MACROECONOMICSMajor Financial Institutions

The Institutions

Banks and Credit Unions Federal Reserve Types of Business:

Sole Proprietorship, Partnerships, and Corporations

Stock Market Labor Unions

Purpose

The major financial institutions have several purposes Help manage and invest our money Help conduct our monetary policy Help create wealth and innovation in order to

grow the economy Help develop our labor policy

Money

What is money? Money refers to the medium of exchange used to

conduct economic activity No gold standard, so our money is not fixed to specific

value Money stock refers to supply of money in circulation Fiat money refers to hard money-think cash Most of the money stock is in the form of bank

deposits Beyond financial assets, such as stocks, and

property also represent wealth but must be converted or liquidated into money in order to use that wealth as a medium of exchange

Monetary Policy

BANKS THE FEDERAL RESERVE

Place to store and access money in form of deposits

More importantly, banks create wealth and enable the economy to grow

Wealth is created when banks issue loans and receive interests of those loans Businesses and individuals receive loans for a variety

of reasons but typically that loan is used to increase their wealth

The interests allow banks to earn a profit and invest more in the economy

The amount of loans banks lend is determined by two factors Reserve Requirement

regulations on the amount of reserves that banks must hold against their deposits

A percentage set by the Fed of their total deposits Judgment of Bankers

Banks manipulate the money stock through lending The more they lend, the more money is in circulation,

which causes inflation The less the lend the less money is in circulation,

which cause deflation This is largely do to the reserve requirement

Established after a banking panic in the early 1900’s it serves as the central bank of the nation It is the bank of the government Bank of banks Creates and manages our monetary policy

Enforces regulation on banking industry The Fed has to balance the value of money by

controlling long term inflation while maintaining short term goal of high employment and production output Interest Rate (discount rate)

Rate they charge banks for loans Higher the rate the less banks will borrow, reducing

the money stock; vice versa Reserve Requirement

Amount banks must hold in the Federal Reserve Bank

Higher the rate the more the have to hold, the less money stock

Open Market Operations Buy or sell government bonds Buying bonds increases supply; vice versa

Types of businesses

SOLE PROPRIETORSHIP

PARTNERSHIPS

Only one owner Advantage:

Pride in business All profit

Disadvantage: All financial risk Difficult to raise capital

More than one owner but traded publically

Duties and liability defined contractually

Advantage Spreads financial liability and risk

Disadvantage Conflict over decisions

• Multiple Ownership through sale of stock• Advantage

• Disperse risk and liability• Raise financial capital easily

• Disadvantage • Lose total control• More vulnerable to market conditions

Corporations

Labor Policy

LABOR UNIONS

Labor and entrepreneurship have conflicted over control historically

Labor has fought for the ability to collectively bargain for better pay, better wages, and better conditions, better benefits

Today they have a lot if political influence

Stock Market

Stocks in publicly traded companies are bought and sold at a stock market(also known as a stock exchange). NYSE - New York Stock Exchange AMEX - American Stock Exchange NASDAQ - National Association of Securities

Dealers A share a piece of ownership in a company Companies sell shares in order to quickly

and cheaply gain financial capital, for loans cost the amount of interest

Stock Prices Stock prices aren't fixed. From the second a stock is sold to the public,

its price will rise and fall based on free market forces. It is these ever-shifting market forces that make short-term movements

of the stock market so difficult to predict. And that is precisely the reason why short-term stock market investing is so risky.

Prices rise and fall primarily because of changes in supply and demand. In a free market system, the price of any commodity will rise as demand

for it increases, as long as there's a fixed amount of the commodity in circulation. The same is true for stocks. If there are a fixed number of shares in circulation, then the price of the stock will rise as more people want to buy it, and fall as more people want to sell it.

Quarterly earnings reports also play a major role in the price of stocks; shortfalls in earning can drastically drop the price of a share

The value, or price of a share, can create or destroy wealth because you buy it at one value and it becomes another value; if you sell it and it is worth more it is called a capital gain; if it is less a capital loss.