Unit IV - Time Value

• 
• Is a dollar today worth more than a dollar tomorrow?
• Yes
• Why? Opportunity cost and inflation
• This is the reason for charging and paying interest.
• Simple Interest Formula
• V = ((1 + r) ^ n) * p 
• V = future value of $
• P = present value of $
• r = real interest rate (nominal - inflation) expressed as a decimal
• n = year
• k = # of times interest is credited per year.
• Compound Interest Formula: V = (1 + r/k)^ nk
• When interest rates increase, the quantity demanded of money decrease.
• Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded. 

• Money Demand Shifters
1. Change in price level
2. Change in income
3. Changes in taxation that affect investment
• Increase money > decreases interest rate > increases investment > increases AD 

• Financial Assets vs. Financial Liabilities
• Asset: Something you own.
• Liability: Something you owe.

• Stocks vs. Bonds
• Stocks: A share of a company you buy.
• Bonds: Lend money to government so they pay you back with interest. 

• Bank: A financial intermediary
• Uses liquid assets (i.e. bank deposits)
• Process is known as Fractional Reserve Banking.
• A system in which depository institutions hold liquid assets less than the amount of deposits. 
• Can take the form of:
• Currency in bank vaults
• Bank Reserves: deposits held at the federal reserve. 
• T-Account (Balance Sheet)
• Statement of assets and liabilities. 

• Reserve Requirement: FED requires bank to always have some money readily available to met consumers' demand for cash.
• Ratio: Amount set by the FED.
• % of DD that must not be loaned out.
• Typically is 10%.
• 3 Types of Multiple Deposit Expansion
• Type 1: Calculate initial change in excess reserves.
• Type 2: Calculate change in loans in banking.
• Type 3: Calculate change in the money supply.
• Sometimes type 2 and type 3 will have the same result.