Unit IV:

Unit IV: chapter 13: 

Money Market: Any assets that can be used for any goods 

Three uses of Money is a medium of exchange. 

Determining value

Unit of account (comparing costs) 

Store of value 

Three types of money

Commodity money- has value in itself (salt olive oil and gold) 

Representative money-represents something of value(IOU) 

Fiat money-it is money because the government says so. (Paper currency, coins) 

Six Characteristics of Money 

Durability

Portability 

Divisibility

Uniformity

Limited supply

Acceptability 

Money Supply made up of m1 (liquid assets - easy to convert to cash- cash currency check able or demand deposits) and m2 money (M1 money + Savings Account , money markets accounts) 

Financial Institutions -to save (1. Savings account 2. checking account 3. Money markets account 4. Certificate of Deposit(CD), loan(1.credit cards 2. mortgages), store money 

Interest:

Principle: amount of money borrowed 

Interest- price paid for the use of borrowed money 

1.simple interest - paid on the principal I=PRT/ 100 

p=I x 100 / RT

R=I x 100/ PT 

T=I x100/ 

2. compound interest paid on the principle plus accumulated interest 

Commercial banks 

Savings and Loan Institutions 

Mutual Savings Bank

Credit Union

Finance Companies

Investments: redirecting resources that we would consume now for future purposes. 

Financial Assets: claims in property and income of the borrower

Financial Intermediaries: Institution that channels funds from savers to borrowers

Purposes:

 1. Share risk - through diversification, Spreading investments 

2. Providing information

3. Liquidity - returns

Bonds are loans or RIU that represent death that the government or a corporation must repay to an investor. Bonds are literally low risk investments 

Three Components: 

Coupon Rate:  interest rate that a bond issuer will pay to a bond holder 

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

Par Value: amount that an investor pays to purchase a bond and that will be repaid to an investor at maturity. 

Functions of the FED: 

It issues paper currency 

Sets reserve requirements and holds reserve of banks

It lends money to banks and charges them interest. 

They are a check clearing service for banks 

It acts as personal banks for the government

Supervises member banks

Controls the money supply in the economy. 

The Three Types of multiple deposit expansion question: 

Type 1: calculate the initial change in excess reserves aka 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 2 and 3 will have the same result (ie no federal involvement)

Creating a bank: transaction #4: depositing reserves in a Federal Reserve Bank 

- Required reserves

- Reserve Ratio 

Reserve Ratio: commercial banks required reserves / commercial banks checkable-deposit liabilities 

Reserve Requirements: 

Excess reserves : actual reserves - required reserves 

Required Reserves: checkable deposits x reserve ratio