financial intermediaries - institutions that use funds from ppl to buy stocks, make loans
- liabilities - amount owed to ppl/firms that gave the intermediaries their funds
- assets - stocks/bonds owned, loans made
- banks - uses money as liabilities
- keep some received funds as reserves
- uses rest to make loans, purchase bonds
- reserve ratio - fraction of deposits that banks must keep as reserves (or else bank will fail)
- banks runs - situation where bad loans, declining consumer confidence exceeds the reserve >> bank starts failing
- prevented by gov't insuring each account up to $100,000
bond market - exchange between ppl diversifying their money-bond allocations
- want to increase proportion of money >> sell bonds
- want to increase proportion of bonds >> buy bonds
- at equilibrium, Bs = Bd as w/ Ms = Md
open-market operations - controls money supply by buying/selling bonds
- operated by central banks
- wants to increase money >> creates money to buy up bonds >> expansionary open-market operation
- increases central bank's assets through more bonds, increases liabilitites by increasing money circulation
- wants to decrease money >> sells bonds >> takes money received from sale of bonds, removes them from circulation >> contractionary open-market operation
- reduced bonds >> reduced assets, reduced money in circulation >> reduced liabilities
Treasury bills (T-bills) - promises payment of a certain amount within a year
- closer the price of bill to final payment >> lower the interest rate
- i = (return - price) / price
- price = return / (1+i)
- increase in interest >> price of bonds decrease
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