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