Financial Institutions and Markets Dr. Andrew L. H. Parkes Day 6 “How do financial markets work?” 卜安吉

Sept. 20, 2012Financial Institutions & Markets, Day 62 Interest rates to Zero % So now the Fed must use OTHER ways to “ease” credit conditions!

Sept. 20, 2012Financial Institutions & Markets, Day 63 The Government Budget Constraint The Constraint Abbreviations  G is Government Spending  T is Tax Revenue Income   Bonds is NEWLY Issued Bonds   M s is Printed Money The U.S. Budget

Sept. 20, 2012Financial Institutions & Markets, Day 64 The Government Budget Constraint The Constraint G - T =  Bonds +  M s The U.S. Budget You may not use this formula on the test – use the words!

Sept. 20, 2012Financial Institutions & Markets, Day 65 Government Spending Government expenditures are required of all governments. Government expenditures are required of all governments. Everything provided by the “public” sector of the economy. Everything provided by the “public” sector of the economy. Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc. Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc.

Sept. 20, 2012Financial Institutions & Markets, Day 66 Tax Revenue Income Tax revenue includes any fees, assessments or taxes collected by the government. Income taxes, utility taxes or revenue collections, tolls for highways, fees for park entrance, sales taxes, property taxes, etc.

Sept. 20, 2012Financial Institutions & Markets, Day 67 U.S. Treasury Bills, Notes, and Bonds Debt or borrowing of the government. The U.S. has the lowest cost of borrowing, that is the least risk or lowest interest rate due to the lack of default risk. NEW borrowing – not debt issued to cover bonds maturing which need refinancing.

Sept. 20, 2012Financial Institutions & Markets, Day 68 Change in the Money Supply Commonly called “Printing Money” Commonly called “Printing Money” When the Federal Reserve Prints currency to specifically buy bonds. When the Federal Reserve Prints currency to specifically buy bonds. Federal Reserve Notes A Liability of the Fed

Sept. 20, 2012Financial Institutions & Markets, Day 69 Spending versus taxes Taxes – paid today Taxes – paid today Bonds – taxes tomorrow (when the bonds mature) Bonds – taxes tomorrow (when the bonds mature) Printing money leads to inflation Printing money leads to inflation Inflation tax - $ worth less Inflation tax - $ worth less Federal Reserve Notes A Liability of the Fed

Sept. 20, 2012Financial Institutions & Markets, Day 610 LIBOR Investopedia explains London Interbank Offered Rate - LIBOR in plain english... Investopedia explains London Interbank Offered Rate - LIBOR in plain english... The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.