EX: salt, gold, and olive oil
2. representative money - represent something of value
EX: I.O.U.
3. Fiat money - it is money because the government says so.
EX: paper currency and coins,
Money supply - total value of financial assets available in the U.S economy.
M1 money
-Liquid assets - easily to convert to cash
M2 money
-M1 money plus
*savings account
*money market account
3 purposes of financial institutions.
1. store money
2. save money
3. loan money
4 ways to save money
1. savings account
2. checking account
3. money market accounts
4. certificate of deposit
Loans - Banks operate on a fractional reserve system. which is where they keep a fraction of the funds and loan out the rest.
Interests rates
- Principle - amount of money borrowed
- Interest - price paid for the use of borrowed money
> simple interest - paid on the principle
> compound interest - paid on the principle plus accumulative interest.
And Finance companies are part of the financial institution.
Investment - redirecting resources you would consume now for the future.
Financial assets - claims on property or income of borrower
Financial intermediaries - institution that channels funds from savors to borrowers
Savers ----> financial institution ----> investors.
Purposes of financial intermediaries
1. sharing risks
diversification - spread out investment in order to reduce risk
2. providing information
3. liquidity
returns - amount an investor receives above and beyond the sum of initially invested.
Bonds and stocks
Bonds you loan; stocks you own
Bonds - I.O.U.'s or loans that represent that the government/corporation must repay to an investor
3 components
1. coupon rate: interest rate the issuer pays ti the bond holder
2. maturity: time at which payment to a bond holder is due.
3. par value: amount an investor pays to purchase a bond and that will be repaid to an investor at maturity.
Yield - annual rate of return on a bond if the bond were held at maturity.
3 uses of money
1. The medium of exchange: used to determine value.
2. Unit of account: how do you compare prices.
3. store of value: how money can be stored.
3 types of money
1. commodity money - has value within itself.
EX: salt, gold, and olive oil
2. representative money - represent something of value
EX: I.O.U.
3. Fiat money - it is money because the government says so.
EX: paper currency and coins,
Money supply - total value of financial assets available in the U.S economy.
M1 money
-Liquid assets - easily to convert to cash
M2 money
-M1 money plus
*savings account
*money market account
3 purposes of financial institutions.
1. store money
2. save money
3. loan money
4 ways to save money
1. savings account
2. checking account
3. money market accounts
4. certificate of deposit
Loans - Banks operate on a fractional reserve system. which is where they keep a fraction of the funds and loan out the rest.
Interests rates
- Principle - amount of money borrowed
- Interest - price paid for the use of borrowed money
> simple interest - paid on the principle
> compound interest - paid on the principle plus accumulative interest.
And Finance companies are part of the financial institution.
Investment - redirecting resources you would consume now for the future.
Financial assets - claims on property or income of borrower
Financial intermediaries - institution that channels funds from savors to borrowers
Savers ----> financial institution ----> investors.
Purposes of financial intermediaries
1. sharing risks
diversification - spread out investment in order to reduce risk
2. providing information
3. liquidity
returns - amount an investor receives above and beyond the sum of initially invested.
Bonds and stocks
Bonds you loan; stocks you own
Bonds - I.O.U.'s or loans that represent that the government/corporation must repay to an investor
3 components
1. coupon rate: interest rate the issuer pays ti the bond holder
2. maturity: time at which payment to a bond holder is due.
3. par value: amount an investor pays to purchase a bond and that will be repaid to an investor at maturity.
Yield - annual rate of return on a bond if the bond were held at maturity.
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