ECON 252: Chapter 10 Notes
ECON 252: Chapter 10 Notes ECON 252
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This 2 page Class Notes was uploaded by Zach Weinkauf on Tuesday March 22, 2016. The Class Notes belongs to ECON 252 at Purdue University taught by Andres Vargas in Fall 2016. Since its upload, it has received 47 views. For similar materials see Macroeconomics in Economcs at Purdue University.
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Date Created: 03/22/16
Chapter 10: Credit Markets 10.1 – What is the credit market? Debtors – borrowers – economic agents who borrow funds. Credit – loans that the debtor receives. Interest Rate – Nominal Interest Rate – i – is the annual cost of a one-dollar loan, so i X L is the annual cost of an $L loan. Real Interest Rate = Nominal Interest Rate – Inflation Rate Credit Demand Curve – schedule that reports the relationship between the quantity of credit demanded and the real interest rate. o Factors that shift curve: Changes in perceived business opportunities for firms. Changes in household preferences or expectations. Changes in government policy. Credit Supply Curve – schedule that reports the relationship between the quantity of credit supplied and the real interest rate. o Factors that shift curve: Changes in saving motives of households. Changes in the saving motives of firms. Credit Market – where borrowers obtain funds from savers. 10.2 – Banks and Financial Intermediation: Putting Supply and Demand Together Financial Intermediation – channel funds from suppliers of financial capital to users of financial capital. Securities – financial contracts. Bank Reserves – consist of vault cash and deposits at the Federal Reserve Bank. Demand Deposits – funds that depositors can access on demand by withdrawing money from the bank, writing checks, or using their debit cards. Stockholders’ Equity = Total Assets – Total Liabilities 10.3 – What Banks Do 1. Banks identify profitable lending opportunities. 2. Banks transform short-term liabilities, like deposits, into long-term investments in a process called maturity transformation. 3. Banks manage risk by using diversification strategies and also by transferring risk from depositors to the bank’s stockholders, and in some cases, to the U.S. government. Maturity Transformation – process by which banks take short-maturity liabilities and invest in long-term assets. Insolvent – when the value of the bank’s assets is less than the value of its liabilities. Solvent – when the value of the bank’s assets is greater than the value of its liabilities. Bank Run – occurs when a bank experiences an extraordinary large volume of withdrawals driven by a concern that the bank will run out of liquid assets which to pay withdrawals.