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.