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Econ Exam Notes

by: Thomas Chadwick

Econ Exam Notes

Thomas Chadwick
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This 12 page Study Guide was uploaded by Thomas Chadwick on Tuesday February 10, 2015. The Study Guide belongs to a course at Michigan State University taught by a professor in Fall. Since its upload, it has received 22 views.


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Date Created: 02/10/15
Macroeconomics October 9 2014 LS 51 Notes Q Economic growth is enhanced by A High rates of saving investment farmer grows the com A Store or B Eat more saved the larger next years crop will be Q What increases economic growth the most A Use of scarce saving to fund the most productive projects Q How do you allocate the scarce savings to the most useful project A In a free market it is done by a decentralized nancial system In a command economy it is don t by the central bureaucracy Q What economy is the US A A mixed economy Q Free market oriented nancial systems A Both institutions markets very ef cient provide info to savers ways to use the funds most productively and helps savers share the risks improves allocation Q Misallocation occurs A Bubbles exist people act on emotion vs reason Q Command economy A Misallocates resources use of non economic reasons to make aocation decisions poitica favoritism in uences decisions Q Command economies misaocate resources A Dif cult to obtain info expertise to be able to allocate ef ciently Q Financial intermediaries A Extend credit to borrowers using funds raised from savers banks credit unions insurance Q Financial intermediaries are A Very ef cient because there are so many savers borrowers Because of the ef ciency they can do this at a lower cost They are able to gather important info Q The nancial intermediaries can get savings towards A Most productive products Q Financial market A Collection of households rms government banks and other nancial institutions that lend and borrow Q Global nancial markets A Lenders seek the highest possible real interest rate and borrowers seek the lowest possible real interest rate in a single global nancial market Q Four groups of nancial markets A Bond stock short term securities and loan markets Q Bond market A Promise to pay speci c sums of money on speci ed dates Q Bond market A Financial market in which bonds issued by rms governments are traded Q Primary market Buying new debt Secondary market Already issued bonds are traded Stock market Certi cate of ownership and claim to the pro ts that a rm makes A Q A Q A Q Dividends A Return from a stock come out of the pro ts Q A Q A Q A Return on stocks and bonds short term Changes in price Stock market Financial market in which shares of companies stocks are traded Short term securities Debt instruments IOU with maturities no more than one year commercial bills treasury bills Q Money market funds A Mutual fund that holds the short term securities are very safe because they maintain 1 xed price per share Hold the short term securities so when you need the money they can always pay it off Q Money market funds vs checking account A Money market pays higher interest Q Loans markets A Banks nancial institutions lower the cost of nancing rms capital expenditures by accepting short term deposits and making longer term loans Q Bond pays back A Principal amount interest Q Coupon rate on a bond A Amount of interest that was originally promised Q Term of a bond A Length of the bond till maturity Q Maturity A Time when bondholders are supposed to be repaid the principe last interest payment Q Credit risk A Risk that the borrower will not repay the loan Q High Yield quotjunk bondsquot A Pay high interest rate because of the high risk that they could not get the principle back Q People can sell bonds A Before maturity could incur a capital gain Q Price of the bond is determined by A Price demand Q There is a between the price of a bond and the interest rate A lnverse relationship Macroeconomics October 9 2014 Lesson 52 Notes Q Coupon rates are A Fixed Bond prices and interest rates 6 January 1 2000 Tanya purchases a newly issued 21year government bond with principal amount of 1000 and with a coupon rate of 5 paid annually 6 Payment of 50 on January 1 2001 9 Payment of 1050 on January 1 2002 0 If iianya decides to sell her bond on January 1 2001 after receipt of 50 and if new one year bonds at that time pay 6 or 4 how much will people pay for Tanya s old bond Bond prices and interest rates 0 People will not pay a price more than that which provides a 6 return it new oneayear bonds pay 6 O P 1 06 1050 9 Where i is the price to he paid for the bond 6 P 1050106 99057 10112 Q The higher interest rates are the lower A Bond price Q Coupon rate depends on A Bonds term longer term higher interest rate credit risk tax treatment Federal taxes Muni s have a yield Lower Muni is Insured by the government Stocks returns come from Dividends and capital gains Capital gains are P0 P0 P0 P0 P0 Q Dividends Local government bonds are exempt from When the price of a stock bond increases A Payments for each stock owned and is determined by the rms management and related to pro ts no legal requirement to pay dividend Q Stock price today is affected by A This year s dividend next years dividend Q Stock price is also affected by A Supply demand Q Corporations can to acquire money A Borrow from banks issue bonds issue new shares Q Bonds and stock markets improve in the A Ef ciency in the market by providing info about the most productive opportunities Q Markets allow to share risk A Diversi cation Q Mutual fund A Financial intermediary that sells shares to the public to raise funds to buy a variety of nancial assets Macroeconomics October 14 2014 LS 53 Notes Q Money is a variable Stock Money is Any asset that can be used directly in making purchases Money is considered to be Currency and coin checking account balance Three principal uses of money include Medium of exchange unit of account store of value Medium of exchange Any asset that can be used to purchase goods services Barter is A Q A Q A Q A Q A Q A Trading goods for goods direct trade Q Bartering is bad because A It has a high transaction cost and requires double coincidence of wants Q Using a medium of exchange reduces A Transaction costs Q Money permits A Specialization in production Q Money increases A Efficiency and living standards Q Unit of account A Is used as a basic measure of economic value yardstick for measuring value prices expressed in dollars evaluate expenditures output Q Store of value A Asset that serves as a mean of holding wealth Q Money is a way of storing