Money Creation- 03/27/17

Money Creation- 03/27/17

- A single bank can create $ by the amount of its excess reserves
- The banking system as a whole can create money by a multiple of the excess reserves
- MM * ER = expansion of money
- MM = 1/RRR

New vs. Existing Money
- If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money of the initial deposit in a bank comes from the FED or bank purchase of a bond or other money out of circulation ( buried treasure) the deposit immediately increases the money supply
-The deposit then leads to further expansion of the money supply through the money creation process
-The total change in MS if initial deposit is new money = Deposit + money created by banking system.
-If a deposit in a bank is existing money (already counted in M1, currency or checks) depositing the amount does NOT change the MS immediately because it is already counted in it
-Existing currecy deposited into a checking account changed only the composition of the money supply from coins/paper money to checking account deposits

-       Total change in MS in deposit is existing money = banking system created money only

Money Market- 03/23/17

Money Market- 03/23/17

-Demand for money has an inverse relationship between nominal interest rates and the quality of money demanded

1) What happens to the quantity demanded of the money when interest rates increase?
-Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities
2) What happens to the quantity demanded when interest rates decrease?
-Quantity demanded increase
-There is no incentive to convert cash into interest earning assets.

The Determinants for Money
1) Changes in price level
2) Changes in income
3) Changes in taxation that affects investment

Increasing the money supply
- increase money supply à Decreases interest rates à Increases investment à Increases AD

How Banks Create Money?
Fractional Reserve System
- Demand deposits are created
- The process in which banks hold a small portion of their deposits in reserves and they loan out the excess
- Banks keep cash on hand (RR) to meet depositors needs
- Banks must keep reserve deposits in their vaults or at their district FED
- Total Reserves ( total funds held by the bank) equals to Required Reserves + Excess Reserves
- Banks can only lend out their excess reserves 

Bonds vs. Stocks- 03/22/17

Bonds vs. Stocks- 03/22/17

Bonds:
-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

How are the values of bond determined?
-First, if a corporation issues then sells a bond, it’s liability for the corporation and asset for the buyer
-If nominal interest rate increases, bonds decrease

Stocks:
-Stock owners can profit in two ways
    1) Dividends: portions of a corporation’s profits are paid out to stockholders
        -As the profit increases, the dividend increases
    2) Capital gain: earned when a stockholder sells stock for more than what he/she paid for it
        -Capital loss: when a stockholder sells stock at a lower price than the purchase price

Financial Institutions- 02/21/17

Financial Institutions- 02/21/17

Purposes of Financial Institutions
1) store money
2) save money
-savings account, checking account, CDs, money market account
3) loan money
-interest: price paid for the use of borrowed money
-principal: amount that you borrow

Types of Financial Intermediaries
1) Commercial Bank
2) Savings and Loans Institution
3) Credit Union
4) Mutual Fund Companies
5) Finance Companies

The Financial System:
-Assets: anything of monetary valued owned by a person or a business
-Financial Assets: a paper claim that entitles the buyer to future income from the seller
-Physical Assets: a claim on a tangible object
-Liability: a requirement to pay money in the future

Five Major Assets
1) Loans
2) Stocks
3) Bonds
4) Loan-based Securities
5) Bank Deposits

Interest Rates and Inflation:
-The time value of money: a dollar is worth more today than it is tomorrow
-You are losing money every second you’re not investing it

Present Value vs. Future Value
-FV = Future Value
-PV = Present Value
-I = Nominal Interest Rate
-t = Time
-Future Value: if you invest (lend) money to someone, it will compound (grow) according to the following equation:
-FV = PV(1+i)^t
-Present Value: the amount of money I need to invest now, in order to get some amount in the future
-PV = FV/(1+i)^t

The Simple Interest Formula
-V = (1+r)^n * P

The Compound Interest Formula
-V = (1+r/k)^nk * P

Money- 03/20/17

Money- 03/20/17

The Barter System:
-Goods and services are traded directly. There is no money exchanged.
-Money is generally anything accepted in payment for goods and services.
-Money is not the same thing as wealth or income

-Wealth is the total collection of assets that store value.

-Income is a flow of earnings per unit of time.

Money can be used as:
1) Medium of exchange used to determine value.

2) Unit of account: comparing cost/price

3) Store of value: hoe well does my money hold?

Three types of money:
1) Representative money: represents something of value
-IOU’s

2) Commodity money: It has value within itself
-Salt
-Gold
3) Fiat money: It is money because the government says so
-Paper money
-Coins

Characteristics of money:
1) Durability: Money is durable
2) Portability: You are able to carry is anywhere

3) Uniformity: Looks the same

4) Limited Supply
5) Acceptability: Money is accepted in all places.

Liquidity:
-ease with which an asset can be accessed and converted into cash

Three Types of money

1)    M1 Money (High liquidity)
-Coins, currency, and checkable deposits
-Personal and corporate checking accounts are the largest component of M1
-In general, this is MONEY SUPPLY

2)    M2 Money Supply (Medium Liquidity)
-M1 plus savings deposits, time deposits, and mutual funds below $100k

      3) M3 Money (Low Liquidity)
           -M2 plus time deposits above 100k