Characteristics of Money - ReviewCharacteristics of Money - Review

A_______________A_______________

S_______________S_______________

D_______________D_______________

D_______________D_______________

P_______________P_______________

Characteristics of MoneyCharacteristics of Money

AcceptabilityAcceptability

ScarcityScarcity

DurabilityDurability

DivisibilityDivisibility

PortabilityPortability

Why is Money Used? - ReviewWhy is Money Used? - Review

__________________________________– People must be willing to trust it and accept itPeople must be willing to trust it and accept it

__________________________________– Wages and PricesWages and Prices

__________________________________– Savings or investments in CashSavings or investments in Cash

Why is Money Used?Why is Money Used?

Medium of ExchangeMedium of Exchange– People must be willing to trust it and accept itPeople must be willing to trust it and accept it

Measure of ValueMeasure of Value– Wages and PricesWages and Prices

Store of ValueStore of Value– Savings or investments in CashSavings or investments in Cash

(Cash beat the stock market over the past 8 years)(Cash beat the stock market over the past 8 years)

Money Supply - ReviewMoney Supply - Review

Total ______________ availableTotal ______________ available

Controlled (to some extent) by ________ Controlled (to some extent) by ________ ___________ in each country___________ in each country

Money Supply Includes:Money Supply Includes:– ______________________________– ______________________________

Money SupplyMoney Supply

Total Total amount of money amount of money availableavailable

Controlled (to some extent) by Controlled (to some extent) by Central Central BanksBanks in each country in each country

Money Supply Includes:Money Supply Includes:– Physical CashPhysical Cash– Credit/Debt outstandingCredit/Debt outstanding

Interest Rate - ReviewInterest Rate - Review

Amount Charged on Amount Charged on ________________‘‘The _________ of Money’The _________ of Money’

________________Interest Rate is used ________________Interest Rate is used to __________ money supplyto __________ money supply– _____ rates increase lending & money supply_____ rates increase lending & money supply– _____ rates reduce lending & money supply_____ rates reduce lending & money supply

““__________ Policy” – used to control __________ Policy” – used to control growthgrowth

Interest RateInterest Rate

Amount Charged on Amount Charged on DebtDebt‘‘The The PricePrice of Money’ of Money’

Central Bank Prime Central Bank Prime Interest Rate is used Interest Rate is used to control money supplyto control money supply– LowerLower rates increase lending & money supply rates increase lending & money supply– HigherHigher rates reduce lending & money supply rates reduce lending & money supply

““MonetaryMonetary Policy” – used to control Policy” – used to control growthgrowth

Stock Market – ______________Stock Market – ______________

Yesterday

All-TimeHigh (Oct ’07)

Stock Market – Stock Market – Economic BarometerEconomic Barometer

Yesterday

All-TimeHigh (Oct ’07)

‘‘Rate Cuts’ - ReviewRate Cuts’ - Review

Central Banks reduce the interest rate Central Banks reduce the interest rate when there is an _______________when there is an _______________

The hope is to encourage more ________ The hope is to encourage more ________ due to lower costs, and encourage due to lower costs, and encourage __________________________________

Worked in 2002Worked in 2002

Isn’t working very well now – US Fed rate Isn’t working very well now – US Fed rate ____________________

‘‘Rate Cuts’Rate Cuts’

Central Banks reduce the interest rate when Central Banks reduce the interest rate when there is an there is an economic downturn economic downturn

The hope is to encourage more The hope is to encourage more borrowingborrowing due to lower costs, and encourage due to lower costs, and encourage economic expansioneconomic expansion

Worked in 2002Worked in 2002

Isn’t working very well now – US Fed rate Isn’t working very well now – US Fed rate near zeronear zero

Inflation/Deflation - ReviewInflation/Deflation - Review

Inflation is a __________ in the value of a dollar.Inflation is a __________ in the value of a dollar.

– Can result from an _________ in credit/money supplyCan result from an _________ in credit/money supply

Deflation is an ________ in the value of a dollar.Deflation is an ________ in the value of a dollar.

– Can result from a _________ in credit/money supplyCan result from a _________ in credit/money supply

Deflation is associated with a _______________ Deflation is associated with a _______________ _____________ (e.g. Japan in the 1990s)_____________ (e.g. Japan in the 1990s)

Inflation/DeflationInflation/Deflation

Inflation is a Inflation is a decreasedecrease in the value of a dollar. in the value of a dollar.

– Can result from an Can result from an expansionexpansion in credit/money supply in credit/money supply

Deflation is an Deflation is an increaseincrease in the value of a dollar. in the value of a dollar.

