Test 1 (ch1-5) Review
Test 1 (ch1-5) Review ECON 3303
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This 13 page Study Guide was uploaded by Ashlie Meckley on Monday September 28, 2015. The Study Guide belongs to ECON 3303 at University of Texas at Arlington taught by Chi-Young Choi in Summer 2015. Since its upload, it has received 171 views.
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Date Created: 09/28/15
Test 1 Review 0 Money 0 Exchange for satisfaction or utility 0 Something people want for exchange 0 Importance 1Affects business cycle boom and bust in economy 2 In ation 0 Continually rise in price level purchasing power of money 3 Affects interest rate 0 Cost of borrowing or price paid for rental funds 0 Monetary Theory ties change in money supply to change in price level and interest rate 0 Cash will NOT die due to privacy and underground community 0 ONLY Fort Worth and DC print money 0 Banking 0 Finance transfer of capital 0 More important rule then direct financing 0 Positive connection between money supply and price level 0 Negative connection between money supply and interest rates 0 Financial System 0 Network of markets to bring together savers and buyers 1Creating financial instruments 2 Provides 3 key financial services 0 Risk sharing 0 Liquidity 0 Information 0 Important source of job and income Finance Connects Lenders and Barrowers Lender gt Barrower savers have Direct FinancingFrom extra money lender to barrower through Financial Markets 7 Indirect A Financing goes FInanCIal Intermediaries through nancial 0 Banks 23 of companies intermediaries barrow money from banks 0 Insurance l 7 A777il 0 Financial Markets Direct Financing 0 Promotes economic efficiency 0 Efficient allocation of capital increase production 0 Directly improves well being of consumers O Gives them time to purchase lStocks 2 or 3 company barrow from 2 Bonds gov 0 Debt security that promises to make payment periodically for specified period of time 0 25 company barrow from 3 Foreign Exchange FOREX 0 Converting one currency to another 0 Determines Foreign Exchange Rate 0 One currency in terms of another Overcoming Deficits 0 Increase Taxes ONLY CREDIABLE GOV 0 Issue Bonds ONLY CREDIABLE GOV 0 Government buys bonds because they spend too much money 0 Printing money Bonds 0 Zero Bond theory that interest rate can t be below 0 O Yankee Bond US bonds bought by foreigners 0 Domestic Bond Local barrowers local currency 0 International Bond Local or foreign countries 0 Foreign Bonds 0Eurobonds Terms for Bonds and Mortgages 0 Short Term less than a year 0 Intermediate Term 1 to 10 years 0 Long Term More than 10 years Debt Equity Definition Constructional agreement Claims to share net income Ownership of firm No Yes Maturity Yes No Yield Interest Dividends 0 Set rate 0 Change with profit of firm EX Bonds and mortgages Stocks Relative Advantage Get paid before equity Benefit directly from change in holders when bankrupt the firm profitability or asset value 0 Residual Claimants getting paid after bonds get paid lSt then stocks Primary Market 0 Deals with new issues of stocks or bonds which are sold to initial buyers 0 EX investment banks underwrites securities before delling them to the public IPO Initial Public Offerings Secondary Market 0 Secondhand sales of stock and bonds 0 EX 1 Exchange 0 Buyers and sellers brokers meet in central location New York Stock Exchange and Chicago Board of Trading 2 Over the Counter 0 Dealers different locations who have an inventory of securities and are ready to sell to anyone Gov bonds fed funds foreign exchange 0 Function 1 Easier to sell financial instruments to raise cash increase Liquidityeasiness to turn assets into cash 2 Determine price of security sold in primary market Money Market 0 SHORT TERM debt instruments are traded NO stocks Capital Market 0 LONG TERM debt and equity investment and traded Federal funds are overnight Depository Institutions 0 Commercial Banks 0 Saving and loans amp neutral savings banks 0 Credit union Treasury Securities 0 Federal Reserve holds most treasury securities 0 Monthly interest for treasury securities in Fiscal 2014 was 35 Billion 0 China holds most internationally US Government Securities 0 Treasury In ation Protected Securities TIPS 0 5 1020 years 0 Paid interest semi annually 0 Protects against in ation Common Securties lTreasury Bonds less then a year 4 1352 26 WEEKS Min face value 10000 lT Notes earn amp pay autrity 2 3 4 10 yrs 5000 lT Bonds Stopped in 0 months 6 earn interest every 6 Money PPT Lecture Date September 3 September 10 0 Currency 1 Narrow concept of money 2 Cash 0 Money 1 Any commodity or token that is generally accepted as a means of payment I Recognized I Usually able to be divided into small parts coins and dollar bills 0 3 Primary