Chapter 1 + Appendix

- Why is the money supply important? Anything that is generally accepted as payments for goods or services or in the repayments of
debts
- Why is banking important? Accepts deposits and make loans
- Why are financial intermediaries important? Borrow funds from people who have saved and in turn make loans to people who need
funds
- Why are interest rates important? Is the cost of borrowing or the price paid for the rental of funds; affects overall economy from
consumers to business investment decisions
- Where is the US in the business cycle today? The upward and downward movement of aggregate output produced in the economy. We
are currently in a trough
- Who officially says where the US is in the business cycle today? NBER's Business Cycle Dating Committee
- GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of
time.
- Income approach NI = W (Labor income) + R (Rental income) + I (interest income) + PR (profits)
- Expenditures approach GDP = C (Gross private consumption expenditures) + I (gross private investment) + G (Government purchases
+ NX (Net exports)
- Circular flow idea Resources, production and distribution, goods and services, consumers
- Real GDP adjusted for inflation
- Nominal GDP current prices
- Price indexes a number telling us how much prices have changed since a base year
- GDP deflator
- CPI
- Rates of change
- Rule of 72 tells you the numbers of years it takes something to double, given an annual percentage rate (72/interest rate)
Chapter 2
- Financial markets matching savers with the funds to lend to people who want to borrow funds
- Debt markets where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed
dollar amounts at regular intervals until a specified date when a final payment is made, are traded (long term 30 years, short term 6
months, intermediate term treasury note with maturity of 5 or 10 years, short term 90 days treasury bill)
- Primary markets new issues of a security such as a bond or a stock are sold to initial buyers by the corporations or government agency
borrowing the funds
- Secondary markets securities that have been previously issued can be resold
- Liquidity ease of converting quickly into cash with little or no loss of purchasing power
- Risk uncertainty about the returns investors will earn on assets
- Diversification is a form of risk sharing because savers distribute wealth among many assets
- Asymmetric information a situation where one party often does not know enough about the other party to make accurate decisions
- Adverse selection occurs when the potential borrowers who are most likely to produce an undesirable outcome, bad credit risks are the
ones who most actively seek out a loan and are thus more likely to be selected
- Moral hazard when the borrower might engage in activities that are undesirable for the lenders point of view because they make it less
likely that the loan will be paid back
- What is a mutual fund? Acquires funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of
stocks and bonds
- Depository institutions raise funds by accepting deposits from firms and individuals, use funds to make loans
- Commercial banks raise funds primarily thought savings deposits and time and checkable deposits
- Thrifts saving and loan associations, mutual savings banks and credit unions
- Types of commercial banks: national, state
- Types of thrifts: savings banks, credit unions
- FDIC insures deposit accounts up to 250,000 at commercial banks and thrifts, does not insure securities, mutual funds or similar
investment offered by banks and thrifts
- US Treasury Securities:
-Bills short term 1,3,6 months
-Notes intermediate 2,5,10 years
-Bonds long term 10+ years
-TIPS principal adjusted to CPI, maturity 5,10,30 years
- Examples of money market instruments US treasury bills, very liquid, safe actively traded and certificates of deposit, federal funds,
Eurodollars, bankers acceptances
- Examples of capital market instruments stocks, mortgages, us government, corporate and municipal bonds
Regulation of financial markets restrictions on entry, disclosure requirements, asset restrictions; deposit insurance requirements and
oversight of operations
Chapter 3
- Money anything generally accepted as payments for goods or services or in repayments of debts
- Wealth the total collection of pieces of property that serve to store value
- Income is a flow of earnings per unit of time
- Stock an amount at a certain point in time (money, wealth, saving deposit, debt)
- Flow an amount that changes over time (income, deficit spending, investment expenditure, sales revenue)
Functions of money
How money provides efficiency to the economy
Examples of money in early times
Criteria for good money
- Payments system method of conducting transactions in the economy
- Barter exchanging goods and services, no money involved

