Macron notes

                            UNIT 4

Topic 4.1: Financial Assets

1. Assets

            •          What It Is: Things you own that have value.

            •          Types:

            •          Physical Asset: Stuff you can touch, like a house or car.

            •          Financial Asset: Paper or digital things that show you own something valuable, like stocks or bonds.

2. Liquidity

            •          What It Is: How quickly you can turn something into cash without losing value.

            •          Example: Cash is super easy to use, but selling a house takes time.

3. Rate of Return

            •          What It Is: How much money you make from an investment.

            •          Example: If you invest $100 and get $110 back, your return is 10%.

4. Risk

            •          What It Is: The chance you could lose money.

            •          Example: Stocks are risky, but savings accounts are safe.

5. Types of Financial Assets

            •          Cash: Money you can spend right away.

            •          Opportunity Cost of Cash: What you miss out on if you hold cash instead of investing it.

            •          Demand Deposits: Money in a checking account you can use anytime.

            •          Bonds: Loans you give to companies or the government, and they pay you back with interest.

            •          Bonds & Interest Rates: When interest rates go up, old bonds are worth less.

            •          Stocks: A piece of ownership in a company.

Topic 4.2: Nominal vs. Real Interest Rates

1. Interest Rate

            •          What It Is: The cost of borrowing money or what you earn from saving it.

2. Nominal Interest Rate

            •          What It Is: The interest rate you see on paper, not adjusted for inflation.

3. Real Interest Rate

            •          What It Is: The interest rate after subtracting inflation.

            •          Formula: Real Interest Rate = Nominal Interest Rate - Inflation Rate.

4. Who is Helped & Hurt by Inflation

            •          Helped: People with fixed-rate loans (they pay back money that’s worth less).

            •          Hurt: Savers and lenders (their money loses value).

Topic 4.3: Money

1. What Is Money?

            •          Something people use to buy things or save for later.

2. Functions of Money

            •          Medium of Exchange: Used to buy stuff.

            •          Store of Value: Keeps its worth over time (e.g., saving money).

            •          Unit of Account: Helps measure and compare prices.

3. Types of Money

            •          Money Supply: All the money in the economy.

            •          Money Aggregates: Groups of money based on how easily they can be spent:

            •          M0 (Monetary Base): Physical cash and reserves.

            •          M1: Cash + checking accounts.

            •          M2: M1 + savings accounts and short-term deposits.

Topic 4.4: Banking & the Money Supply

1. Banking Terms

            •          Depository Institutions: Banks where people keep their money.

            •          Fractional Reserve Banking: Banks keep part of your money and lend the rest.

            •          Required Reserves: The part banks must keep and not lend out.

            •          Excess Reserves: The extra money banks can lend.

2. Money Multiplier

            •          What It Is: How banks create more money by lending.

            •          Formula: 1 ÷ Reserve Ratio.

Topic 4.5: The Money Market

1. What Is the Money Market?

            •          A market for borrowing and lending money for short periods.

2. Key Factors

            •          Money Demand: How much people want to hold cash (instead of saving or investing it).

            •          Money Supply: The amount of money the central bank makes available.

3. Equilibrium

            •          What It Is: Where money demand and money supply meet, setting the interest rate.

            •          Changes in Supply/Demand:

            •          More supply = lower interest rates.

            •          Higher demand = higher interest rates.

Topic 4.6: Monetary Policy

1. What Is Monetary Policy?

            •          How the central bank controls money and interest rates to help the economy.

2. Tools of Monetary Policy

            •          Open-Market Operations: Buying/selling bonds to change the money supply.

            •          Reserve Ratio: Adjusting how much banks must keep in reserves.

            •          Discount Rate: The interest rate the central bank charges banks for loans.

            •          Federal Funds Rate: The interest rate banks charge each other for overnight loans.

3. Types of Policies

            •          Expansionary Policy: Increases money supply to boost the economy.

            •          Contractionary Policy: Decreases money supply to slow down inflation.

Topic 4.7: Loanable Funds Market

1. What Is the Loanable Funds Market?

            •          A market where people save money and businesses borrow money to invest.

2. Key Factors

            •          Demand for Loanable Funds: Comes from borrowers (e.g., businesses).

            •          Supply of Loanable Funds: Comes from savers.

3. Equilibrium

            •          What It Is: Where demand and supply meet, setting the interest rate.

4. Open Economy Formula

            •          Investment = National Savings + Net Capital Inflows:

            •          National Savings: What people save in the country.

            •          Net Capital Inflows: Money coming in from other countries.