Unit 4 - Financial Sector

What is the Loanable Funds Market

The market where savers and borrowers exhange funds (QLF) at the real rate of interest (r%)

Where does the demand for loneable funds come from? AKA BORROWING

Households, businesses, gov’t, foreign sector

the demand for loanable funds is also…

the supply of bonds

where does supply of loanable funds come from? AKA SAVINGS

households, businesses, gov’t, foreign sector

The supply of loanable funds is also…

the demand for bonds

More borrowing =

more demand for loanable funds - DLF SHIFTS RIGHT

less borrowing =

less demand for loanable funds - DLF SHIFTS LEFT

more saving =

more supply of lonable funds - S SHIFTS RIGHT

less saving =

less supply of lonable funds - SLF SHIFTS LEFT

what will be affected when gov’t implements fiscal policy?

the Loanable Funds Market

Changes in saving and borrowing create changes in…

loanable funds, which changes real rate of interest (r%)

Changes in real rate of interest (r%) affects…

Gross Private Investments

(loanable funds) In a gov’t budget surplus….

more saving = more supply of LF. SLF shifts right and decrease in r%

(loanable funds) In a gov’t budget deficit….

more borrowing = more demand of LF. DLF shifts right and increase in r%

(loanable funds) with less investment demand

less borrowing = less demand of LF. DLF shifts left and decrease in r%

(loanable funds) with decrease in consumer MPS

less saving = less supply of LF. SLF shifts left and increase in r%

If an economy is closed, national savings is…

the sum of private savings and public savings

Private savings

what is leftover from national income after consumption and taxes

Public savings

the difference between tax revenues and government spending

Liquidity is…

spendiability (how easy an asset can be spent)

What are the 3 functions of the money supply?

• Medium of Exchange

• Unit of Account

• Store of Value

Explain money as a medium of exhange

Money is a concept and can be used to buy all the available goods in the market as well as pay resource suppliers

Explain money as a unit of account

Money measures the value of a variety of good/services (allows for easy comparison of prices)

Explain money as a store of value

Money allows people to transfer current purchasing power to the future (via safes or checking accounts)

M1 (the narrowest definition of the US $ supply) consists of…

Currency (paper money/coins) and all checkable deposits

Who provides currency?

The US gov’t

Who provides checkable deposits?

Commerical banks and saving institutions

What type of money is the currency of the US?

token money

What is token money?

The face value of currency UNRELATED to its intrisic value (value derived from it’s material)

Face value will always

EXCEED intrisic value

Checks

a way to transfer the ownership of depositis in banks/financial institutions

Loans

Provide short-term financial capital to firms and finances consumer purchases of durable goods.

Thrift institutions include…

Savings & Loan Associations, Mutual Savings Banks, and Credit Unions

Credit Unions

accept depositis from and lend to “members” usually working for the same company

Checkable Deposits are also called…

demand deposits, NOW (negotiable order of withdrawal) accounts, ATS (automatic transfer service) accounts, and share draft accounts

What is EXCLUDED from M1 and other measures of the money supply to avoid double counting and proicde an accurate assesment of money available to private sector for spending?

Currency held by the Fed/US Treasury/commerical banks/thrifts and any checkable deposits belonging to gov’t or the Fed held in commerical banks/thrifts

M2 (broader definition of money) consists of…

M1 and near monies

near monies

specific highly liquid financial assets that don’t function directly as a medium of exchange but can be converted into currency/checkable deposits

What are the three categories of near monies?

• Savings deposits (money market deposit accounts - MMDA)

• Small-denominated time deposits (LESS than $100,000)

• Money Market Mutual Funds (MMMF)

Savings Deposits (MMDA)

Small-denominated time deposits

certifications of depositis where money is depositied for a fixed period of time and then can be cashed out. The deposited money will earn higer interest rates.

Money Market Mutual Funds (MMMF)

held by people, combinde funds used to buy short-term securities which can be quickly converted to cash (ONLY INCLUDES INDIVIDUALS)

What backs the money supply?

the gov’t’s ability to keep the value of money realatively stable

paper money and checkable deposits are…

debts of the Fed and commercial banks/thrifts (promises to pay)

What gives money its value?

• Acceptability

• Legal Tender

• Relative Scarcity

the relationship between purchasing power and price level is…

inverse

Formula for the value of the dollar

$V = 1/P (price level in hundreths)

How is the purchasing power of money stabilized?

Via monetary policy and fiscal policy

The Fed

the federal reserve system

Goal of the Fed

to control the money supply and assure stability of the banking system

Fed’s responsibilities/functions

• controlling money supply

• supervising banks

• issuing currency

• setting reserve requirements/holding reserves

• acting as a fiscal agent

• providing for check collection

• lending to financial institutions/serving as an emergency lender of last resort

Why is a balance sheet balanced?

Assets = liabilities + net worth

Vault cash

cash held by a bank

Reserves

the funds commerical banks deposit in the federal reserve banks