– Can result from a Can result from a contractioncontraction in credit/money supply in credit/money supply

Deflation is associated with a Deflation is associated with a serious economic serious economic contractioncontraction (e.g. Japan in the 1990s) (e.g. Japan in the 1990s)

Unprecedented ______________Unprecedented ______________

Credit divided by Production

Currently 350%

Unprecedented Unprecedented Credit ExpansionCredit Expansion

Credit divided by Production

Currently 350%

US Interest US Interest RatesRates

Long Term Central Bank Interest Rates are usually somewhat higher than the ________________

US Interest US Interest RatesRates

Long Term Central Bank Interest Rates are usually somewhat higher than the rate of inflation

Risk and the Risk and the Credit SpreadCredit Spread

Difference between __________ and________ credit

An increase in spread means lenders are _______ about more risky borrowers’ ability to __________

Risk and the Risk and the Credit SpreadCredit Spread

Difference between more risky andless risky credit

An increase in spread means lenders are nervous about more risky borrowers’ ability to repay loans

‘‘Credit Crisis’Credit Crisis’

Lenders are not ___________Lenders are not ___________

Borrowers are not __________Borrowers are not __________

All players are losing __________All players are losing __________

Credit is _________; money supply is Credit is _________; money supply is __________ – Deflation?__________ – Deflation?

Governments trying to __________the Governments trying to __________the economy (President Obama)economy (President Obama)

‘‘Credit Crisis’Credit Crisis’

Lenders are not Lenders are not willing to lendwilling to lend

Borrowers are not Borrowers are not able to borrowable to borrow

All players are losing All players are losing confidenceconfidence

Credit is Credit is contractingcontracting; money supply is ; money supply is contractingcontracting – Deflation? – Deflation?

Governments trying to Governments trying to ‘stimulate’ ‘stimulate’ the the economy (President Obama)economy (President Obama)

Read A Question of Ethics (pg. 176)Read A Question of Ethics (pg. 176)

Stimulus Bills are Stimulus Bills are being financed by being financed by ____________ ____________ __________________________________– this is paid for by – this is paid for by “Printing Money”“Printing Money”Printing Money… Printing Money… ‘_____________’‘_____________’– __________ in 1930s__________ in 1930s– Zimbabwe nowZimbabwe now

Ethical?Ethical?

Read A Question of Ethics (pg. 176)Read A Question of Ethics (pg. 176)

Stimulus Bills are Stimulus Bills are being financed by being financed by increased increased government debt government debt – – this is paid for by this is paid for by “Printing Money”“Printing Money”Printing Money… Printing Money… ‘‘Hyper InflationHyper Inflation’’– GermanyGermany in 1930s in 1930s– Zimbabwe nowZimbabwe now

Ethical?Ethical?

New Topic – Foreign ExchangeNew Topic – Foreign Exchange

Foreign Exchange RateForeign Exchange Rate

The The ValueValue of one currency in terms of another of one currency in terms of another currencycurrencyGoods sold to another country will usually be Goods sold to another country will usually be paid for in that country’s currencypaid for in that country’s currencyExporters and Importers face ‘Exporters and Importers face ‘Foreign Exchange Foreign Exchange RiskRisk’’– Can lead to a gain or a lossCan lead to a gain or a loss– Need to Need to forecastforecast and account for changes in foreign and account for changes in foreign

exchangeexchange– May need to buy ‘May need to buy ‘futures contractsfutures contracts’, or use ‘’, or use ‘natural natural

hedginghedging’ to reduce risk ’ to reduce risk

Some Factors Affecting Foreign Some Factors Affecting Foreign Exchange RatesExchange Rates

Economic Conditions Economic Conditions in a Countryin a Country– Growth vs. Recession/ContractionGrowth vs. Recession/Contraction– Central Bank Interest Rates & Money SupplyCentral Bank Interest Rates & Money Supply

Balance of PaymentsBalance of Payments– Related to Total Foreign Debt Related to Total Foreign Debt – Related to Balance of TradeRelated to Balance of Trade

Political StabilityPolitical Stability– Changing governments, warChanging governments, war

Financial SpeculationFinancial Speculation

Balance of PaymentsBalance of Payments

Measure of Money Flows into and out of a Measure of Money Flows into and out of a countrycountry

Money ___ – Money ___ = BalanceMoney ___ – Money ___ = Balance

A A PositivePositive Balance of Payments usually Balance of Payments usually results in a currency results in a currency __________________ in value in value

A A NegativeNegative Balance of Payments usually Balance of Payments usually results in a currency results in a currency ____________ value value

Balance of PaymentsBalance of Payments

Measure of Money Flows into and out of a Measure of Money Flows into and out of a countrycountry

Money In – Money Out = BalanceMoney In – Money Out = Balance

A A PositivePositive Balance of Payments usually Balance of Payments usually results in a currency results in a currency increasingincreasing in value in value

A A NegativeNegative Balance of Payments usually Balance of Payments usually results in a currency results in a currency losinglosing value value

Political StabilityPolitical Stability

Political Instability in a country can affect Political Instability in a country can affect ________________________– Has a direct impact on the Has a direct impact on the __________________ of a of a

country’s currencycountry’s currency– Instability can cause a currency to Instability can cause a currency to _____ _____

value quickly (Monopoly money)value quickly (Monopoly money)

Political StabilityPolitical Stability

Political Instability in a country can affect Political Instability in a country can affect confidenceconfidence– Has a direct impact on the Has a direct impact on the AcceptabilityAcceptability of the of the

country’s currencycountry’s currency– Instability can cause a currency to Instability can cause a currency to loselose value value

quickly (Monopoly money)quickly (Monopoly money)

Financial SpeculationFinancial Speculation

Most major currencies Most major currencies are traded on a are traded on a market, similar to the market, similar to the stock marketstock marketExchange rates can Exchange rates can _______ quite widely_______ quite widelyHowever, some However, some countries ‘peg’ their countries ‘peg’ their exchange rates (e.g. exchange rates (e.g. China to U.S.)China to U.S.)

