unit 4: Time value of money

March 9, 2016
Time value of money

• Is a dollar worth more than a dollar tomorrow? yes, inflation and opportunity cost. This is the reason for charging ad paying interest.

V= future value of money
P= present value of money
r= real interest rate (nominal rate- inflation rate)
expressed as a decimal
n=years
k= # of times in interest is credited per year

• The simple interest formula 

v= (1+r)^n*p

• v=(1+r/k)^nk*p

Demand for money has an inverse relationship between nominal rate and the quantity of money demanded.

Money demand

Increase in money supply

increase $ supply > decrease interest rate > increases investment > increases AD

or

Decrease $ supply > increase interest rate > decrease investment > decrease AD

Assets= what you own (when you die the rest of the stuff is an asset)

Liability= what you owe (groceries, clothes)

Stocks- ownership (owner of a company)

*not actual owner

Bond- loaning  money to government hoping you get it back.

What banks do

- A bank is a financial intermediary 

• uses liquid assets (i.c. bank deposits) to finance the investments of borrowers.
• A process is known as fractional reserve banking

-a system which depository 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 a federal reserve

Basic accounting review

T-account (balance sheet)

-statements of assets and liabilities