wealth ABaddu ngin ann Q What are the different ways of measuring money A M1 M2 Q M1 is A The narrowest way of measuring money Sum of currency outstanding and balances held in checking accounts and travelers checks Q What does the money supply consist of for econ class A Currency in the hands of the public and balances held in checking accounts held by commercial banks Q M2 is a broad de nition All assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks Q Examples of M2 are A Savings accounts money market mutual funds small time deposits M1 Components of M 1 and M2 Jul 2002 billions of dollars lllll l 11978 Currency 6151 Demand deposits 3033 Other checllcable deposits 2703 Travelersquot checks 86 IMZ 56412 M1 151973 Savings deposits 255523 Smallclenomination time deposits 9208 Money market mutual funds 9698 10115 Q The determination of the money supply depends on A Behavior of commercial banks do this by deciding to make loans buy securities with excess reserves Q What does the banks balance sheet have A Assets liabilities and bank reserves Q Asset is A What the bank owns Q Liabilities are A What the bank owes Q Bank reserves A Cash similar asset held by commercial banks for the purpose of meeting depositor withdrawals payments Q Bank reserves are part of the money supply A Not part of the money supply because the money is not circulating Q Reserve banking system A 100 reserve banking not necessary bene cial Q What do banks do with the excess reserves To earn income pay depositors interest The US has a banking system Fractional banking system Reserve deposit ratio Bank reservesDeposits A Q A Q A Q When the bank lends out reserves A Creates deposits and therefore money Q A Q A Q Money suppy Currency held by the public Bank Deposits Process of expansion of loans and deposits end when Excess reserves are loaned out There are no excess reserves when the reserve to deposit ratio A drops top the level required by the fed Q Reserves I RESDeposits Morley Creation DP20 or 15 4 1 6 Suppose there is 12 million of cash in 5 cross the economy with 13 of it held in bank I I I vaults as reserves If the required reserve multlplyl 20 mllllon to deposit ratio is 20 how large will the 8 million 28 million money supply be if banks hold no excess reserves 6 Banks hold 4 million of reserves Since ReserveDeposit must be exactly 20 deposits will be 20 million 0 Money Supply will be 8 million 20 million or 28 million since the money supply is the total of cash in the hands of the public plus deposits mm Macroeconomics October 14 2014 Lesson 54 Notes Q Federal Reserve A FED is the central bank of the US Q Fed s two responsibilities A Monetary Policy and oversight and regulation of the nancial markets Q Fed s monetary policy A Includes determining how much money circulates in the economy therefore in uences interest rates It also in uences key macro variables Fed created in 1913 by the Federal Reserve Act and went into operation on 1914 1907 JP Morgan bailed out the economy because the US didn t have a central bank US didn t have a central bank because of the Fear in a to powerful bank Fed s goals are Pursuing public goals by growth low in ation and smooth operation LLIC39I IL UI LIIC IIIIGIILIGI IIIGIKCLD THE FEERAIL RESERVE SYSTEM P0 P0 P0 P0 Figure shows the Federal Reserve districts l V a If H 7 39 g m Elmeast Th an 393 N H 1 Emma es imam dwlded Iht012 39 mm Federal Reserve districts each with a Federal Resewe mime are included in the has Framismdiwtitt A 12 regional banks each represent a geographic area The Board of Governors of the Federal Reserve System is reeere rea b Q Each bank provides services like A Check clearing Q The Fed s headquarters is in A Washington DC Q There are Board of Governors A 7 appointed by the president advice consent of the senate to staggered 14 year terms Q Chair of the Fed is A Appointed by the president for a 4 year term Q FOMC A Federal Open Market Committee Q FOMC makes A Decisions concerning monetary policy Meet 8 times a year Q The people in the FOMC are the seven fed governors the president of the Federal Reserve Bank of New York and four other Fed Reserve Bank presidents on a rotating basis Total of 12 people Q The Fed s power center A Chair of the Board of Governors has the largest in uence on the monetary policy Q Greenspan appointed by A Reagan in 1987 and reappointed by Bush in 1992 Clinton in 1996 and 2000 and Bush in 2004 Q Ben Bernanke replaced Greenspan in A 2006 Q The Fed has absolute control over the A Money supply Q The tools the Fed has include A Open marxket operations discount window lending change in discount rate and the changing of required reserve to deposit ratio Q Open market operations are A Fed s most useful tool Buying selling securities in the open market Bonds notes and bills Q Fed can make open market purchases A Buying government bonds from the public When the person brings that check to the bank then the Fed credits them in extra reserves equal to the amount of the check increase money supply bank reserves Q Open market sales A Selling of government bonds to the public reduces the money supply reserves from the bank rising interest rates Q Discount window lending is A Lending from the Fed to banks when they can t meet reserve requirements Increases the reserves therefore increases the money supply Q Discount rate is A Interest rate the Fed charges commercial banks that borrow reserves from it Q Federal fund rate A Banks rate that they charge each other for loans Q Reserve requirements A Minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain Q The sets Reserve requirements A Fed Q With an increase in reserve requirements A Banks end out a smaller share of their deposits and the money supply fas Q Banking Panics A Episode in which depositors rush to withdraw money because of fear of default Q saw one of the worst bank panics in US history A 19301933 Q Deposit insurance A Government guarantees that depositors will not loose any money even if the bank goes bankrupt Created in 1994 Q The banks now are not considered about A Solvency of the loans because depositors are less concerned with prudence Q Before federal deposit insurance seemed to work well A 1980 s Q After 1981 A Failure of banks climbed to more than 10x previous Q 2008 panic started from the US because A 9152008 Lehman Brothers Holdings Inc led for chapter 11 bankruptcy protection Q Lehman s default triggered a A Cascade of failures starting with a money market fund that broke the 1 xed redemption value Then a panic run on money market assets then companies that need the funding no longer have it Q A run forces further A Defaults


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