FRQ Video 4/12/17

Unit 4: Money Creation Formula 3/27/17

• A Single Bank can create $ by the amount of its excess reserves.
• The Banking System as a whole can create $ by a multiple of the excess reserves.
• MM * ER = Expansion of money
• Money Multiplier = 1/RR

New vs. Existing $:

• If the initial deposit in a bank comes from the Fed or bank purchase or a bond or other money out of circulation, the deposit immediately increases the money supply.
• The deposit then leads to further expansion of the money supply through the money creation process.
• Total change in MS if initial deposit is new $ = deposit + $ created by banking system.
• If a deposit in a bank is existing $ (already counted in M1), depositing the amount does NOT change the MS immediately because it is already counted.
• Existing currency deposited into a checking account changes only the composition of the MS from coins/paper $ to checking account deposits.
• Total change in MS if deposit is existing $ = banking system created money only.

LINK:

http://www.csun.edu/sites/default/files/macro6_0.pdf

Unit 4: Loanable Funds Market 4/3/17

The Loanable Funds Market is the private sector supply and demand of loans.

-This market brings together the savers and the borrowers.

-This market shows the effect on REAL INTEREST RATE

Demand-Inverse relationship between real interest rate and quantity loans demanded

Supply-Direct relationship between real interest rate and quantity loans supplied

This is NOT the same as the money market (supply is not vertical)

Federal Fund Rate: Interest rate that banks charge one another for overnight loans.

Prime Rate: Interest rate that the banks charge their most credit worthy customers.

Unit 4: Tools of monetary policy 3/30/17

The Fed adjusting the MS by changing any of the following:
1. Setting Reserve Requirements
2. Lending money to banks & thrifts
   -Discount Rate
3. Open Market Operations
   -Buying & Selling bonds

#1 The Reserve Requirement:
-The Fed sets the amount that banks must hold.
-The Reserve Requirement (reserve ratio) is the percent of deposits that banks must hold in reserve (the % they can not loan out)
Using Reserve Requirement:
1. If there is a recession, what should the Fed do to the Reserve Requirement?
   -Decrease the Reserve Ratio
   -RR dec./MS inc./i (interest rate) dec./I (inflation) inc./AD inc.
2. If there is inflation, what should the Fed do to the reserve requirement?
   -Increase the Reserve Ratio
   -RR inc./MS dec./i inc./I dec./AD dec.

#2 Open Market Operations:
-Open market operations is when the Fed buys or sells government bonds (services)
-Most important & widely used monetary policy
-If the Fed buys bonds- it takes bonds out of the economy & replaces them with money. MS inc.
-If the Fed sells bonds- it takes money & gives the security to the investor. MS dec.

#3 The Discount Rate:
-There are money different interest rates, but they tend to all rise & fall together.
-The Discount Rate is the interest rate that the Fed charges commercial banks for short term loans.

Tools of Monetary Policy

Monetary Policy                                 Expansionary Policy                            Contractionary Policy

Open Market Operation                              Buy Bonds                                              Sell Bonds
Reserve Requirement                                        dec.                                                          inc.
Discount Rate                                                    dec.                                                          inc.
Bank Reserves                                                   inc.                                                          dec.
Money Supply                                                   inc.                                                          dec.
Federal Fund Rate                                             dec.                                                          inc. 

LINK:
https://courses.lumenlearning.com/macroeconomics/chapter/tools-of-monetary-policy/

Unit 4: Stocks and Bonds 3/22/17

Bonds or loans, or IOU's, that represent debt that the government or a corporation must repay to an investor. The bond holder has NO OWNERSHIP of the company.

If a corporation issues and then sells a bond. 
- Its is a liability for the corporation
- An asset for the buyer
If that corporation issues a 10k bond with a 10 year term and a 5% interest.
-Nominal interest rate at the time of issue - 5%
If the Nominal Interest Rate falls 3%, the value of the bond increases.

