https://youtube/watch?v=xg0Frqvh3T0&list=PLD7C33AB80B405B9A&index=1

1. Financial Sector https://www.youtube.com/watch?v=xg0Frqvh3T0&list=PLD7C33AB80B405B9A&index=1

2. I. Roles of Money • Medium of exchange – an asset that individuals use to trade for goods and services • Store of Value - a way of holding purchasing power over time • Unit of account – measure individuals use to set prices and make economic calculations http://www.brainpop.com/socialstudies/economics/money/

3. Money Supply A. M1 1. currency 2. checkable deposits 3. traveler’s checks B. M2 1. M1 2. Near Monies – financial assets that are highly liquid but not directly usable a. Savings deposits b. Money market funds c. Small time deposits – CDs C. M3 1. M1 and M2 2. large time deposits

4. Let’s play • Is it in the Money Supply?

5. Cash in your pocket In the money supply

6. Cash destroyed in a fire NOTin the money supply

7. Money in a checking account In the money supply

8. Cash stored in a vault at the FED NOTin the money supply

9. III. Financial Assets A. Loans B. Bonds 1. issuer pays interest each year and repays the principal to the bond owner on a particular day 2. risk is that the that the bond issuer may default 3. bonds with higher default risk pay higher interest

10. C. Stocks 1. share in the ownership of a company 2. companies sell stocks to spread out the risk 3. owners of stocks are entitled to a share of the company profits brainpop.com/socialstudies/economics/stockmarket/ https://www.youtube.com/watch?v=SNa4EMUWnAc

11. Time Value of Money A. Having a dollar today is worth more than having a dollar a year from now B. Present Values – using interest rates to compare future benefits and costs allows economists to compare the value of dollars received and paid out at different times

12. Do Time Value of Money Exercise now.

13. Banking and Money Creation A. Reserves 1. currency in bank vaults and bank deposits at the FED 2. reserve ratio – fraction of bank deposits that a bank holds 3. required reserve ratio a. Reserves banks are required by law to hold b. Prevents a run on the bank c. Allows FED to control the lending ability of banks http://vimeo.com/37034368

14. Banking and Money Creation A. Reserves B. Banking regulations protect depositors prevent bank runs 1. FDIC – guarantees depositors the first $250,000 2. Capital Requirements a. Deposit insurance encourages risk b. Banks must hold more assets than the value of bank deposits – bank capital 3. Reserve requirements 4. discount window – FED lends money to banks http://www.youtube.com/watch?v=TAE8i40A5uI

15. Banking and Money Creation A. Reserves B. Banking regulations protect depositors prevent bank runs C. Banks Create Money 1. banks lend excess reserves 2. money multiplier – indicates the amount of money created by bank loans Formulas Money multiplier = _________1_________ required reserve ratio excess reserves X money multiplier = increase in money supply OR amount of first loan

16. Let’s demonstrate how banks create money!

17. Bank T accounts A. Financial spreadsheet that displays an institution’s financial position B. Assets 1. economic resources, things of value 2. on the left side of the T-account C. Liabilities 1. debts 2. on the right side of the T-account

18. Work through this example: • Suppose Narvaizville has a single bank that has: • $20,000 of deposits • $4000 of reserves • $16,000 of loans • Narvaizville’s central bank has 10% reserve requirement. • Construct a T-account depicting this situation. Make sure you: • differentiate between required and excess reserves • Have assets equal to liabilities. Assets Liabilities Required Reserves $2,000 Excess Reserves $2,000 Loans $16,000 Deposits $20,000 Assets and Liabilities must be equal --- Are they?

19. Work through this example: Remember the reserve requirement is 10% What is the multiplier ? 1/rr = 1/.1 = 10 Assets Liabilities Required Reserves $2,000 Excess Reserves $2,000 Loans $16,000 Deposits $20,000

20. Work through this example: Suppose the bank in Narvaizville lends all its excess reserves (the amount you calculated in the previous problem) until it reaches the point where its excess reserves equal zero. How much additional money will the bank lend out? $2,000 How much money will this additional lending add to the money supply? $2,000 x 10 (multiplier) = $20,000

21. Work through this example: How much money will this additional lending add to the money supply? $2000 x 10 (multiplier) = $20,000 Assume that all of the money that is created will be deposited in the bank and that the bank will loan out all excess reserves. Create a t-account that shows this. Assets Liabilities Required Reserves $2,000 Excess Reserves $2,000 Loans $16,000 Deposits $20,000 Required Reserves $4,000 Deposits $40,000 Excess Reserves $0 Loans $36,000

22. Work Money Multiplier Example now!

23. Chairman Janet Yellen

24. Degrees: • Summa cum lade from Brown University in Economics • Ph.D. in Economics from Yale • Job History: • Assistant Professor at Harvard University from 1971 to 1976, • Economist with the Federal Reserve's Board of Governors from 1977 to 1978 • Faculty of the London School of Economics and Political Science from 1978 to 1980. http://www.huffingtonpost.com/2014/10/17/federal-reserve-pay-janet-yellen_n_6001202.html

25. Ben Bernanke Will Work With Citadel, a Hedge Fund, as an Adviser For eight years, Ben S. Bernanke, the former Federal Reserve chairman, was steward of the world’s largest economy. Now he has signed on to advise one of Wall Street’s biggest hedge funds. Mr. Bernanke will become a senior adviser to Citadel, the $25 billion hedge fund.

