Economics 51605 www'msu'edumilewsk6

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Economics 5/16/05www.msu.edu/milewsk6

• OBJECTIVE Analyze the relationship between risk
  return.
• I. Journal 44 pt.A
• -Read Diesel from natural gas cuts smog 2E
• -Examine Bank Rates p.4E
• 1.) What are the benefits of turning natural
  gas into a liquid?
• 2.) How profitable is GTL technology?
• 3.) What bank has the best 6 month CD yield?
• 4.) Which bank has the best auto loan?
• II. Journal 44 pt.B
• -notes on investment risk and return
• III. Homework due Friday 5/20/05
• 1.) Read Chapter 12 section2 p.(318-326)
• -Answer questions (4-7) p.326
• 2.) Read Chapter 12 section3 p.(328-333)
• -Answer questions (3-6) p.333

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What the next test will cover

• Chapter12 section2 p.318-326
• Chapter12 section3 p.328-333
• Chapter14 section1 p.374-380
• Chapter15 section2 p.415-424

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Risk

• Risk a situation in which the outcome is not
  certain, but probabilities for each outcome can
  be estimated.
• Low risk low return on investment, high degree
  of safety
• High risk possibility of high return, little
  degree of safety

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p. 319
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Economics 5/17/05www.msu.edu/milewsk6

• OBJECTIVE Examine investment strategies and
  financial assets.
• I. Journal 45 pt.A
• -Read Business Week Newsclip p.327
• -Answer questions (1-2) p.327
• II. Journal 45 pt.B
• -notes on types of investments
• III. Homework due Friday 5/20/05
• 1.) Read Chapter 12 section2 p.(318-326)
• -Answer questions (4-7) p.326
• 2.) Read Chapter 12 section3 p.(328-333)
• -Answer questions (3-6) p.333

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Bonds

• Bonds are long term obligations that pay a
  defined interest rate for a specific number of
  years
• The 3 components of a Bond
• coupon the interest rate
• maturity the length of time
• par value the amount borrowed (MUST be repaid
  when the bond matures)

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Example of a Bond

• You have 1000 to invest. The Milewski
  Corporation is offering a ten year bond at a 10
  interest rate paid annually. If you decide to
  invest in the Milewski Corp. today, what is the
  coupon, maturity, and par value on the bond you
  purchase?
• Coupon
• -10 or .10
• Maturity
• -5/17/2015
• Par value
• -1000.00
• Annual Interest Paid
• -100.00

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Was it a good investment?

• To determine if you made a good investment you
  should
• 1.) Determine the bond yield
• annual interest / purchase price current yield
• 100.00 / 1000.00 .10
• 2.) Check the Bond Rating
• 3.) Compare it to other similar bonds

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Organized Stock Exchanges

• NYSE oldest, largest, and most prestigious in
  the U.S. Located on Wall Street in NYC
• AMEX smaller stocks, those who cant quite make
  it to the NYSE are traded here. (the JV team)
  Also located in NYC
• Regional Stock Exchanges originally listed
  small companies and new companies. Now, they
  trade local stocks and better meets the needs of
  smaller companies. Located in Chicago, Pacific,
  Philadelphia, Boston, and Memphis

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Over-the-Counter Market

• OTC most stocks in the U.S. are not traded on
  organized exchanges. They are traded
  electronically using NASDAQ
• NASDAQ National Association of Securities
  Dealers Automated Quotation
• Few OTC stocks pay dividends. Most are small and
  new companies

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Bull v. Bear

• Bull market when stocks are strong and stock
  prices are rising
• Bear Market when stock prices are falling

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Measuring the Market

• Question How do you know if stock market is a
  bull or a bear?
• Dow Jones Industrial Average (the Dow) the
  average of 30 stocks traded on the NYSE
• SP 500 uses the movement of 500 stocks traded
  to determine an index number which shows the
  direction of the market

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Futures Trading

• Spot you pay the price something is worth today
• Futures contract you buy at todays price and
  you sell at a specific date in the future at
  todays price, regardless of the market price at
  the time of sale.
• Example You buy 1 oz of gold at todays price
  You also agree to sell that gold at todays price
  to your friend six months from today. If gold
  six months from now is lower, you make money. If
  the price of gold is higher, you lose money.

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Futures Market

• Where futures contracts are bought and sold.
• Most are associated with livestock and farm
  products.
• Futures markets are located in NYC, Chicago,
  Kansas City.

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Options Markets

• Call option the right to buy the share of stock
  at a specific date and price in the future.
• Put option the right to sell a share of stock
  at a specific date and price in the future.

