CHAPTER ONE-MONEY
What is money?Money is usually thought of as something that is
generally accepted as payment for goods and services and for the
discharge of debt.Money has five functions:1. Medium of exchange.2.
Temporary abode of purchasing power.3. Store of value4. Unit of
account5. Standard of deferredpayment
1. Medium of exchange.A good use as a medium of exchange in
widely accepted for the payment of debt and the purchase of goods
and services, an example are currency, coins etc.2. Temporary abode
of purchasing power.He temporary abode for purchasing power
function is thus related to the medium of exchange property and
refers to the holding of money as a readily available means of
negotiating future transactions. (Share,bond, bills)3. Store of
valueThe store of value function of money is not a unique function
of money. One way to store well is in the form of money.
Nevertheless it is not the only way to store well. Owing a house is
also a way to store wealth.4. Unit of accountA unit of account is a
basic number in counting system. The generally accepted practice of
translating the value of all transactions, wealth and debts into a
single monetary unit of account. Measurement is a great
convenience.
5. Standard of deferred payment Function of money merely refers
to the practice of calculating debts in turn of unit accounting
used for money. Uniformity of appearance:Uniformity of appearance
is a characteristic of money forms of money. It can be added to the
five functions of money to form a list of six commonly described
money characteristics.
What is barter economy?Barter economy:Barter economy is one in
which goods and services are exchanged without the use of money.
Goods and services are traded for the other goods and services. No
goods value is largely our entirely related to its medium of
exchange services.
Limitations of barter economy:
Double co-incidence:It is oftenheld that in barter economy
buyers and sellers are not fortunate enough to enjoy a double co
incidence in exchange and that in why money was invented. The
double co-incidence occurs when both parties do a transaction wish
to buy the good or services that the other party offers to sell in
exact exchange. Thus is a barter economy. Double co-incidence is a
limitation.Unit of account:It is not necessary to have a physical
exchange of money in order to avoid the double- co incidence and
because anthropologists and archeologists structuring primitive
communities have found evidence that in some cases the communities
developed a unit of account before they developed a physical medium
of exchange. For example: a small stack of shells.Counting
pieces:Individuals in primitive communities could count to even
very small numbers without some device in addition to fingers and
toes. The most efficient method of counting may have been the use
of some homogeneous physical commodities. The difficulty of keeping
track of the values in exchange must have been great. Commodities
that were fairly uniformed could be used for counting purposes and
become the unit of account. The more uniformed the items, the
easier the were to understand as equal units of account. Such
counting pieces may have been important ingredients for more
efficient exchange.Physical form of money:Commodity money:Money may
be made out of a material with a valuable alternative use. Such as
gold. This kind of money is called commodity money.Full bodied
money:If the material out of which money is made in as valuable in
other uses as it is, when it is used as money it is called
full-bodied money.Fiat money:Fiat money is made of a substance
(USUALLY PAPER OR BOOKKEEPING ENTRY IN A BANK ACCOUNT RECORD) with
negligible value.
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CHAPTER TWOFINANCIAL ASSET
Financial assetFinancial asset are important components of the
wealth of individuals, government and business in m0odern society
and there also significant determinants of economic activity. There
is a broader group of item that has money at the characteristics of
money, called financial assets
Financial assets can be divided into three groups:1. Bonds:Bonds
are evidence of debt. Economists often use the term bonds for all
debt instruments to signify their analysis. There are many names
for particular type of debt instruments such as bills, notes and
bonds.2. Equity:Equity is ownership rights in business. Equity is
ownership rights in business equity share issue by corporation are
called common stock.3. Money:Money is usually thought of as
something that is generally accepted as payment for goods and
services and for the discharge of debt.
Bonds and notes:A bond or note is part of a group of formally
offered debt instruments there on tracks that stimulates a series
of fixed payments form the issues to the holder of the bonds and
notes. The payments are usually annually, semiannually or once a
year, sometimes quarterly. The final payment also includes the face
value of the bonds or note.Bond indenture:Is the contract between
the bond issuer and the bond holder, most bonds or notes or bond
indentures includes the following information:1. The name of the
issuer.\the face value or per value is the amount the is obliged to
pay when the bond matures.2. The maturity date is the date of the
final payment.3. The interest payments noted on the bond are often
stated as a percentage of the face value to be paid each period.
This is called coupon rate.4. The date in which the interest
payment are to be paid are indicated 5. In the cases of bonds or
notes issued by corporation the trustee usually trust company or
large bank is named. The trustee must see that the issuer comprise
with the terms of bonds or note.Bills:A bill usually refers to a
marketable debt instrument such as those issued by Bangladesh
government treasury, that matures in one year or less. They yield
no coupon payment, only a final lump-sum payment.Assume that a
$10000 a year treasury bill is sold at a five percent discount.
Stock:Stocks are ownership rights in a corporation. The
corporation charter specifies the maximum authorized stock issues
that can be outstanding.There are two types of stock:1. Common
stock2. Preferred stock The common stock is the basic form of
ownership allowing the holder to vote for the directors of the
corporation each share of common stock claim against current and
future earnings. Those earnings may be paid to the stock holders as
dividends or retained in the corporation and invested to enhance
future earnings.Preferred stock: The preferred stock has no voting
rights unless dividendsare not paid for a number of periods.
Preferred stock pays a fixed dividend.Convertibles: The privilege
of converting preferred stock (convertible preferred stock) and
bonds (convertible Bonds) into common stock, at specific price is
called convertibles.
Definition of wealth: Wealth is the stock of everything of
economic value at a moment in time. Wealth is valuable because it
produces future services. There are two types of wealth:1.
