The Value of Money

The Value of Money

Simple Interest Formula

• V = ((1 + r) ^ n) * p 
• V = future value of $
• P = present value of $
• r = real interest rate (nominal rate - inflation rate)
• n = year
• k = number of times interest is credited per year

Compound Interest Formula:

 V = ((1 + r/k)^ nk)*p

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded. 

Money Demand Factors

1. Change in price level
2. Change in income
3. Changes in taxation hat affect investment

Financial Assets vs. Financial Liabilities

Asset

• stocks and bonds whose benefits to the owner depends on the issuer of the asset meeting certain obligations
• (what you get)

Liabilities

• incurred by the issuer of a financial  asset to stand behind the issued asset
• (risk gain or lose)

Stocks vs. Bonds

Stocks

• Financial asset that can vague ownership in a cooperation

Bonds

• Promise to pay certain amount of money plus interest in the future

Bank: A financial intermediary

• Uses liquid assets (i.e. bank deposits) to finance investment to borrowers
• Process is known as Fractional Reserve Banking.

Fractional Reserve Banking

• A system in which depository institutions hold liquid assets less than the amount of deposits. 
• Can take the form of:
1. Currency in bank vaults
2. Bank Reserves: deposits held at the federal reserve. 

T-Account (Balance Sheet)

• Statement of assets and liabilities. 

Federal Reserve Bank

• 12 district federal banks
• each one is quanzi owned .7 members

Functions

1. Issues paper currency
2. sets reserve requirement and holds reserves of banks
3. Lends money to banks ( charges interest)
4. check clearing service for banks
5. act as personal band for government
6. supervise member banks
7.  control money supply in banks

I. Uses of Money

As a medium of exchange- for barter
Unit of Account- established economic worth
Storage Value- money holds its value for a period of time
II. Types of Money Commodity money:

• gets value from type of material from which it is made

Representative money:

• paper money backed by something tangible, giving it value

Fiat money:

• money because the government says so.

III. Characteristics of moneyPortableDurableDivisibleLimited SupplyAcceptableUniformIV. Money SupplyM1 Money - 75% of all money and most liquid (easy to convert)

• currency in circulation, medium of exchange

 M2 Money

• consist of M1 money along with saving account, money market accounts, and deposits held by banks outside U.S.

M3 Money

• encompasses M2 money and certificate deposits (CDs)