26. After stepping down from the Fed last year, Mr. Bernanke said he “couldn’t even refinance his mortgage.” He has hit the speaking circuit. At the Fed, Mr. Bernanke made $200,000 a year, a sum he can now make in a single speaking engagement. While Mr. Bernanke declined to disclose his compensation, he said he would be paid an annual fee. His arrangement with Citadel is not exclusive, so he could take on other consulting roles.

27. VII. The FED • Federal Reserve System – created in 1913 • They make banks hold adequate reserves • Banks must let regulators inspect their accounts • Structure • Chairman • a. Appointed every four years – may be reappointed • b. Janet Yellen http://www.chicagofed.org/webpages/utilities/about_us/what_we_do.cfm Federal Reserve Bank of Dallas

28. B. Structure • 2. Board of Governors • Oversees the system • 7 members • Appointed by the President approved by Senate • 14 year terms insulates them from politics • Cannot be reappointed

29. 12 Federal Reserve Banks • 1. serve a region of the U.S. • 2. provide banking supervisory service

30. Functions • Provide Financial Services • Hold reserves • Clear checks • Provides cash • Transfer funds for commercial banks • Provide checking account for U.S. Treasury • Supervise and Regulate Banking Institutions • 3. Maintain the stability of the banking system by providing liquidity • 4. Conduct monetary policy to prevent extreme fluctuations in the economy

31. Monetary Policy Tools • Reserve Requirement • a. Banks that need reserve can borrow • 1. from one another – pay federal funds rate • 2. from the FED at the discount window • Discount Rate • a. Interest rate the Fed charges on loans • b. Normally set above federal funds rate to discourage borrowing from the FED • Open Market Operations • a. Fed buys and sells U.S. Treasury Bills (Bonds) • b. Buying increases the money supply • c. Selling decreases the money supply https://www.youtube.com/watch?v=6OpzAD9Okds FOMC meeting

32. Monetary Policy The Fed’s tools to manipulate the economy Come on tools. Let’s get to work

33. VIII. The Demand for Money (cash in your pocket) A. Opportunity Cost 1. opportunity cost of keeping cash – interest you would earn in a bank 2. interest rate is the price of money 3. low interest rate a. Low opportunity cost b. More cash is held 4. high interest rates a. High opportunity cost b. Less cash is held

34. B. Money Demand Curve (cash in your pocket) 1. movement along the curve – caused by change in interest rate

35. 2. Shifting the Money Demand Curve • a. Change in aggregate Price level • 1. As prices rise it takes more money to buy the same goods • b. Changes in Real GDP (spending) • 1. The more people buy the larger the quantity of money they will want to hold

36. Shifting the Money Demand Curve • a. Change in aggregate Price level • b. Changes in Real GDP (spending) • c. Changes in Technology • 1. Advances in technology usually reduce the demand for money

37. C. Money Supply Curve 1. Vertical line whose location is controlled by the FED 2. Since FED controls Money supply curve they control interest rate

38. 3. Increase money supply moves curve right. a. Lowers interest rate b. Caused by FED action 1. buy bonds 2. lower reserve requirement 3. lower discount rate Interest Rate MS MS1 MD Quantity of money

39. 4. decrease money supply moves curve left. a. Raises interest rate b. Caused by FED action 1. sell bonds 2. raise reserve requirements 3. raise discount rate Interest Rate MS 1 MS https://www.youtube.com/watch?v=_dNIDo8UFSc MD Quantity of money

40. Demand for Money

41. IX. Real versus Nominal Interest Rate A. Nominal interest rate is unadjusted for inflation B. Real interest rate represents change in purchasing power C. Formula 1. Real interest rate = nominal interest rate – inflation rate

42. X. Loanable Funds Market A. Brings together buyers (borrowers) and sellers (lenders)

43. B. Demand Curve 1. downward sloping 2. Rate of return = revenue from project – cost of project x 100 cost of project 3. business will borrow only if the rate of return is equal to or greater than the interest rate.

44. A business has two possible investment projects available to it for the coming year. The following table summarizes the information the business has about these projects. Suppose the interest rate is 10%. What is the rate of return on Project A? Should the business invest in project A? 11% Yes

45. A business has two possible investment projects available to it for the coming year. The following table summarizes the information the business has about these projects. Suppose the interest rate is 10%. What is the rate of return on Project B? Should the business invest in project B? 11% Yes

46. C. Supply Curve 1. the amount of money that is made available for loans at a given interest rate 2. people will lend only when interest rates are high enough to make them willing to give up current consumption

47. D. Equilibrium 1. interest rate at which quantity of loanable funds supplied equals quantity of loanable funds demanded

48. E. Shift in Demand 1. changes in perceived business opportunities 2. Change in government borrowing a. Government participates in the loanable funs market b. Spending increase leads to increase demand for loanable funds c. Crowding out – increase in government spending crowds out private spending

49. What Crowding Out looks like Interest rate The Government increases spending and funds this increase by borrowing. Increase in demand for loanable funds S re D Qe Quantity of loanable funds

50. What Crowding Out looks like Interest rate The Government increases spending and funds this increase by borrowing. Increase in demand for loanable funds Interest rates increase and “crowd out” private investment S r1 re D1 D Qe Quantity of loanable funds