Stock owners can earn a profit in two ways;
1. Dividends: Portions of a corporation's profits, are paid out to stockholders.
-The higher the corporate profit, the higher the dividend
2. Capital Gain: Earned when a stockholder sells stock for more than he or she paid for it.
A stockholder that sells stock at a lower price than the purchase price suffers a capitol loss.

The Money Market:
-Demand for money has an inverse relationship between nominal interest rates & the quantity of money demanded.

The Demand for Money:
What happens if price level increases?
1. Changes in price level
2. Changes in income
3. Changes in taxation that affects investment



The Money Demand Curve slopes down and to the right, because all else being equal, higher interest rates increase the opportunity cost of holding money, thus leading public to reduce quantity or money it demands.

Fractional Reserve System: Process by which banks hold a small portion of their deposits in reserve and loan out the excess.
-Demand Deposits are demanded through the Fractional Reserve System.

Unit 4: Financial Assets & The Time Value of Money 3/21/17

Purchase of Financial Institutions:
1. Store $
2. Save $
   -Savings acct
   -Checking acct
   -CD
   -Money market acct
3. Loan

Interest: Price paid for the use of borrowed money.
Principal: Amount that you borrow.

Types of Financial Intermediates:
1. Commercial Banks
2. Savings + Loans institution
3. Credit Unions
4. Mutual Fund Companies
5. Finance Companies

The Financial System:
Assets- Anything of monetary value owned by a person or business.
   -Financial Asset: A paper claim that entitles the buyer to future income from the seller.
   -Physical Asset: A claim on a tangible object (Ex: house, car). If you go to your bank and take out a loan.... The Bank has created a financial asset. You have created a liability.
Liability: A requirement to pay money in the future (usually w/interest)

5 Major Financial Assets:
1. Loans
2. Stocks
3. Bonds
4. Loan-backed securities
5. Bank Deposits

Interest Rates & Inflation:
Time value of money: A dollar is worth more today than it is tomorrow. You are losing money every second you are not investing it.

Present Value vs. Future Value:
-Future Value: If you invest (or lend) money to someone, it will compound (grow) according to the following equation:
 FV = PV (I + i)^t
-Present Value: The amount of money I need to invest now, in order to get some amount (FV is known) in the future.
PV =      FV      
          (I + i)^N

The Simple Interest Formula:
V = (I + r)^n * p

The Compound Interest Formula:
V = (I + r/k)^nk * p

V: Future Value of $
P: Present Value of $
r: real interest rate(nominal rate-inflation rate)
n: years
k: # of times interest is compounded per year

Unit 4: Money and Monetary Policy 3/20/17

What would happen if we didn't have money?
The Barter System: Goods & services are traded directly. There is no money exchanged.

Money: Anything that is generally accepted in payment for goods & services. Money is not the same as wealth or income
Wealth: Total collection of assets that store value.
Income: A flow of earnings per unit of time.

Money can be used as a:
1. Medium of Exchange
-Buy goods & services
2. Unit of Account
-Measuring the value of goods & services
3. Store of Value

3 Types of Money:
Representative Money (represents something of value):
-IOU's
Commodity Money (something that performs the function of money & has alternative uses):
-Salt
-Gold
-Silver
-Cigarettes
Fiat Money (money because the government says so):
-Paper Money
-Coins

6 Characteristics of Money:
1. Durability
2. Portability
3. Divisibility
4. Limited Supply
5. Uniformity
6. Acceptability

3 Types of Money:
Liquidity: Ease w/ which an asset can be accessed and converted into cash (liquidized)
M1 (High Liquidity): Coins, currency, and checkable deposits. AKA demand deposits. In general, this is the MONEY SUPPLY.
M2 (Medium Liquidity): M1 plus savings deposits (money market accounts), time deposits (CD's = certificates of deposit), and Mutual Funds below $100k.
M3 (Low Liquidity): M2 plus time deposits above $100k.