UNIT 4: Financial Sector/FED

(3/9/16 - 3/10/16)

Financial Sector

Financial Assets: - what you own
                            - ex./ stuff you leave in your will
Financial Liability: - what you owe
                               - ex./ mortage, phone bill, etc.

Interest Rate: the cost of borrowing money

Stocks: - ownership in company
             - safe
             - % of company owned
Bonds: - loaning money to gov. for the promise of mature return
            - involve risk

What Banks Do
- A bank is a financial intermediary.
- Uses liquid assets (i.e bank deposits) to finance the investments of borrowers.
- Process known as Fractional Reserve Banking.

Fractional Reserve Banking:
a system in which depositing institutions hold liquid assets less than the amount of deposits.
-can take form of: 1) currency in bank vaults
                              2) Bank Reserves: deposits held at the Federal Reserve

Basic Accounting Review
- T-Account (Balance Sheet)
- Assets (Amount owned): ~ items to which a bank holds legal claim.
                                             ~ the uses of funds by financial intermediaries.
-Liabilities(Amount owed): ~ the legal claims against a bank.
                                               ~ the sources of funds for financial intermediaries.
EX./

          Assests               |                 Liabilities        
RR                                     DD

ER
                     


FED ~ Federal Reserve Bank    
Functions of the FED:
1) Control & supply
2) Issue paper currency
3) Set the reserve requirements & hold reserves of banks
4) Lend $ to the banks & change interest
5) Check clearing service for banks
6) Acts as a personal bank for the government
7) Supervises member banks

Reserve Requirement
- The Fed requires banks to always have some money readily available to meet consumers demand for cash.
- the amount, set by the Fed, is the Required Reserve Ratio.
- the Required Reserve Ratio is the % of demand deposits (checking amount balance) that must not be loaned out.
- typically 10%

3 Types of Multiple Deposit Expansion Questions
Type 1: Calculate the initial change in excess reserves.
            - aka the amount a single bank can loan from the initial deposit.
Type 2: Calculate the change in loans in the banking system.
Type 3: Calculate the change in the $ supply.
*sometimes type 2 & 3 will have same result (i.e no Fed involvement)