- Commodity money made up of precious metals or another valuable commodity

- Fiat money paper currency decreed by government to be legal tender but not convertible into precious metals
- Bimetallic standard both gold and silver were coined and used as money
- Money supply / monetary aggregates consists of safe assets that households and businesses can use to male payments or hold as short
term investments
- M1
- Currency coins and paper money in circulation
- Demand deposit checking account with no restrictions as to size or number of checks that can be written
- Other checkable deposits interest earnings checking accounts
- M2
- Time deposit saving account or CD that has a fixed date for withdrawal of the funds
- Savings deposit savings account where funds can be withdrawn on demand but not directly by checks
- Retail money fund money market funds offered primarily to individuals
- Issue re dollars held overseas US currency in circulation = $2000 per person
Chapter 9 / 12
- Financial crisis a major disruption of the financial system, typically involving sharp drops in asset prices and failures of financial
institutions
- Characteristics of financial crises
- Asset price declines Bubbles occur when people expect asset prices to rise, thus increasing demand and causing the asset prices to rise,
prices end up much higher than the present value of expected income flows from the assets, people eventually worry that prices are too
high and sell off assets, causing prices to fall and leading to more selling. The bubble bursts.
- Insolvencies may occur when net worth is negative, financial institutions may fail, banks become insolvent because of loan defaults
-Liquidity crises / credit crunch results in situations where financial institutions doesnt have enough liquid asset to make promised
payments
-Lead to recession and downward spiral
- Great Depression
Background (8/1929-3/1993, 5/1936-6/1938), effects (unemployment rose, industrial production fell, overall decline in money
supply, prices fell, banking panics, international repercussions), Feds response (declining productions, provide liquidity to banks,
expansionary monetary policy)
- Stock market Crash of 1987
Background (estimated $500 billion loss to investor in one day, overvalued stock, computer trading, deficits, panic selling),
effects (not long term, recession, insolvencies, credit crunch), Feds response (decreased federal funds rate, engaged in expansionary
monetary policy)
- Financial crisis of 2007 2009
Background (housing boo, subprime mortgages, risky loans), effects (worldwide liquidity crisis, stock values fell, banks and
financial institutions incurred losses on mortgages and related investments, Feds response (lowered interest rates, injected massive
amounts of liquidity into the economy, increased flow of credit to households and businesses)
- Glass-Steagall Act of 1933 separated functions of financial banks and other financial services
- Dodd Frank Act of 2010 strengthen supervision of financial markets, enhances Federal reserve accountability, expands supervisory
authority
Chapter 4 (online)
Single payment instruments
- Simple loan
- Discount bond
Multiple payment instruments
- Coupon bond
- Fixed payment loan
Present value = Future value/ (1+i)^n
- Concept
- Equation
- Examples
Yield to maturity
Yield to maturity examples for
- Simple loan
- Discount bond
- Coupon bond
- Fixed payment loans
Macroeconomic Schools of Thought (video)
Major ideas of
- Classical economists (long run focus, AS=AD, Saving = investment, no long run unemployment, economy is self correcting, no general
overproduction, active policies not necessary)
- Keynesians (short run focus, can have insufficient aggregate demand, savers and investors are different people with different
motivations, wages and prices are sticky downward, economy is not self-correcting, active policies may be necessary for economic
stability, through changes in aggregate demand)
- Monetarists (long run focus, MV=PQ, in ling run, changes in M cause changes in P, money matters most, inappropriate monetary policy
causes macro instability, monetary rule preferred to discretion for central banks)
- Supply side economics (emphasis on aggregated supply rather than aggregate demand, beliefs that decreasing taxes to businesses will
provide incentives to produce more, decreasing taxes to individuals will provide incentives to work more, desire to decrease size of
government

- New classical (rational expectations) economists (long run focus, expectations matter, people are rational, informed and correctly
anticipate policy effects, active policies only work if people are fooled, in the long run people correctly anticipate policies, economy is
self correcting, active policies not necessary
- Group B (old school credit card swipe, 92%) Group C (Federal Reserve System), Group E (Alexander Hamilton) and Group G (700
billion, 10)