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

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I 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 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? ONLINE MIDTERM –Week of 3/7 – Must be taken in 1 hour window during the period from Tuesday 3/8 6pm and Thursday 3/10 6pm. COVERS weeks 1-7 in 50 multiple choice questions more or less randomly drawn from hw 1-7. Investment Game Round 2 – efficient markets, random walks, etc. READING Samuelson Chapter 9 and chapter 8- section A (only, for now) Short, simple article on capital and leverage in banking at: www.mercatus.org/PDFDownload.aspx?contentID=26042 And on the shadow banking system at: http://www.thefiscaltimes.com/Issues/The- Economy/2010/09/28/Shadow-Banks-Pose-Major-Threat-to-Financial-Stability.aspx 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
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assign6 - Intro Macro N Sheflin ASSIGNMENT 6 NOTES We...

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