Financial Wealth2. Non-financial wealthNon-financial wealth:Every
commodity of value in an economy is part of the stock of wealth or
equivalently. The stock of capital or assets for example: hotels,
factories, land, onions, potatoesetc. are the part of the expected
output. These examples of assets are part of the stock of
non-financial wealth.There are three general characteristics of
non-financial wealth, which are given below:
The physical condition or form of non-financial wealth I
important to its value for example: building or machinery.The
transportation cost of moving many non-financial assets are
substantial. The costs of moving a house or a machine may be large
realize to its value.The payments made for the services form
non-financial wealth are part of the societys national
income.Financial wealth:The types of non-financial wealth differ
from the types of financial wealth. The financial wealth divides as
bonds, equities and money. The importance of financial wealth to
the economy is sometimes obscured behind the maze of institutional
details. Financial wealth has three important
characteristics:Financial assets are in the physical form of paper
documents, bookkeeping entries, currency or coins.The
transportation cost squired to move a financial asset is small
relative to its value.The income to the owner of financial wealth
such as interest payments on bonds or dividend payments on common
stock is as valuable as any other income to the owner. When the
firms are transferred, no goods or services are exchanged. So, the
national income does not increased by the size of those
payments.Liquidity:Liquidity is a property of assets relating to
the time and cost of exchanging them for money. The transaction
cost of changing an asset into money is one measure of
liquidity.
Different kinds of risk on financial assets:There are three
types of risks in firm financial asset:Capital risk:If the bond is
sold before its matures, the price of the bond may be unexpectedly
low or equivalently the market rate of interest on bonds may be
unexpectedly high. This is capital risk.Purchasing power
risk:Inflation could unexpectedly increase. These means that the
real value of the income form the bond unexpectedly declines. This
is called purchasing power risk.Default risk:The bond may pay less
than the expected nominal income in the case of a bond that pays
fixed money return this is called a default risk.
Chapter 4Real interest rate
Real interest rate:The value of measuring unit- a dollar- is
adjusted for any expected inflation or deflation which is called
real variables. Example: one could say that the only hundred
thousand dollar rental apartment produces output at the real rate
of interest. Thus the equibrilium real rate of interest. The
nominal interest rate is the rate of interest on the bond which
includes a premium for expected inflation. Suppose, the $100000
apartment produces $10000 per year. Here the real interest rate is
10% moreover newly expected 5% inflation in measure here the
nominal interest rate could equal:A 10% real return on it did with
no inflation plus,A 5% extra return to cover expected inflation.
Therefore nominal yield (interest rate) could be 15%
Risk premium:Default risk is that the issues of the bond may
fail to make all the payments. A risk premium is paid to the buyer
of the instrument for bearing the default risk.Savings and
investment:Let, Y is the dollar expenditure on output or national
income for the whole economy. The expenditures on national income
are either for consumption(C), goods and services that are used up
during the year, or for investment (I), goods that are not used up
during the year. The basic income identity is by the
definitions,
Saving is that part of the income from providing the output that
is not used for consumption.
If the consumption is subtractedfrom each side of equation
(1)
It is plain by the comparison of the equation (2) and (3)
This identity reflects the fact that if income received for
producing national income is greater than consumption, some of the
national income is held for the future periods.
The demand and supply loanable fund:The demand for loan fund
consists first, of desired investment and second of increase in the
demand for money buy individual corporation of governmentCreation
of the money supply is a major part of the subject of money and
banking both the government and private banking system require
money.The demand for loans in each period can be greater than
desired investment by the amount by which individuals, corporation
and government, wish to increase their holding of money.Also the
supply of loans can be greater in each period by the amount by
which the money supply increasedTherefore the demand and supply of
loanable funds must include not only desired saving and desired
investment but also desired changes in money holdings and money
supply.Explain it in graph:
The demand and supply of loanable funds are explain in the given
between:The supply schedule slopes up where on the grounds that
more will be said (at a given level of income and prices) when the
reward (the interest rate) is higher the demand schedule slopes
down downward on the assumptions that:1. With a given stock of
wealth and a given level stock of prices more investment
opportunity are profitable at a lower rate of interest2. There will
be a greater demand to increase money holdings when interest rates
all alternative assets. Such as bonds.The equilibrium of interest
rate in the figure equals the amount of loanable funds supplied
with those demand.At a higher interest rate, such as i3, then would
be and supply of loanable funds and excess supply of loanable funds
and interest rate would drop, at a lower interest rate such as i1,
there would be an excess demand and interest rate would rise then
things being the same, the following changes will ethically shift
the demand for loanable funds, DL to the right and increased the
nominal interest rate-1. An increased demand for investment at each
interest rate.2. An increased demand for money at each interest
rateOther things being same the following changes will also
initially increased the nominal interest rate by shifting the
supply of loanable funds, to the left-1. A decrease demand for
savings at each interest rate.2. A decreased income money supply
because of actions by government.
The result of inflationary expectation on interest rate:
Figure: the demand and supply of loadable funds adjusting to the
expectation of money rapid inflation
If there is a sudden of inflation it insured that there is no
prior adjustment where made, seems the inflation of assume are
anticipationThe adjustment is shown:The ethical equilibrium at
interest rate saver will be unwilling to long out the same amount
of money at interest rate that they were before they expected
inflation. Another way of saving this is that the bond buyer will
demand their interest on their bond. To cover the interest on their
interest income for expected inflation. The supply of loanable fund
will shift to the left Browse will also recognized the effect of
inflation that will increases there money income and the amount
fund. They need to finance their investment. They will riveted be
will icing to pay more interest on the bonds they sell. The demand
for loanable funds shifts to from. A full adjustment because a new
equilibrium interest rate is
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