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

Contractionary and Expansionary Fiscal Policy- 03/07/2017

Contractionary and Expansionary Fiscal Policy

Contractionary (The Brake)
-law that reduces inflation, decreases GDP
-closes a inflationary gap
1) Decreases Government spending
2) Tax increases
3) Combinations of the two

Expansionary fiscal policy (The GAS)
-law that reduces unemployment and increases GDP
-closes a recessionary gap
1) Increases Government spending

2) Decreases taxes on consumers
3) Combination of the two

Automatic or Butt-in Stabilizers
-Anything that increases the government’s budget deficit during a recession and increases it’s budget surplus during inflation without requiring explicit action by policy makers.

Transfer Payments
-Welfare checks
-Food Stamps
-Unemployment checks
-Corporate dividends
-Social security
-Veteran’s Benefits

Fiscal Policy- 03/06/17

Fiscal Policy

Fiscal Policy:
-actions by congress to stabilize economy
- changes in expenditures or tax revenue of the federal government
- enacted to promote nation’s economic goals: full employment, price stability, and economic growth

2 tools of Fiscal Policy:

-Taxes – government can increase or decrease taxes

-Spending – government can increase/ decrease spending

Deficits, Surpluses, Debt

- Balanced budget (revenues = expenditures)

- Budget Deficit (revenues < expenditures)
- Budget Surplus (revenues > expenditures)
- Government Debt (sum of all deficits – sum of all surpluses)

- Government can borrow money when it runs a budget deficit
       -ex) individual taxes, corporations, financial institutions, foreign governments

Discretionary fiscal policy:
- Congress’s action

Contractionary fiscal policy:

- Think surplus

Non- discretionary fiscal policy:
- No action

Three types of Taxes:
1) Progressive taxes
-takes a large % of income from high income groups
-takes more from rich
-ex) current federal income tax system

2) Proportional taxes
-takes the same percent of income from all income groups
-ex) 20% flat income tax on all income groups

3) Regressive Taxes
-takes a large percent from low income groups
-takes from poor
-ex) sales tax

Aggregate Supply Curve- 02/27/2017

Aggregate Supply Curve

Reasons why prices tend to be inflexible or sticky in a downward direction
1) fear of price wars
2) wage contracts
3) minimum wage
4) menu cost
5) morale effort +productivity

Range 1:
- Output is low, relative to the economy’s full employment output
- unemployment increase, real GDP decrease

Range 2:
-Output expands as spending increases

Range 3:
-In the long run, aggregate supply curve is vertical because the only effects of the increase in AD when we’re already at full employment or an increase in the price level

Multipliers- 02/24/17

Multipliers

The Spending Multiplier
- initial change in spending ( C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand
- multiplier = change in AD
                    change in C, Ig, G, Xn/

Why does it happen?
-Expenditures + income flows continuously which sets off a spending increase in the economy
-Spending multiplier = 1            or        1

                                    1-MPC               MPS

-Multipliers are (+) when spending increases, and (-) when spending decreases

Tax Multiplier
-government taxes, the multiplier works in reverse b/c now money is leaving the circular flow
-tax multiplier is negative
- tax multiplier = -MPC      or     -MPC
                              1-MPC            MPS

-if there’s a tax cut, then the multiplier is + because there is now more money in the circular flow