Unit 4: Notes and Need-To-Knows 3.4.2015

Is a dollar today worth more than a dollar tomorrow? Yes because of inflation and opportunity cost.

V = future value of money
P = present value of money
R = real interest rate (nominal rate - inflation rate)
N = number of years
K = number of times interest is credited per year.
Simple Interest Formula:
V = ( 1 + r ) ^n x p

Compound Interest Formula:
V = ( 1 + r/k )^nk x p

Monetary Equation of Change:
MV = PQ
M = money supply (M1 or M2)
V = moneys velocity (M1 or M2)
P = Price Level ( PL on AS/AD diagram)
Q = Real GDP

P x Q = nominal GDP

Functions of the FED:

• Issues paper currency
• Sets reserve requirements and hold reserves of banks
• Its lends money to banks and charges them interest
• They are a check clearing service for banks
• Acts as personal bank for government
• Supervises member banks
• Controls the money supply in economy.

How do banks create money?
Lending out deposits that are used multiple times

Where do loans come from?
Depositers who take cash and place it in their banks.

How are the amounts of potential loans calculated?
Using their bank balance sheet  or T accounts of assets and liabilities for banks.

Bank liability:
Liability is what you owe.

Demand Deposits or checkable deposits:

Cash deposits from public.
Liabilities because belong to depositers.

Owners Equity:
Values of stock held by public ownership of bank shares

If DD come from someone's cash holdings, DD is Part of money supply

If DD comes from purchase of bonds (by FED) then this creates new cash and create new money supply. (M1)

Bank Assets:
Required Reserves: (RR)
Percentages of demand deposits that must be held in the vault so that some depositers have access to their money. Amount can vary but AP usually uses 5, 10, or 20 percent for easy calculations.

Excess Reserves: (ER)
These are source of new loans. These a amounts are applied to the monetary multiplier/reserve multiplier (DD = RR + ER)

Bank Property Holdings:
Buildings and fixtures.

Securities: (Federal Bonds)
These are bonds purchased by the bank or new bonds sold to the bank by the Federal Reserve. These bonds can be purchased from the bank, turned into cash that immediately becomes available as "excess reserves."

Customer Loans: This can be held by banks from previous transactions, owed to the bank by their customers