2. Unit 4- Financial Sector

6. Sam Simon

13. At the base of the pyramid on the $1 bill you will find “****” in Roman Numerals

14. On the $100 bill, the clock tower of Independence Hall in Philadelphia is shown with the time set at 4:10. According to the US Bureau of Engraving and Printing, “there are no records explaining why that particular time was chosen”

15. The elm tree on back of the $20 bill near the White House represents a real tree in this same location. However, the tree is no longer on the White House grounds because it succumbed to rain-softened ground in 2006

16. Most people save $2 bills, thinking they are rare and therefore valuable; they're actually worth... $2

17. 97% of all paper money contains traces of cocaine

18. Barter Inefficient Prevents economic growth Double coincidence of wants

19. Types of Money Commodity money- money itself serves a purpose (i.e. tulip bulbs, salt, tobacco) Commodity-Backed money- money’s value is backed by a commodity (gold, silver) *Fiat money- value based solely on acceptance of value and government backing

20. Functions of Money Medium of Exchange Unit of Account (Standard of Value) Store of Value

21. Time Value of Money Money and Interest Rates PV=FV/(1+r) n FV = PV X (1+r) n 13% interest rate I give you $100 today I give you $100 on March 10, 2016 *No calculators on the AP exam, so…

22. Money Supply Money Supply Measures based on Liquidity Monetary Base = M0 = M1= M2=

25. The Banking System – Three important features of the fractional reserve banking system: Bank profitability Banks discretion over the money supply Exposure to bank runs

26. The Banking System Principles of Bank Management: Profits versus Safety – Greater risk – greater potential profit. – How much risk to take?? – How’s that worked out?

27. FIGURE 28-1 Bank Failures in the United States, 1915-2000 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. '00 '95 '00'95 Number of Bank Failures 198519751965195519451935 40 80 120 160 200 0 Great Depression begins FDIC established Number of Bank Failures Year 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1990198519801975197019651960195519501945194019351930192519201915

29. The Banking System Bank Regulation – Deposit Insurance The Federal Deposit Insurance Corporation insures people’s deposits at banks. – Bank Supervision Ensures banks take only sensible, defensible risks Controls the money supply – Reserve Requirements Helps control the money supply

30. Multiplier Effect Simple Deposit Multiplier = 1 /Reserve Requirement RR = 10% Multiplier =

31. Money Supply Expansion Expansion = Multiplier X Excess Reserves For each calculate expansion for a $1000 deposit.

32. How Bankers Keep Books Banks keep balance sheets Assets = liabilities + net worth (Equity) Assets include: Reserves Loans Liabilities include: Deposits owed to customers.

33. Money Market

34. Q of money is fixed at any given point in time MS = M1

35. Money Market i = nominal interest rate Money Market graphs short term interest rates

36. Money Market Nominal Interest rate is the Federal Funds Rate FFR = rate banks charge each other for overnight loans

37. Money Market MD= Q of money demanded at various interest rates Q of money demanded = amount of wealth held as money over other assets

38. Money Market What is the opportunity cost of holding money?

39. Money Market Money v. Bonds

40. Money Market Change in “i“ causes movement along the curve

41. Money Market Increase in RGDP and Price Level will shift MD to the right

42. Fed Tools Open Market Operations- buy/sell bonds Discount Rate- rate Fed charges banks Reserve Requirement/Required Reserve Ratio

43. What should the Fed do? During a recessionary period? List 3 During an inflationary period? List 3

44. What should the Fed do? During a recessionary period? – Expansionary Monetary Policy During an expansionary period? – Contractionary Monetary Policy

46. Agenda FRQ Review – Bond Basics – Bond prices Balance Sheets – Intro and Practice HW- Real v. Nominal Article Test- Friday???? Or Monday

47. Just what is a bond? Issued by a government or business to raise $ Bond purchaser is the lender Purchaser receives regular interest payments Interest rate is called coupon rate Purchaser is paid the principle at maturity Longer the term, higher the interest Bonds can be traded before maturity Privately issued bonds have higher coupon rates- more risk US government bonds have “zero” risk

49. Agenda Balance Sheet FRQs Money Demand Dissected Equation of Exchange Intro Sides Game

50. Stock v. Bonds Stock = owner Bond = lender – Riskier company = higher coupon rate

51. Trading Existing Bonds If interest rates go up? If interest rates go down?

52. How Bankers Keep Books Banks keep balance sheets Assets = liabilities + net worth (Equity) Assets include: Reserves Loans Liabilities include: Deposits owed to customers.

53. Balance Sheets- Important Points 1. Deposits and withdraws do not INITIALLY change M1 2. Required Reserves only apply to demand (checkable) deposits

54. Demand for Money Transaction Demand- function? Asset Demand- function?

55. Demand for Money Financial Assets- stocks, bonds, loans, deposits Asset Demand- inverse relationship to interest rates

56. Monetarism Money Supply is chief determinant of economic growth MV = PQ

57. Equation of exchange M= money supply V= velocity of money P= price level Q= quantity of goods and services produced

58. MV = PQ Equation of exchange V = constant Increase in M should outpace increase in Q Otherwise- “Too much money chasing too few goods”

59. MV = PQ Otherwise- “Too much money chasing too few goods”

60. Sides Game

61. Investment Demand

62. Investment leads to capital formation This changes future capital stock This influences growth rate

63. Investment Demand Some Determinants – Expectations – Capacity Utilization – Cost of Capital Goods – Tax Credits