1. Financial Institutions and Markets FIN 304 Dr. Andrew L. H. Parkes Day 6 “How do financial markets work?” 卜安吉

2. Dec. 18, 2008Financial Institutions & Markets, Misc2 Interest rates to Zero % http://www.nytimes.com/2008/12/17/business/economy/17fed.html?_r=1&hp So now the Fed must use OTHER ways to “ease” credit conditions!

3. Dec. 18, 2008Financial Institutions & Markets, Misc3 The Government Budget Constraint The Constraint Abbreviations  G is Government Spending  T is Tax Revenue Income   Bonds is NEWLY Issued Bonds   M s is Printed Money The U.S. Budget http://www.gpoaccess.gov/usbudget/index.html

4. Dec. 18, 2008Financial Institutions & Markets, Misc4 The Government Budget Constraint The Constraint G - T =  Bonds +  M s The U.S. Budget http://www.gpoaccess.gov/usbudget/index.html You may not use this formula on the test – use the words!

5. Dec. 18, 2008Financial Institutions & Markets, Misc5 Government Spending Government expenditures are required of all governments. Government expenditures are required of all governments. Everything provided by the “public” sector of the economy. Everything provided by the “public” sector of the economy. Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc. Salaries of government employees, bridges, guns, roads, water pipes, sewage pipes and maintenance, defense, etc.

6. Dec. 18, 2008Financial Institutions & Markets, Misc6 Tax Revenue Income Tax revenue includes any fees, assessments or taxes collected by the government. Income taxes, utility taxes or revenue collections, tolls for highways, fees for park entrance, sales taxes, property taxes, etc. http://www.irs.gov/

7. Dec. 18, 2008Financial Institutions & Markets, Misc7 U.S. Treasury Bills, Notes, and Bonds Debt or borrowing of the government. The U.S. has the lowest cost of borrowing, that is the least risk or lowest interest rate due to the lack of default risk. NEW borrowing – not debt issued to cover bonds maturing which need refinancing.

8. Dec. 18, 2008Financial Institutions & Markets, Misc8 Change in the Money Supply Commonly called “Printing Money” Commonly called “Printing Money” When the Federal Reserve Prints currency to specifically buy bonds. When the Federal Reserve Prints currency to specifically buy bonds. Federal Reserve Notes A Liability of the Fed

9. Dec. 18, 2008Financial Institutions & Markets, Misc9 Spending versus taxes Taxes – paid today Taxes – paid today Bonds – taxes tomorrow (when the bonds mature) Bonds – taxes tomorrow (when the bonds mature) Printing money leads to inflation Printing money leads to inflation Inflation tax - $ worth less Inflation tax - $ worth less Federal Reserve Notes A Liability of the Fed