Function of Money 1Medium of Exchange IObject generally accepted in return for good or service I Use of money 0 Saves transportation costs enhances production promotes efficiency I Without money we would use barter system buyers want what sellers have double coincidence of wants I Required Features for Exchange 1Easily standardized 2 Widely accepted 3 Divisible 4 Doesn t deteriorate quickly 5 Easy to carry 0 Yap I12ft diameter IValue in lives killed trying to move it IWorth thousands 2 Unit of Account IAgreed upon measure for stating the price of a good or service IWithout money prices are needed I of prices per good 0 n n 12 2 I In World Trade 0 key currency in international trade 0 Most commonly traded 0 Almost all commodity trade in 0 International debts in 0 Foreign countries saves for trade I Seigniorage 0 Difference between face value and cost to produce 0 EX Value Cost 100 123 99877 0 Based taxes off Seigniorage 0 Saddam Hussein tried to challenge US Seigniorage 0 would lose value 3 Store of Value I Any commodity or token that can be held and exchanged later for goods and services I Saves purchasing power I Depends on price level I Central bank g keep value of money stable 0 BONDS amp STOCKS amp CREDIT CARD NOT M0NEYquotquot quotquot quotlt 0 Evolution of money 0 Commodity Money I Goods had value I Money with intrinsic value I EX salt and cigarettes 0 Fiat Money I Ordered by government I Money not redeemable for any commodity I No intrinsic value AKA 0 Check I NOT MONEY 0 Electronic Payment 0 E money I Debt Card stored value card e cash I Could risk Seigniorage Types of MoneV 0 Commodity Money see above section 0 Fiat Money see above section 0 Token Money I Money with positive Seigniorage Bank Notes I Paper promising a specific amount of gold or silver to bearers who persuaded them to issuing banks for redemption Legal Tender I Creditors must accept as payments of debts Medium of Exchange in Prison 0 Cigarettes no longer allowed 0 Mack Money IMackerel now in use IWorth about 1 Currencv in USA 0 Federal Reserve Notes paper money Coins us treasury makes Bills have letters A L 12 letter for 12 Federal Reserve Banks US Treasury Secretary signature on bills Monev Todav 0 Currency in Banks is NOT money 0 Forms of Money IBank deposits ICurrency outside banks 0 Credit Cards ICreate debt which you pay off Too little money in circulation makes exchange difficult Too much money in circulation creates in ation Monetarv Aggregates 0 Way to measure money in economy 0 M1 ICurrency held by 0M2 Nonbank public 0 Travelers checks Checkable deposits Highly liquid easily used for goods an services Ml 0M3 Saving deposits Small time deposits less then 100000 Noninstutional Money Market Mutual Funds 0 Certificate deposit No longer in use M2 Eurodollar dollar deposits outside US 0 Profitability Ml lt M2 lt M3 0 Liquidity M1lt M2lt M3 Measuring money is crucial Large time deposits Institutional MMMF RP s 0 Predicting macroeconomic phenomena Should predict Hyperin ation nominal amp real out put 0 Fast changing value of money 0 In ation exceeds 50 month 0 When happens governments turn to foreign Zimbabwe Demand depeeits CUTIE C hee keble deptgreite in eireulatiem Seenage depueiite That s more than a a day Smalltime depus ite Retail truermeF market I y currency Because local currency does not store value of money 0 EX North Korea JME 0 Hyperin ation Price change for food just in the time you were eating Equivalent to was trillion of Zimbabwe s Hot Potato spending money as soon as you get it before its value decreased 0 Effect shelves in markets were cleared out Cause government tried to overcome deficit by printing more money Solution 0 Gov removed all local currency and replaced it with foreign currency 0 Lost their Seigniorage 0Dollarization 0 Other countries using US for currency 0 Germany 0 Hit deficit and hyperin ation after WW1 0 Money was being used to make fires wallpaper and just trash on the ground Ch 4 Interest Rate Lecture Dates September 15th 17th 0 Present Vale I 1 today has a different value tomorrow I 1 today is worth more than a 1 in the future 0 Amount invested today for future payment I Future Value Money X 1 i11 I Present Value Money 1 In 0 i intrest rate 0 n number of years 9 EX suppose that you have 10000 today and your bank pays 5 interest rate for your savings account what will you have neXt year two years from now and three years from now INeXt year 10000 x 1 51 10500 ITwo years 10000 X 1 52 11025 IThree years 10000 X 1 53 11576 0 EX Which of the following would you like to receive at 10 interest rate aL75 one year from now 75 111 6818 bL85 two year from now 85 1 12 7025 QL90 three year from now 90 1 13 6762 0 Borrowing and Lending O Borrowing cost on a loan aLWant interest lower b More Productivebarrowers viewpointuse of