Financial SpeculationFinancial Speculation

Most major currencies Most major currencies are traded on a are traded on a market, similar to the market, similar to the stock marketstock marketExchange rates can Exchange rates can fluctuatefluctuate quite widely quite widelyHowever, some However, some countries ‘peg’ their countries ‘peg’ their exchange rates (e.g. exchange rates (e.g. China to U.S.)China to U.S.)

Pegged vs. Floating ExchangePegged vs. Floating Exchange

$US vs. $CDN (floating)

$US vs. CYuan (Pegged)

Recent Exchange RatesRecent Exchange Rates

Exchange Rate CalculationsExchange Rate Calculations

How To…How To…

A Hamburger in Tokyo costs 400 yen. How A Hamburger in Tokyo costs 400 yen. How much is this in $CDN?much is this in $CDN?

A US company is buying computers from a A US company is buying computers from a company in France. Each computer costs company in France. Each computer costs 1700 Euro. How much does the US 1700 Euro. How much does the US company need to pay ($US)?company need to pay ($US)?

Practice Problems due tomorrow Practice Problems due tomorrow (Thursday) (Thursday)

Why is this Relevant?Why is this Relevant?

The economic downturn has resulted in The economic downturn has resulted in devastation of the US economydevastation of the US economy

Government has stepped in to prop up Government has stepped in to prop up banks and bail out investorsbanks and bail out investors

Amount of credit outstanding is dropping Amount of credit outstanding is dropping for the first time in several decadesfor the first time in several decades

New TermsNew Terms

Credit/GDP ratioCredit/GDP ratioCredit SpreadCredit SpreadCredit CrisisCredit CrisisHedge FundHedge FundDeleveragingDeleveragingRate cutRate cut““Pushing on a string” Pushing on a string” Inflation/DeflationInflation/Deflation

Definition: DeleveragingDefinition: Deleveraging

What hedge funds and other investors What hedge funds and other investors who buy on credit have to do when asset who buy on credit have to do when asset values fall, like they have in the past six values fall, like they have in the past six monthsmonthsNeed to sell assets to cover lossesNeed to sell assets to cover lossesSince credit is no longer easily available, Since credit is no longer easily available, investors have to sell more assets to cover investors have to sell more assets to cover losseslossesA downward spiralA downward spiral

‘‘Pushing on a String’Pushing on a String’

‘‘Pulling on a string’ is a way to describe Pulling on a string’ is a way to describe increasing interest rates – this has the desired increasing interest rates – this has the desired effect of slowing down an overheated economy effect of slowing down an overheated economy and usually worksand usually works‘‘Pushing on a string’ is a way to describe Pushing on a string’ is a way to describe lowering interest rates – the desire is to get lowering interest rates – the desire is to get people to borrow and increase economic people to borrow and increase economic activity, but only works if people want to lend activity, but only works if people want to lend and are able to borrowand are able to borrowRight now, lower interest rates are not working, Right now, lower interest rates are not working, so it is like ‘pushing on a string’so it is like ‘pushing on a string’

Credit/DebtCredit/Debt

Credit/Debt Relationships depend on Credit/Debt Relationships depend on everyone having confidence in everyone everyone having confidence in everyone elseelseBanks have insufficient reserves to handle Banks have insufficient reserves to handle large withdrawalslarge withdrawals– If everyone withdraws their money from a If everyone withdraws their money from a

bank at the same time, the bank will failbank at the same time, the bank will fail

IOU’s are not cashIOU’s are not cashBe careful who you loan your money toBe careful who you loan your money to

Hedge FundHedge Fund

Investment group that uses credit to buy Investment group that uses credit to buy financial assets such as stocks (like Intel, financial assets such as stocks (like Intel, BCE, RIM etc.) and commodity futures BCE, RIM etc.) and commodity futures (such as oil, wheat, copper, gold, etc.)(such as oil, wheat, copper, gold, etc.)

Allowed to borrow up to 40 times the Allowed to borrow up to 40 times the actual cash they have – called ‘leverage’ – actual cash they have – called ‘leverage’ – to buy financial assets on creditto buy financial assets on credit

Works as long as assets go up in priceWorks as long as assets go up in price

Stimulus vs. $ ValueStimulus vs. $ Value