Module 22-24 Notes

MODULE 22-24 Notes


OBJECTIVES
• You will learn the following
- Relationship between savings and investment spending
- Purpose of the four principal types of financial assets
•Stocks
•Bonds
•Loans
•Bank deposits
- How investors achieve diversity

MATCHING UP SAVINGS AND INVESTMENTS
• Physical capital
- Factories, shopping malls, large pieces of machinery, etc.
• Usually paid for by borrowing
• Where does this funding come from?
• Savings = Spending
- Savings - investments spending identity
• In a simple economy (No government intervention)
- All money spent by a person or firm ends up pockets of others as income
• Total income = Total spending = C + I
• So... C + S = C + I

Lets add Government activity
• The government spends on goods services, and transfers and collects tax revenues
• If the budget is balanced...
- Tax revenue = Government spending + transfer payment
- Budget balance (BB) = Tax revenue - G - Transfers
- If BB is > 0, there is a surplus and government is saving money
- If BB is < 0, there is a deficit and the government is borrowing money.

THE FINANCIAL SYSTEM
• Financial markets is where households invest their current savings and their current savings and their accumulated savings (WEALTH) by purchasing financial assets
• FINANCIAL ASSET
- Paper claim that entitles the buyer to the future income from the seller.

THREE TASKS OF THE FINANCIAL SYSTEM
0. Reducing transaction cost
1. Reducing risk
- Financial Risk
- Diversification
3. Providing Liquidity
- Liquid assets
- Illiquid Assets

WHAT IS MONEY?
• Money
- Something that you can turn into a good or service
• Three roles of money
- Medium of exchange
• Gimmie a dollar for a pack of gum
- Store of value
• Retains its value over short periods of time
- Unit of account
• A way of evaluating the "measurements" of goods and services

MEDIUM OF EXCHANGE
• Your employer exchanges dollars for an hour of your labor
• Your exchange those dollars for a grocers pound of apples
• The grocer exchanges those dollars for an orchards apples crop, and on and on

STORE OF VALUE
• So long as prices are not rapidly increasing, money is a decent way to store value. You can put money under your mattress or in a checking account and still useful, with essentially the same value a week or month later
• If i were the town cheese maker, I must quickly get rid of my cheese because if I wait long, moldy cheese loses value quickly.

UNIT OF ACCOUNT
• Units of currency (Dollars, Euro yen...) Measures the relative worth of goods and services just as inches and meters measure distance
• In the barter system all goods are measured in terms of other goods
• Prices in a barter economy: A Ib of cheese dozen eggs = beer or something
• With money the value of cheese and all other goods and services is measured in terms of a monetary unit.

TYPES OF MONEY
• Commodity money
- Something used as money, normally gold of silver, that has intrinsic value to
others
• Commodity backed money
- Medium of exchange with no intrinsic value guaranteed by a promise that it
could be converted into valuable goods on demand
• Fiat money
- Money whose value derives entirely from its official status as a means of
exchange.

MEASURES THE MONEY SUPPLY
• How much money is out there?
• Two different measures on the amount of money supply. M1 and M2
- M1 = Currency and coin in circulation+checking deposits+Travelers checks
- M2 = M1 + Savings accounts + Short term CD, money market accounts.