Money and Banking Exam 1 Study Guide
Money and Banking Exam 1 Study Guide ECON 04305 - 1
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ECON 04305 - 1
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This page Study Guide was uploaded by Nicole Rossi on Saturday February 27, 2016. The Study Guide belongs to ECON 04305 - 1 at Rowan University taught by Robert Ferrari in Spring 2016. Since its upload, it has received 81 views. For similar materials see Money and Banking in Economcs at Rowan University.
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Date Created: 02/27/16
Money and Banking Test 1 Study Guide Money not de ned legally but de ned functionally Functions of Money the main 4 0 medium of exchange must be acceptable to society 0 store of value ability to save money 0 standard of measure unit of measurement 0 standard of deferred payment have to be able to write a contract with it The functions of money are eroded by in ation a rise in the overall prices It destroys money Money Standards mono metallic standard coins bi metallic standard quotusing Gold as moneyquot representative full bodv use the money in our pockets 0 credit standard paper money exceeded value of gold 0 Fiat standard what we currently have Gresham39s Law Gresham was concerned with the movement away from full body money His concept was bad money will drive good money out of circulation Good Money de ned commodity valuemonetary value Bad Money de ned money where monetary value is greater than commodity value The Gold Standard to have a gold standard government must have 4 rules standards 1 De ne the relationship between currency and gold 2 Support that relationship 3 Issue the Money to the amount of gold you have 4 Free convertibility able to covert from gold to currency or currency to gold Depression in the 193039s It was under the gold standard Y C l G XM Bretton Woods in 1944 they came up with a new system called the Gold Exchange Standard which was a hybrid system This kept parts of the old system and added more to it The US is the center of this US would de ne its currency in gold and all other countries would de ne based off US dollar The problem with this is the issuance Each country will decide how much money to gold they have IBRD World Bank sell securities to the market place International Monetary Fund IMF would be a bank If US didn t have a suf cient amount of gold they would lend some On August 15th 1971 Nixon announced the Gold Standard is over for the US quotWe are on a free oating exchange systemquot Now we have a foreign exchange market and it is the biggest market out Since we are off the Gold Standard the price of gold will now go up G7 A group of 7 countries that are Primarily Industralized United States United Kingdom 0 Germany 0 Japan 0 Canada 0 Italy 0 France Everyone agrees except Germany Germany is antiin ation Everyone agrees to lower interest rates and increase the money supply quotSWAPSquot agreements between countries swapping currency Central Banks responsibility is to regulate the money supply m money supply de nition for Federal Reserve System m currency in circulation checkable deposits nonbank traveler s checks m M1 savings accounts small certi cates of deposits consumer MMMF s MMDA MZM money at quot0 maturity Currency in Circulation money in the hands of the private sector outside of the banks Checkable Deposi quotdemand depositsquot Commercial Banks savings banks savings and loans credit unions commercial Banks were the only ones legally allowed to issue demand deposit accounts or checking accounts NOW accounts Negotiable Order of Withdrawal Account legal in the New England states and also New York Eventually these accounts could be offered everywhere all states Monetary Control Act of 1980 MCA First law that began the deregulation of banks anyone can offer checking accounts didn t regulate interest rates though Nonbank Traveler39s Checks these are included in checkable deposits Small Certi cate of Deposi of consumers were regulated Disintermediation the saver goes straight to the institution and bypasses the bank Money Market Deposit Accounts money is insured 3 aspects to determine money de nitions liquidity negotiability stability Broker individual who brings a buyer and seller together and for the service they earn commission Dealer look at price of what the house is worth and purchases the asset in hope of selling it for more in the future taking a risk 2 Functions of Dealers specialist they have a book with all the buysell orders 0 investment banking Money Markets 0 short term 0 any security being traded up to 1 year BID vs ASKED BDasked price ASKEDwhat you want to sell it for 0 interest rates are volatile o more liquid 0 prices of securities more stable Capital Markets 0 Any security being traded more than 1 year bigger difference between BID and ASKED prices 0 interest rates are more stable 0 less liquid 0 prices for securities are more volatile Registered Securities quotthis is the physical securityquot go to a registrar with your name on it Bearer Securities same thing but without your name on it Primary Markets marketplace where securities are rst offered to the public Secondary Markets that have already been issued are sold extremely liquid Types of Securities 1 Common Stock ownership interst in a company 2 Bonds interest is contractual has a maturity date 3 Preferred Stock has a stated dividend rate will pay dividends not contractual 4 Derivative obligations whose value is derived from something else 5 Commodities 6 Futures betting on the price is the future Market Ef ciency 3 Levels 0 Weak Form you can t predict the price of a security in the future based off it s current price Semistronq Form public information is factored into a stock price faster than you can react to it 0 Strong Form you can t out perform the market even if you are an insider o Insider if you are on the board of directors for any company if you are a member of an audit rm bank that is doing work with IBM you are automatically insiders Frank Mooigliani Professor at MIT premier nancial economist in US primary factors earnings pro ts risk dividends Capital Asset Pricing Model CAPM ERR k Rf BRm Rf Rm Rf risk premium Internal Debt dominated in your currency External Debt dominated in other s currency Price Risks when we study prices of securities we nd that as it reaches maturity the risk becomes less and less At the maturity date there is no risk Credit Risks the risk of default shortdated
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