Unit 4 03/09/16

Unit 4 03/09/16

Time Value of Money 

• Is a dollar today worth more than a dollar tomorrow?
  • Yes
   
• Why? 
• Because of inflation & opportunity cost 

• Let V = future value of money 
• P = Present value of money 
• r = real inflation rate (nominal rate - inflation rate)
• N = years
• K = number of times interest is credited per year.

• The simple interest formula 
• V = (1 + r)^n * P

• The compound interest formula
• V = (1 + r/k)^nk * P  

• Demand have an inverse relationship between nominal interest rates and the quantity of money demanded.
• When the interest rate increase, the money demand decrease.
• When the interest rate decrease, the money demand increase.

The Demand for money

 

• Money demand shifter 
• Change in price level
• Change in income
• Change Taxation that affect investment 

the money supply

•  How does this affect AD
  • Money supply Increase - Interest rate decrease - Investment increase - AD increase 
  • Money supply decrease - Interest rate increase - Investment decrease - AD decrease  
  Financial Asset
  Stocks & Bond 
  Future benefit
  What you own
  
  
  • Stock - financial asset that convey ownership in company.
  • Bond - promise to pay a certain amount of money + interest in the future

   

  What Bank Do 

  • A bank is a financial intermediary
  • Uses liquid assets (i.e. bank deposit) to financial the investment of borrowers.

  • Process is known as Factional Reserve Banking.
  • A system in which depository institution hold liquid assets less than the amount of deposits