Principles of Economics Macroeconomics
Principles of Economics Macroeconomics ECON 2020
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This 4 page Class Notes was uploaded by Nola Williamson on Monday September 21, 2015. The Class Notes belongs to ECON 2020 at University of Virginia taught by Lee Coppock in Fall. Since its upload, it has received 16 views. For similar materials see /class/209773/econ-2020-university-of-virginia in Economcs at University of Virginia.
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Date Created: 09/21/15
Fina nce M a rket Exam Wilson 402 no lecture that Tuesday no calculator Includes today and Thursday all of part one on the syllabus Tuesday February 15 20H Review session Sunday Gilmer 130 25 1052 AM Or Econ Club tutoring Market for Loanable funds Capital Goods Tools that help us produce more goods or services in the future A means to an end Purpose help us produce goods GDP UP Without savings we would never get them Investment Spending on Capital Spending has to come before revenue investment must precede production Every Dollar Borrowed requires a dollar saved Good Savings Loans EX Buying a loan 500 R 6 Dollar Price 305 Price Interest Rate BuyersDemand Borrowers Sellers SaversLenders Price Interest Rates Supply of Loanable Funds Savings 1 Interest Rate Price a Reward for Saving Law of Supply price UP quantity supplied UP 2 Time Preferences Goods and services are more valuable the sooner they are delivered a Now is preferred to later People are impatient b You must pay to borrow 3 Consumer Smoothing People generally prefer smooth consumption patterns 4 Expected Inflation reduces the incentive to save because the dollars you get back are not worth as much a I UP Savings DOWN b Inflation reduces the real values of future funds Savings decline if more people retire than enter the workforce 0 quot ing4 Notes Page 1 3quotin m CALth b 3 fryrmle 3m 5 lliahs Demand 1 Interest Rate Price The Cost of Borrowing a Borrow iff expected return on investment Capital gt Cost of the loan interest rate Question How many investments have returns greater than 157 A few a few more Aot DOWN R UP Quantity Demanded 2 Capita Productivity When capital is more productive loan demand increases at all interest rated 3 Expected Inflation Increases the incentive to borrow Paying back with funds that aren39t worth as much a I UP Demand for Loans UP K Tiab D l swig n VM39JM Inusmu 56 I l quotbrium I S n mnstmwt Notes Page 2 Borrowers FinanCIal Markets are the bridge WW w WW w between Savers and Borrowers Elrmsw Governme Household Indirect finance gt 3 goes to firms through financial intermediary to the firm Banks Direct Financegt Savers and households went directly to the firm straight from saver to borrowerBonds and Stocks nt Bonds Direct between the Borrower and the Saver and IOU or a loan Contract eg buy a 10000 bond from entrepreneur at 8000 the 8000 price to 10000 sets the interest rate 25 Characteristics 1 Borrower 2 Date of Maturity When it is worth itself in cash 3 Face Value Value at maturity eg 10000 Two Principles 1 Dollar price dictates interest rate i Think of R as the rate of return on the initial dollars paid 2 The 3 price and R move opposite to each other gt By definition Default Risk 1 460m Will borrower Default 0 Depends on background check Firms Evaluated by Rating agencys like Moody39s and Paid W 25 i obfullv Standard and Poor39s Deterimines the interest rate High grade low interest rate CRUCIAL for firms VMoody39s SampP Description Examples Prime Toyota Walmart Intel VT Duke CocaCola A I39I39 Mcdonalds V ftBofAU Home Depot Kellog Sprint High Grade IE5 V V VBVBVBV V V VLJvJeVrV ragga 355 V V V V V V 22 V V a V V VV VN QH iVn vV gth VthVgFaZi JrVgg EJithiv f V V 39hngEIQVsViS ELJith iQJV39VVVV39VVVV39VVVV39 E52 V V VCVVCCVorVDVV 9qu ngJVeculthiveVoVrVDefaultVV VV V V Notes Page 3 Stocks Sell Ownership shares in the firm Eg Google 62422 gt Become Partial owner Not a fixed investment One of 320 million shares Market value 200 billion dollars Everything you need to know for the test Misc Secondary Markets Where bonds and stocks are traded after their initial sale NY stock exchange Important because securities with secondary markets are much more valuable Eg couldn39t resale the example bond from earlier Therefore marketable securities are more valuable Aids the borrowing entities Two special Debt Instruments 1 Us Treasury Bonds Funds the National Debt i Very low default risk i Used in Monetary Policy 2 Home Mortgages Loan Contract like a bond for HomeBuyers ii Mature in 30 years iii Difficult to rate Securitization Creation of a Financial Asset Security by combining other financial assets Like Bundling EG Mortgage Backed Securities Put lots of mortgages together M95 ma rcgogul WIquot 2 ob L 3 L01 L This creates a secondary Market which is good But by Diversifying risk they decided they were AAA sold all over the world to banks Eg Iceland bought a ton of them and tanked when the bubble burst Notes Page 4
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