Financial Sector

Financial assets vs. Financial liabilities

Financial assets
.Stocks and bonds that provide expected future benefits
.Benefits the owner only if the issue of the asset meet certain obligations

Financial liabilities
.It is encouraged by the issuer of a financial asset to stand behind the issued asset

Interest rate-is the price paid for the use of a financial asset

Stocks- are Financial assets that represent ownership in a corporation

Bonds-are the promise to pay a certain amount of money plus interest in the future

What banks do
A bank is a financial intermediary
.Uses liquid assets to finance the Investments of Borrowers
.process is known as Financial reserve banking
.A system in which depository institutions hold liquid assets less than the amount of deposits
.Can take form of currency in Bank vaults Bank Reserves deposits held out the Federal Reserve

What banks do-basic accounting review

T account -Statements of assets and liabilities
Assets-item see how much a bank holds legal claim the uses of funds in Financial intermediaries

Time Value of Money

Time Value of Money

.Is a dollar today worth more than a dollar tommorow?
-YES
.Why?
  -opportunity and inflation
   - this is the reason for changing and paying interest
. Let V=future value of $
  P=present value of money
  R=real interest rate (nominal interest rate-inflation rate) expressed as a decimal
  N=years
  K=number of times interest is credited per year

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.

1. What happens to the quantity demanded money when interest rates increase?
Quantity demanded falls because individuals would prefer to have interest becoming assets instead of burrowed liabilities

2. What happens to the quantity demanded when interest rates decrease?
  Quantity demanded increases. There is no incentive to convert cash into interests earning assets

3. Money demand shifters
1.Change in price level
Change in income
Change in taxation that affects investment

If the FED increases the money supply a temporary surplus of money will occur at 5% interest.
The Surplus will cause the interest rates to fall to 2%

How does this affect AD?
Increase money supply-decrease interest rates_increase investment- increase AD

Decreasing money supply-how does it affect AD?
Decrease money supply-decrease interest rate-decrease investment - decrease AD

Jeremiah Paresa's Video On Monetary Policy

Go Check It Out!

https://youtu.be/dEg7m9qvoUk

Jeremiah Paresa's Video On Monetary Policy

Go Check It Out!