EC10Hourly#2

EC10Hourly#2 - Midterm #2 Review Ennice Han Icfw_PR...

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Midterm #2 Review Ennice Han I{{PR l:Chapter 29 1. The functionr of moneY l)Mdirm of excbange proble,m of tnade is "double coincidme of wants": Someone who bas what youwaat also f,as to want what you have. Usingmolrey avoids this problem- 2)Store of rmlue: it is iryortant that whatwer you accepted in exchange today will still have the value so sill beexcbmgeable tomorisw. 3)Unit of accognf coryaing the relative prices of maay goods is necessary for trade' This "lry"tl*"is easywhelryouharreacolm good w€rythingelse canberaluedagainst- This comrxln goodis call€d'tmit of accormf <deF liqtridiqr ease and speotl which aa assef can be trades for other goods witb- *We assrmetir* noney sgpgty-"uu5 held by the pgblic + checking dgposits at bmk (Ml) 2. Individtrtt accounting (tater applicd to bank accounting) l <detrBalmce shoef: a financiat smary of a person or institutioa indicating assets, liability and na worth at a point in tinc. <deFAssdA): m item ofyalue that a p€nton owns.(Ex)Casb dcposits, car. - - <rleFliability(L): a claim against a person's ass€ts: in other words, somtfhing owed. <deF Nst worthlttWl: the differcnce between assets and liabiliti*.(NW=A-L) Bythe definition, <quizl> a gift of $100: A inseases by $100 and I{W increases by $tOO .{fuiz>take $50 outof yourpocketanddeposititinthebmlc Afallsb}t $sO(cash}h*checking apcormtincreaseby $50. Total Aunchange4 no change int andNW- <quiz> borrow $3S form a friemd: Asscts increaseby $300(cdsh) and L increase by $300 <Ariz#guy a bd dog for $5: A decreasesby $s(cash) but a ht dog ircreas€s by one rmit If :rssrune that you can resell the hot dog to your friend for $5, toAl A urchangd L& NW 3. BErkaccounting Suppce the ormers of tbe bank invest $700S00 of theii oum money in tbe baok Tlre bank also offers to hold mney for other individuals intheir checking accormts. Saythe toal depsit $2,000,0frXnot including the own€rls' inveshent $700,000) in cash in the bank Then thc bank lends out $700,000 to local businesses. Itr rhis scenario, bank do€s not know tbat they don't bavo to keep all thc deposit in its vault. So thcy keep all of $2,000,000 aod only lends out $700,0S. * Forbmks, bondstheybuy and loanstheymake are assefs,btd depositis a liability. Balance Shcrf #1 Cash{reserve) $}000ff Ioan $700,m Total $2,700,0m Liebilitis & ltw Checking Deposit $2,0fr),000 NW=$700,(n0 Total $2,700,000 *Srry1nse now tbrrt the bank's owners realid that it is very rmlikely that all of the depositors ask for their noney back at the sama time. So the hnk dcidcs to lend out the most of the money to earn the int€rest and keep only small portion ofcash *on reserve". Ifthe bank keeps $400,000 of the checking deposit as reserve and make new loan $1,6(X),(n0, the new balance sheet shows decrase in cash and new loan, but no change in total A and no change io NW and L.
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This note was uploaded on 04/05/2012 for the course ECON 10 taught by Professor N.gregorymankiw during the Fall '09 term at Harvard.

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EC10Hourly#2 - Midterm #2 Review Ennice Han Icfw_PR...

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