l5 - Econ 102 Fall 2006 Lecture 5 Money and Interest 1...

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1 Econ 102 Fall 2006 Lecture 5 Money and Interest
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2 Questions this lecture will address What do banks do? Why are some banks failing How did Friedman modify the Quantity Theory of Money? What the Fed does to control i
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3 Part 1 What do banks do?
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4 Firm Assets Liabilities Capital K F = 90 Bank Loan B = 30 Equity E F = 60 90 90 real financial
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5 Bank Assets Liabilities Capital K B = 10 Deposits D = 40 Bank Equity E B = 10 50 50 real financial Loan B = 30 Cash M = 10
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6 Household Assets Liabilities 110 110 Equity E = 70 Deposit D = 40 real financial Net worth NW = 110
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7 Four different interest rates K i Return to capital – this depends on how well the economy is doing B i Return to corporate debt – this is negotiated in advance D i Return to bank deposit – this is negotiated in advance E i Return to equity – this depends on how well the economy is doing
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Competitive Banking If the banking system is competitive the banks equity will equal the value of its physical capital
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l5 - Econ 102 Fall 2006 Lecture 5 Money and Interest 1...

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