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Economics 11

Capital. The New York Stock Exchange generates the capital that makes capitalism work."Capital the equipment, tools, and machinery used in the production process.Saving absence of spendingSavings dollars that become available when people abstain from consumptionFinancial Capital - saving

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Economics 11

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    1. Economics 11/16/04 www.msu.edu/~milewsk6 OBJECTIVE: Examine savings and the financial system. I. Journal #42 pt. A -Read “Profiles in Economics” p.317 -Answer question #1 p.317 II. Journal #42 pt. B -notes on capital formation III. Homework Due Friday 11/19/04 1.) Read Chapter #11 section#3 p.(300-305) -Answer questions (3-6) p.305 2.) Read Chapter #12 section#1 p.(312-316) -Answer questions (3-6) p.316

    2. Capital “The New York Stock Exchange generates the capital that makes capitalism work.” Capital – the equipment, tools, and machinery used in the production process. Saving – absence of spending Savings – dollars that become available when people abstain from consumption Financial Capital - savings

    3. The Financial System It is a network of savers, investors, & financial institutions that work together to transfer savings to investors. This results in the circular flow, which is the way funds are transferred from savers to borrowers.

    4. As a saver you are: Categorized as a household and can save the following ways: 1.) Open a savings account 2.) Buy a CD (certificate of deposit) which is a receipt showing that an investor has made an interest bearing loan to a bank 3.) Buy a bond from the government or corporation in which you receive a receipt for the funds you loaned them.

    5. Receipts Are the claims on the property and the income of the borrower. They are assets because they are property that has value. It specifies how much was loaned, for how long, and the terms (interest rate) in which the loan was made.

    6. Circular Flow

    7. Circular Flow A circular flow takes place when funds are transferred from savers to borrowers Savings banks, credit unions, commercial banks, and savings associations obtain funds when their customers or members make regular deposits.

    8. Economics 11/17/04 www.msu.edu/~milewsk6 OBJECTIVE: Examine savings and the nonbank financial institutions. I. Journal #43 pt. A -Read “Issues in Free Enterprise” p.(282-283) -Answer questions (1-3) p.283 II. Journal #43 pt. B -notes on nonbank financial intermediaries III. Homework Due Friday 11/19/04 1.) Read Chapter #11 section#3 p.(300-305) -Answer questions (3-6) p.305 2.) Read Chapter #12 section#1 p.(312-316) -Answer questions (3-6) p.316

    9. Nonbank financial institutions Another important group of financial intermediaries includes nonbank financial institutions–nondepository institutions that channel savings to borrowers. Finance companies, life insurance companies, pension funds, and real estate investment trusts are examples of nonbank financial institutions.

    10. Finance Companies A finance company is a firm that specializes in making loans directly to consumers and in buying installment contracts from merchants who sell goods on credit. Some finance companies make loans directly to consumers. Because they make some risky loans, and because they pay more for the funds they borrow, finance companies charge more than commercial banks for loans.

    11. Life Insurance Companies A financial institution that does not get its funds through deposits The head of a family, for example, purchases a life insurance policy to leave money for a spouse and children in case of his or her death.

    12. Life Insurance Companies The premium is the price the insured pays for this policy and is usually paid monthly, quarterly, or annually for the length of the protection. Because insurance companies collect cash on a regular basis, they often lend surplus funds to others.

    13. Mutual Funds A mutual fund is a company that sells stock in itself to individual investors and then invests the money it receives in stocks and bonds issued by other corporations. Mutual funds allow people to play the market without risking all they have in one or a few companies. The net asset value (NAV)–the net value of the mutual fund divided by the number of shares issued by the mutual fund–is the market value of a mutual fund share.

    14. Pension Funds A pension is a regular payment intended to provide income security to someone who has worked a certain number of years, reached a certain age, or suffered a certain kind of injury. A pension fund is a fund set up to collect income and disburse payments to those persons eligible for retirement, old-age, or disability benefits.

    15. Pension Funds During the 30- to 40-year lag between the time the savings are deposited and the time the workers generally use them, the money is usually invested in corporate stocks and bonds.

    16. Real Estate Investment Trusts The final nonbank financial institution is the real estate investment trust (REIT)–a company organized primarily to make loans to construction companies that build homes.

    17. Economics 11/18/04 www.msu.edu/~milewsk6 OBJECTIVE: Examine the role of the Federal Reserve. I. Journal #44 pt. A -Read “For Kmart-Sears, it’s make or break” 1.) What problems does Sears Holdings face? 2.) Why do some think the merger is a good idea for Sears? 3.) What is the fate of Kmart stores & it’s employees? II. Journal #44 pt. B -Watch “The Federal Reserve: The Eye of the Storm” -Answer the questions on the film Notice: Chapter #11-12 Test Tuesday November 23rd

    18. Homework Due Tomorrow 1.) Read Chapter #11 section#3 p.(300-305) -Answer questions (3-6) p.305 2.) Read Chapter #12 section#1 p.(312-316) -Answer questions (3-6) p.316 NOTICES: Chapter #11-12 Test Tuesday 11/23/04 Chapter #11-12 Review available tomorrow

    19. Types of Mergers Horizontal merger – when two or more firms that produce the same type of product join forces. Examples: Mercedes Benz & Chrysler, Sears & K-mart Vertical merger – when firms involved in different steps of the manufacturing process join together. Examples: If Ford bought a steel mill or if Boeing bought United Airlines

    20. The Federal Reserve: The Eye of the Storm 1.) What do people want most in a bank? 2.) What do banks do with the money people deposit in them? 3.) What happens when a bank has more money than it needs? 4.) What emergency economic action did the Fed take in 1992? 5.) What is Fed-Wire? 6.) What was a run on a bank? 7.) How do banks fail today? 8.) In what ways does the Fed ensure that banks don’t fail today?

    21. Economics 11/19/04 www.msu.edu/~milewsk6 OBJECTIVE: Review for the Chapter #11-12 Test. I. Mindjogger -video quiz on Chapter #11 II. Chapter #11-12 Review -Test will cover Chapter #11 and Chapter #12 section #1 Notice: Chapter #11-12 Test Tuesday November 23rd

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