assign6 - Intro Macro N. Sheflin ASSIGNMENT 6 NOTES: We...

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n t r o M a c r o N . S h e f l i n ASSIGNMENT 6 NOTES : We introduce Money, Banking and the Financial System . Lots here, interesting, simple, important points. . You should understand the following: What is the economic role of the financial system? What are the major financial assets (and how do they differ from real assets?) Interest rates: what are they, What’s money (and why is it good (for the economy?) Brief history of money Demand and supply of money and interest rates What are banks and how are they involved in money creation Stocks and the stock market – efficient markets and random walk; risk versus return, diversification What are bonds, how do we measure their return What are interest rates What is meant by present value and discounting and why do we use them? What is meant by real versus nominal rates and how are they related. INVESTMENT GAME ROUND 1 – buy something, read investopedia, get rich. Be prepared for hw/clicker questions on round 0 questions Due before class on Monday 2/22 READING Samuelson Chapters 9 and 8, section A (only, for now) Short, simple article on capital and leverage in banking at: www.mercatus.org/PDFDownload.aspx?contentID=26042 Additional background at: Fun Facts about money http://www.frbsf.org/federalreserve/money/funfacts.html Look at the American Currency Exhibit (Take the Tour) http://www.sf.frb.org/currency/index.html Some interesting pictures of early money at http://www.thebritishmuseum.ac.uk/worldofmoney/world_what.html Key points and Summary– read carefully before and after the homework. Definition and role of money – anything widely accepted in exchange. Money has three primary roles medium of exchange , unit of account and store of value but the first is what makes money money. M1 definition includes currency, checkable deposits and travelers checks – all of which are used in exchange.Legal tender is NOT required of money, but it helps acceptability. Credit cards are NOT money, just a means of obtaining a loan. Benefits of monetary economy – eliminates the double coincidence requirement of barter (you have to have what they want and they have to have what you want) and the inefficiency of searching and calculating many prices (pigs for cows, candy for soda, etc). Thus an economy using money allows specialization and division of labor , the development of a financial system to channel savings to investment , and increases economic efficiency, output, income and wealth . Role and functions of Banks – (officially depository institutions) – Key financial intermediary - banks are part of the means by which money is supplied to the economy (below), they also facilitate the channeling of savings to investment by borrowing short-term (when you put money in a savings account they are borrowing it and are prepared to pay it back when you want it) and lending it to business longer term, earning a profit on the higher interest they charge businesses. They also deal
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assign6 - Intro Macro N. Sheflin ASSIGNMENT 6 NOTES: We...

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