Chapter 4 Economics Notes PDF
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These notes cover key concepts in chapter 4 of an economics course, including financial assets, their characteristics, and the time value of money. The notes also discuss barter systems and different types of money.
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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...
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 ○ demand: comes from borrowers/investors 1. changes in borrowing by consumers/businesses 2. Changes in borrowing by government ○ supply: comes from lenders/savers 1. changes in private savings behavior 2. changes in public savings 3. changes in foreign investment