money 0 Lenders reward on the investment return a Want interest higher b Time Preferencelenders viewpoint You want money now not later 0 Interest rate low aLGreater incentive to borrow b Fewer incentive to lend 0 Whv are interest rates important 1Affects investments and consumption 2Redistributes wealth between borrowers and lenders 3 Impacts prices of key financial assets such as stocks and bonds 0 Investment purchase of new capital goods and additions to inventories 0 Internet Cafe Example aLHow many computers should you buy Revenue Cost 1 Cost 1 7 8 Computer 100 70 80 1 Computer 90 70 80 2 Computer 80 70 80 3 Computer 70 70 80 4 1Firms investment decreases when interest rate increases 2 Profit revenue cost 0 Yield to Maturitv 0 Interest rate equates payments received from a debt instrument with its value today 0 Most accurate measure of interest Rate 0 Debt instruments 0 Loans a Simple Loans 0 one payment b Fixed Pavment Loans 0 same payment every period throughout the life of the loan 0 More than one payment 0 Fixed pavment l i n 0 Bonds a Discount Bond zero coupon bond 0 Bought at a price below its face value which is repaid at the maturity date 0 single payment 0 price lower than face value means no interest 0 Face Value Price paid b Coupon Bond 0 Multiple payments 0 Consol perpetuity 0 Perpetual bond with no maturity date and no payment of principal that makes fixed coupon payments of SEC forever aLPrice consol PC 0cl i11i2 hLCurrent Yield 10 c Pc 0 Rate of Return 0 Payments to the owner plus the change in value eXpressed as a fraction of the purchase price 0RET Q REV PE Pt Pt 0Pt price of bond at time 0 P H price of bond at tl 0 C coupon payment CPt current yield i 0 P1t Pt Pt rate of capital gain g 0 rate of return yield to maturity aLif the holding period equals the time to maturity 0 interest rate rises 0 bond price decreases 0 capital loss if sold before the maturity 0 rate of return lt yield to maturity 0 Real Interest Rate 0 Interest rate that is adjusted for eXpected changes in the price level so that it re ects more accurately the true cost of borrowing or true reward of lending aLeX post real interest rate r 0 i realized in ation rate hLCX ante real interest rate re 0 i eXpected in ation rate 0 Fisher Equation 0 Real interest rate Nominal IR EXpected in ation 0 Federal Open Market Committee FOMCQ 0 Believe change in interest rate may change a Interest Rate increases 0 Sensitive stock market 0 Bad news 0 Bond price decrease I People buy more bonds less stock Ch 5 Behavior of Interest Rate Lecture Dates September 22nOI Market Equilibrium Excess Demand price will rise and interest rates will fall Excess Supply price will fall and interest rates will rise Centeris Paribus m all else remains the same 39 SUDDIV Curve Shift Factors negative shift to the left shif r m the ri h Barrows are bond issuers m shift right Increased expected investment o orarnc39 shift right Increase in ation shift right Increased Nmemnm Coummcalexpenditure government de cit Boom Demand Curve Shift Factors negative 7 shift to the left shift to the right Savers are lenders shift right Increased income wealth shift left Increased expected returns future in ation and futures interest rate shift left Increased risk shift right Increased Liquidity Elusir1ess cycle Procyclical expenditure D t f m 1 lb in percent of potential GDP Price of Bond reciprocal to interest rate I Flight amp Quality risky assets get moved to safer Hm I Emirate investments m m a Higher risk higher interest rate Greek bond market gets risker then the demand for German bonds will increase Price G e r m Price G e k 11 l E Quantityr ill 31 Quantityr Spread difference between two interest rates Expected in ation increases then Nominal interest increases ProCyclical vs CounterCyclical Pro Moves same direction as GDP P ce Tpl p P ce Theory into Practice TIP Yield interest rate 0 M Moves opposite direction as GDP Nominal Interest Rate is ProCyclical During Boom Peak Peak Bond Price is CounterCyclical Business Cycle Supply increases Demand Increases Interest Rate increase Price Decreases when supply shifts more than demand Operational Twist Fed sold 400 billion short term bonds Supply increase Contraction Boom expansion ough 0 Sell Supply 0 Dai 3 D r I l H E Fed bought 400 billion long term bonds Demand increase Buy Demand Short Term tbill D1 D Quan ty D1 Quant y Long Term Market Price Price Decrease Increase Interest Interest Rate Rate Increase Decreases Treasury Euro Dollar Spread TED 0 Peaks show problems Dump risky to gain safer assets lmportance Bond Market is where interest rates are determined Income Effect higher level of income shifts demand curve right Price level effect rise in price level shifts demand curve right
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