Bài giảng Macroeconomics - Chapter 16: Money, Prices, and the Financial System

Chapter 16: Money, Prices, and the Financial SystemDescribe the role of financial intermediariesDifferentiate between bonds and stocks and show why their prices are inversely related to interest ratesExplain how the financial system improves the allocation of saving to productive usesDiscuss the three functions of money and how the money supply is measuredAnalyze how the lending behavior of commercial banks affects the money supplyExplain how the central bank controls the money supply and its relation to inflation in the long runBanking SystemFinancial intermediaries are firms that extend credit to borrowers using funds raised from saversThousands of commercial banks accept deposits from individuals and businesses and make loansBanks and other intermediaries specialize in evaluating the quality of borrowersPrinciple of Comparative AdvantageBanks have a lower cost of evaluating opportunities than an individual wouldBanks pool the saving of many individuals to make large loansBanking SystemBanks gather information about potential investmentsEvaluate the optionsDirect savingService provided to depositorsBanks provide access to credit for small businesses and homeownersMay be the only source of credit for some investmentsWhen banks make loans, they earn interest which, in turn, is paid to the bank's depositorsHaving bank deposits makes payments easierChecks, ATMs, debit cardChecks and debit cards are safer than cashBanks provide a record of your transactionsBonds A bond is a legal promise to repay a debtEach bond specifiesPrincipal amount, the amount originally lentMaturation date, the date when the principal amount will be repaidThe term of a bond is the length of time from issue to maturationCoupon payments, the periodic interest payments to the bondholderCoupon rate, the interest rate that is applied to the principal to determine the coupon paymentsCorporations and governments issue bondsThe coupon rate depends onThe bond's term: 30 days to 30 years; longer term, higher coupon rateThe issuer's credit risk: the higher risk, higher coupon rateTax treatment for the coupon payments: lower taxes, lower coupon ratesMunicipal bonds are free from federal taxesBond MarketBonds can be sold before their maturation dateMarket value at any time is the price of the bondPrice depends on the relationship between the coupon rate and the interest rate in financial marketsA two-year government bond with principal $1,000 is sold for $1,000, 1/1/12Coupon rate is 5% $50 will be paid 1/1/13$1,050 will be paid 1/1/14Bond's price on 1/1/10 depends on the prevailing interest rateStocksA share of stock is a claim to partial ownership of a firmReceive dividends, a periodic payment determined by managementReceive capital gains if the price of the stock increasesPrices are determined in the stock marketReflect supply and demandRisk PremiumRisk premium is the rate of return investors require to hold risky assets minus the rate of return on safe assetsRisk aversion increases the return required of a risky stock and lowers the selling priceBond Markets and Stock MarketsChannel funds from savers to borrowers with productive investment opportunitiesSale of new bonds or new stock can finance capital investmentLike banks, bond and stock markets allocate savingProvision of information on investment projects and their risksProvide risk sharing and diversification across projectsDiversification is spreading one's wealth over a variety of investments to reduce riskStock and Bond MarketsSavers can put saving into a variety of financial assetsDiversification makes risky but potentially valuable projects possibleNo individual saver bears the whole riskSociety is better offA mutual fund is a financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets.Diversified asset for the saverLess costly than buying many stocks and bonds directlyMoneyMoney is any asset that can be used in making purchasesExamples include coins and currency, checking account balances, and traveler's checksShares of stock are not moneyMoney has three principal usesMedium of exchangeUnit of accountStore of valueMoney makes barter unnecessaryBarter is trading goods directlyBank ReservesCash in a bank's vault is not part of the money supplyUnavailable for paymentsBank deposits available for use in transactions are part of the money supplyDepositing a $100 bill in your checking account does not change the money supplyBankers realize that inflows and outflows from vaults leave some guilders unusedOnly 10% of deposits are needed for transactions90% can be lent to borrowers for a fee -- interestThe Federal Reserve SystemThe Fed is the central bank of the USResponsible for monetary policy and the oversight and regulation of financial marketsMonetary policy is deciding and managing the size of the nation's money supplyMoney supply is controlled indirectlyOpen-market purchase of government bonds from the pubic by the Fed increases bank reserves and the money supplyOpen market sale of government bonds by the Fed to the public decreases reserves and money supplyOpen Market OperationsWhen the Fed purchases a bond from the publicFed pays bond holder with new moneyReceipts are deposited and this leads to a multiple expansion of the money supplyWhen the Fed sells a bond to the publicBondholder pays with checking fundsBank reserves decrease and this leads to a multiple contraction of the money supplyVelocity of Money (V)Velocity is a measure of the speed money changes hands in transactions for final goods and servicesNominal GDP is the price level (P) times real GDP (Y)M is the money stockVelocity = Nominal GDPMoney stockV = P x Y MMoney and Inflation in the Long RunThe quantity equation states that money times velocity equals nominal GDP, M x V = P x YRestatement of the velocity definitionShows a relationship between money and price levelSuppose velocity and real GDP are constant The quantity equation becomesAn increase in the money supply by a given percentage would increase the price level by the same percentageV and Y, respectivelyM x V = P x YMoney, Prices, and the Financial SystemDiversificationMoneyReservesFinancial SystemBanksBondsStocksFederal Reserve SystemOpen Market OperationsQuantity Equation