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Consumption spending + Savings = Consumption spending + Investment spending = Total Spending = Total Income

Budget surplus and deficit is difference between tax revenue and government spending, take the larger and subtract smaller

Budget balance is the difference between tax revenue and government spending

National savings is the total amount of saving in an economy calculated by sum of private savings and budget balance

Wealth is value of savings

Financial asset entitles buyer to receive income from seller

Physical asset is an actual object that gives income when disposing of it

Liability is a requirement of payment

Transaction costs are the costs of going through a deal

Financial risk is the risk of the economy changing which will negatively or positively impact you

liquid can be quickly made into cash

illiquid cannot be

4 types of finanical assets, loans bonds and stocks

intermediary is something that transforms funds it gathers

mutual fund creates a stock portfolio and resells to investors

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money is any asset that can be used to purchase goods and services

medium of exchange is an asset for trading money

store of value is a means of holding money

a unit of account is used to set prices and make economic calculations

monetary aggregate is measure of money supply

M1 contains money in circulation, checks, and bank depositis

M2 contains M1 and near moneys

near moneys can't be used as medium of exchange but can be converted into deposits or cash

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value of money in n years: 1/(1+r)^n
r is interest rate

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bank reserves are the deposits in the Fed and currency they hold in vaults

reserve ratio is reserves/bank deposits

required reserve ratio, Fed sets it

discount window describes how Fed is ready to lend money to banks in trouble

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Fed is a central bank, regulates banking system and controls monetary base

Purpose is to response to crises and keep a sufficient amount of money in supply

Savings and loan crises happened because of risky speculation, covered by deposit insurance but resulted in losses in financial sector

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Fed sets reserve requirements
(10%)

federal funds market allows banks who don't meet reserve requirements to borrow from banks with excess

federal funds rate is interest rate in this ^ market

manages the discount rate of the discount window

controls open-market operations to control monetary policy

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short term interest rates, mature within 6 months

long term interest rates, mature for a number of years

money demand curve shows relationship between quantity of money demanded and interest rate

shifts are caused by changes in aggregate price level, real GDP, technology, and institutions

liquidity preference model of interest rate shows that interest rate is determined by supply and demand of money

money supply curve shows relationship between nominal quantity of money supplied and interest rate

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loanable funds market shows relationship between demand for funds by borrowers and supply of funds from loaners

interest rate is a percentage charged by the lender for use of money for a year

rate of return is the profit earned on the project as a percent
(Revenue from project - cost of project)/cost of project * 100

Demand for loanable funds is downwards sloping, supply is upwards, shows relationship between interest rate and demand for loanable funds

shifting the demand for loanable funds includes changes in government borrowing and future business opportunities

shifting the supply for loanable funds includes changes in capital inflows and private savings behavior

shifting any curve will change the interest rate

biggest shift factor is expectations about future inflation

real interest rate = nominal interest rate - inflation rate

Fisher effect states that an increase in expected inflation increases nominal interest rate and expected interest rate unchanged

long run, changes in supply of money doesn't affect interest rate