1. Time has value (interest rates, opportunity cost)

2. Risk requires compensation

3. Information is the basis for decisions (more value requires more info)

4. Markets determine prices and allocation of resources

5. Stability improves welfare

1. Economic Growth

2. Low Unemployment/Full Employment

3. Low inflation/Price level stability

Must be 16 or older, actively searching for employment or employed.

Discouraged workers (workers not actively seeking employment) are not counted

Increase in the average price level

Current U.S. Level of Inflation: 1.4%

Market value of all final goods & services within the economy during the year

- GDP is how we measure economic growth

- What is not included in GDP is the shadow economy

1) Price level increases

2) Quantity increases

1. Means of payment (medium of exchange)

2. Unit of account (Standard of Value)

3. Store of Value

4. Standard of deferred payment

1. Examples

2. Durable

3. Easily transferred

4. Had value in of itself

1. Redeemable for metal

2. Issued to finance wars

3. In US, backed by gold, then silver

4. Evolved into fiat money

- Checks ("Check 21")

- Electronic Payments

a) Electronic funds transfers reduces need for checks

b) Automated Clearinghouse transactions for recurring payments

c) Stored Value Cards (gift cards)

Debit Cards: You need to have the funds in your account before it goes through

Credit Cards: You take out an I.O.U. (i.e. pay with other people's money)

CPI excludes food & energy

Housing is a large part of the CPI (41%)

- Transportation (16.875%)

- Medical Care (7.061%)

1. Substitution bias

2. Insufficient allowance for quality changes

3. Slow production of new products

4. Data collection problems

5. Impact of discount retailers

a) bank loans

b) bonds

c) home mortgages

d) stocks

e) asset-backed securities

a) insurance contracts (disability, housing, etc.)

b) futures contracts (contracts for future delivery, crops, etc.)

c) options

1. Tax advantages

 a) mortgage interest deduction

b) When sold the exclusion of $250,000/$500,000 on long-term capital gains

2. Possibility of future appreciation (people look at home ownership as an investment)

3. The housing services provided

1. Offers savers and borrowers liquidity

2. Pools & communicates information

3. Allows for risk-sharing

a) Primary vs. Secondary markets

b) Centralized exchanges, over-the-counter markets and electronic networks

c) Debt and Equity vs. Derivative Markets

Firms that provide access to the financial markets. They may be classified into two broad categories:

I. Depository Institutions

a) Commerical Banks

b) Savings & Loans

c) Credit Unions

II. Non- Depository Institutions

a) Insurance Companies

b) Pension Funds

c) Securities Firms

d) Finance Companies

e) Government Sponsored Enterprises (GSEs)

Present value is the value today (in the present) of a payment that is promised to be made in the future, or PV is the amount that must be invested today to realize a specific amount on a given future date.

PV is higher when:

1. The higher future value of the payment (FV bigger)

2. The shorter time period until payment (n smaller)

3. The lower the interest payment (i smaller)

The higher the interest rates, the higher to future value.

Time (n) & interest rate (i) must be in same time units.

- If i is set at an annual rate, then n must be in years.

- FV of $100 in 18 months at 5% annual interest rate is: FV = 100 x (1+0.05)^1/5