Investment

Investment: directing resources,consume now for the future.
Financial Asset:claims on property and income of the borrower
Financial Intermediaries: institution that channels funds from savers to borrowers.

  Purposes for Financial Intermediaries

• Share risk Diversification 
• Reduce risk
• Provides
• Liquidity returns account investment received above and beyond in a sum of money that investment
  

Bond

• Coupon rate
• Maturity
• Par Value

• Loans or IOUs that represent debt that the Government  or a cooperation must repay to an investor
• Low risk investments
• Coupon Rate
• Interest rate that a bond issuer will pay to a bond holder
•  It's time at which payment to a bond holder is due
• Hard value it's a account that invested pay to purchase a bond that will be repay at maturity
• 
  

Yield:Annual rate of return on a bond of the bond were held to maturity 


Bond you LOAN
Stocks you OWN

~MONEY~

Money- that is use to purchase goods and services.

Three uses of money

• Meaner of exchange to determine value.

• Unit of Account 
• compare prices

• Store Value
• how money can be store                                                                                                  

1.  Commodity Money: value within its self

• Salt
• olive oil
• gold

2.  Representative Money: Represents something of value

• IOU

3.  Fiat Money: Money because government says so 

• coins

Currency is money BUT not all currency is money

6 Characteristics of Money

1. Durability (last long)
2. Portability ( take it everywhere)
3. Divisibility (Broken down) ex(1 dollar is 10 dimes)
4. Uniformity (looks the same, updates)
5. Limited supply
6. Acceptability 

Money Supply

All the available money in the economy 

M1

• Total value of finical available in use economy
• Liquid assets (easily to convert to cash)
• Crash
• Paper Currency
• coin
• check-able deposits or demand deposits  (checks or checking account)
• Travelers Checks

M2

• Consists of M1 Money
• Savings Accounts 
• money market accounts. 

Financial Institutions

1. Store Money
2. Save Money
3. Loan Money(Credit card)

Save Money

• Savings Account
• Checking Account
• Money Market Account
• CD certificate of Deposit

Loan

• Banks operate on reserve system which where they keep their fraction of the fund and loan out the rest.

Interest Rate

• Principal:amount of money borrowed
• Interest: price paid for the use of borrowed money
• simple interest: paid on the principal
• compound interest: paid on the principal and Interest

Formulas
P- Principal
R- rate of interest
T- time
Simple Interest
I= P x R x T/ 100
Time
T= I x 100/ P x R
Principal
P = I x 100/ R x T
Interest Rate
R = I x 100/ P x T
Types of financial Institutions

1. Commercial banks
2. loans and saving institutions
3. mutual savings banks
4. credit unions
5. financial companies   

Fiscal policy

• Changes in the expenditures or tax revenues of fiscal gov't
• - 2 Tools of fiscal policy:
• Taxes - government can increase or decrease taxes
• Spending- government can increases or decreases spending
• Fiscal- is enacted to promote our nation's economic good: full employment, price stability, economic growth

Deficits Surplus and Debt

• Balance budget
• Revenues =Expenditures
• Budget deficit
• Revenue < expenditures
• Budget Surplus
• Revenues > expenditures

Government borrows from

• individuals
• corporations
• financial institutions
• foreign entities or foreign government

Fiscal Policy Two options

•  Discretionary fiscal policy (action)
• Expensionary fiscal policy (think deficit)
• Discretionary Fiscal Policy(think deficit)
• Contractionary Fiscal Policy-think surplus
• Non-Discretionary Fiscal Policy (action)

Discretionary v automatic fiscal policies

• discretionary

• increasing or decreasing government spending and/or taxes in order to return the economy to full employment

• discretionary policy involves policy makers doing fiscal policy in response to an economic problem
• Automatic 
• unemployment compensation & marginal tax rates are examples of automatic policies that help mitigate the effect of recession and inflation. Automatic fiscal policy takes places with out policy makers having to respond to current economic problems

Contractionary VS Expansionary Fiscal Policy

• contractionary fiscal policy: policy designed to decreased aggregate demand
• strategy for controlling inflation
• Expansionary fiscal policy - policy designed to increase aggregate demand
• strategy for increasing GDP, combating a recessionary &reducing unemployment

Expansionary Fiscal policy

• increase government spending 
•  decrease  taxes
• notice that the PL increase

Contractionary Fiscal Policy

• decrease government spending
• Increase taxes

Automatic or Built- In stabilizers.

• Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring action by policy makers
• Taxes reduce spending Aggregate demand
• Reduction spending  

Transfer payment

•  welfare check
•  food stamping
•  unemployment checks
•  corporate dividends
•  social security
• veteran benefits

Progressive Tax system
Average tax rate ( tax revenue/ GDP)

  Proportional Tax System
Average Tax rate remains constant as GDP changes

Regressive Tax System
Average tax rate falls

Disposable Income

• Income after taxes or net income
• DI = Gross Income - Taxes

2 choices

  which disposable income, household can either

• consume (spend money on goods, and services )
• save (not spend money on goods & services)

Consumption

• Household spending 
• The ability to consume is constrained by the amount of disposable income
• The propensity to save

Do households consume if DI = O

• Autonomous consumption
• Disadvantage
• APC = C/ DI = DI that is Spent saving

Saving

• House hold NOT spending
• the ability to save is constrained by the amount of disposable income
• the propensity to consume
• Do house holds save if DI + O
• NO
• APS = S/DI=%DI that is not spent

APC and APS

• APC+APS=1
• 1-APC = APS
• 1-APS =APC
• APC > 1.Dissaving
• -APS.: Dissaving

MPS and MPC

• Marginal Propensity to consume 
• change in C/ change in DI
• % of every extra dollar earned that is spend
•   Marginal Propensity to save
•   change in S/ change in DI
• % of every extra dollar earned that is save 
• MPC + MPS = 1
• 1-MPC=MPS
• 1-MPS=MPC

Three School of Economic
Classical

• John B. Say
• Adam Smith
• David Ricardo
• Alfred Marshall
• Competition is good
• Invisible-Hand Market will take care of it's self
• Say's law supplies creates its own demand 
• AS- Determines output
• economy is always close to or always at full employment
• in the long run the economy will balance at full employment
• Trickle down effect will help the rich first then help everyone else later
• savings(leakage)= investment considered an (injection) because we invest
• prices and wages are flexible downward 
• no involuntary unemployment
• no reason you shouldn't be employed 
• what ever output is produced will be demanded no government intervention 

Keynesian

 

• John Mainer Keynes
• Competition
• AD is key and not AS
• leaks cause constant recession 
• savings cause recessions 
• believed in ratchet effects and sticky wages Block Say's laws
• In the long run we are all dead
• demand creates its own supply there fore
• savers =/ Investment and save for different reasons
• the economy is not always close to or at full employment
• prices and wages are inflexible downward
• mono-plastic competition 
• there is government intervention
• fiscal or monetary policy 

Monetary 

• Allen Green's Span
• Ben Bernanke
• Congress can time policy options
• government best control the health of the economy, by regulating banks and interest rates
• easy money- recession
• tight money- inflation
• change required reserves if needed
• Use bands through open market operation
• use interest rate to change the discount rate, the discount rate, federal fund rate. 

Investment Demand Curve 

*what is the shape of the investment down curve?
Downward sloping

why?

• when interest rates are high, fewer investments are profitable;when interest rates are low more investments are profitable

Shifts in Investment Demand (ID)

 

cost of production 

• lower cost shift ID->
• high cost shift ID <-

  Business taxes

• lower business taxes shift ID ->
• higher business taxes shift ID<-

  Technological change

• new technology shift ID->
• lack of technology change shift ID<-

Stock of Capital 

• If an economy is low on capital, then ID ->
• If an economy has much capital then ID <-

Expectations

• positive expectations shift ID ->
• Negative expectations shift ID <-

(Long run is always vertical)
 

Full employment 
Full employment equilibrium exists where AD intersects SRAS & LRAS at the same point
Recessionary GAP

• A recessionary gap exists when equilibrium occurs below full employment out put 
• Anytime have recessionary gap graph move to the left.

inflationary GA

•  An inflationary GAP exists when equilibrium occurs beyond full employment output
• Ad will move to the right

Investment Demand
Interest Rate

what is investment?

• Money spent of expenditures on
• New plant (factories)
• Capital equipment (machinery)
• Technology (hardware software)
• New homes
• Inventories (goods sold by produces

Expected Rate of Return

• How does business determine the benefits?
• How does business count the cost
• Interest Cost
• How does business determine the amount of investment my undertake
• Compare expected rate of return to interest cost
• If expected return> interest cost
• If expected return< interest cost then do not interest.

Real (r%) v. Nominal (I%) 
what's the difference?

• Nominal is the observable rate of interest. real subtract out inflation (pie%) and is only known ex post factor
• how do you complete the real interest rate (r%)
• r%= I%- pie%
• what then determine the cost of an investment decision?
• The real interest rate (r%)