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CHAP 2 Financial Assets, Money,Financial Transactions, and Financial…

- - - - Financial asset accepted in payment for purchases of goods and services
        
        Examples are currency and checking
    - - Ownership shares in a business firm
        
        Claims against the firm’s profits
        
        Claims against proceeds from the sale of its assets
        
        Examples are common stock and preferred stock
    - - Priority claim over the holders of equities to the assets and income of an economic unit
        
        Can be negotiable or nonnegotiable
        
        Examples include bonds, notes, accounts payable, and savings deposits
    - - Market value tied to or influenced by the value or return on a financial asset
        
        Examples include futures contracts, options, and swaps
- - - - Economists John Gurley and Edward Shaw pointed out that each business firm, household, or unit of government active in the financial system must conform to:
        R - E = FA - D
        Where R = Current income receipts E = Expenditures out of current income FA = Change in holdings of financial assets D = Change in debt and equity outstanding
        So, for any given time period, each economic unit must fall into one of three groups:
        Deficit-budget unit (DBU):
        E > R, so D > FA (net borrower of funds)
        Surplus-budget unit (SBU):
        R > E, so FA > D (net lender of funds)
        Balanced-budget unit (BBU):
        R = E, so D = FA (neither net lender nor borrower)
      - The global financial system permits businesses, households, and governments to adjust their financial position from that of net borrower (DBU) to net lender (SBU) and back again, smoothly and efficiently.
- - - - M1 (Narrow Money)
        
        Physical Currency (notes/bills and coins) plus demand deposits, which are checking accounts.
        
        This is used as a measurement for economists trying to quantify the amount of money in circulation.
        
        The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.
      - M2 (Broad Money)
        
        M1 + small time deposits (less than $100,000), savings deposits, and non-institutional money-market funds.
        
        Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions.
        
        M2 is a key economic indicator used to forecast inflation.
      - M3
        
        M2 + all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.
        
        This measure of money is used by economists to estimate the entire supply of money within an economy.
  - - - Changes in purchasing power can be dramatic
        Due to inflation
        
        Need to think in terms of real values
        Purchasing power adjusted
        Nominal values can be misleading