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Economics 5/18/05www.msu.edu/milewsk6

• OBJECTIVE Examine the business cycle.
• I. Journal 46 pt.A
• -Read The Global Economy p.323
• -Answer questions (1-2) p.323
• II. Journal 46 pt.B
• -notes on the business cycle
• III. Journal46 pt.C
• -Econ U.S.A. Episode3
• -question on Economic Growth. (film)
• IV. Homework due Friday 5/20/05
• 1.) Read Chapter 12 section2 p.(318-326)
• -Answer questions (4-7) p.326
• 2.) Read Chapter 12 section3 p.(328-333)
• -Answer questions (3-6) p.333

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The Business Cycle

• Business cycle - the rise and fall of GDP over
  time.
• GDP Gross Domestic Product
• GDP CIG(X-M)
• C consumer
• I business
• G government
• X exports
• M - imports

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Phases of the Business Cycle

• Ch14 sec1 p.376

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The Recession Phase of the Business Cycle

• There are two phases of the business cycle
• Recession when real GDP declines for two
  quarters in a row (6 months)
• A recession begins following a peak
• Peak the point where GDP stops going up
• A recession ends at a trough
• Trough the turnaround point where GDP stops
  going down.

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The Expansion Phase of the Business Cycle

• Expansion period of recovery from a recession.
  
• Expansion begins at the trough of the business
  cycle.
• Expansion ends when the business cycle reaches a
  new peak.
• Since WWII, the average recession lasted 11
  months. The average expansion lasted 43 months.
• The expansion that began in March 1991 almost
  ended in March 2001 is the longest in history.
  (1st and 3rd quarters of 2001 GDP dropped)

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GNP v. GDP

• GDP- the dollar value of all final goods and
  services produced within a countrys national
  borders in a year.
• GNP- the dollar value of all final goods,
  services, and structures produced with labor and
  property supplied by a countries residents.

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Econ U.S.A. episode 3

• 1.) Why was Congress unable to determine the true
  severity of the Great Depression?
• 2.) What was the result of this problem?
• 3.) How did the U.S. Government prepare
  economically for WWII?
• 4.) How does government spending affect the
  circular flow?
• 5.) How did the environmentally concerns of the
  1970s effect the economy?
• 6.) How does the government know if the policies
  they enact have helped the economy?

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Economics 5/19/05www.msu.edu/milewsk6

• OBJECTIVE Examine the monetary policies of the
  Federal Reserve.
• I. Journal 47 pt. A
• -Read Profiles in Economics p.414
• -Answer questions (1-2) p.414
• II. Journal 47 pt. B
• -notes on the monetary policies of the Fed.
  (Ch15 sec2)
• III. Homework due tomorrow!
• 1.) Read Chapter 12 section2 p.(318-326)
• -Answer questions (4-7) p.326
• 2.) Read Chapter 12 section3 p.(328-333)
• -Answer questions (3-6) p.333

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Monetary Policy

• Monetary policy the expansion or contraction of
  the money supply in order to influence the cost
  and the availability of credit.
• In English, when the Fed raises interest rates
  the amount of money in the economy gets smaller.
• When the Fed lowers interest rates, the amount of
  money in the economy gets bigger.
• Higher interest rates encourage people to save
  money.
• Lower interest rates encourage people to spend
  and borrow money.

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Structure of the Fed
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How does the Fed influence interest rates?

• Fractional reserve system requires banks and
  other depository institutions to keep a certain
  percentage of their deposits on hand as legal
  reserves.
• Legal reserves consists of coins and currency
  held in the banks vault and the currency it has
  on deposit with the Federal Reserve.
• The Fed requires that banks keep a reserve of 12
  against demand deposit accounts.

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How Banks Operate

• You deposit 100 in either your savings account.
• The bank MUST keep 12 of that 100 on reserve.
  (They must keep 12)
• The bank loans out the other 88.
• If the person who borrows the money puts it in a
  checking account, the 88 is treated as a new
  deposit and 12 or 10.56 of it must be set aside
  as a reserve. The other 77.44 can now be
  loaned out.
• This is the multiplication of the money supply.

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Example of Fractional Reserve at 20

• Ch15 sec2 p.419

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Tools of Monetary Policy

• If the Fed wants the money supply to grow they
  can do the following
• 1.) Lower the interest rate
• 2.) Lower the reserve requirement
• 3.) Buy securities (buy bonds)
• This is known as easy money policy.

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Tight money policy

• If the Fed wants the money supply to contract, or
  slow they can do the following
• 1.) Increase the interest rate
• 2.) Increase the reserve requirement
• 3.) Sell securities (sell bonds)
• This is known as tight money policy.

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Tight money policy
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The Role of the Fed

• Main goal of the Fed Open Market
  Committeecontrol inflation
• How can the Fed control inflation?
• 1.) Change the interest rate
• 2.) Change the reserve requirement
• 3.) Open Market Operations - Buy or Sell
  securities (bonds)
• buy increases the money supply
• sell decreases the money supply

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Economics 5/20/05www.msu.edu/milewsk6

• OBJECTIVE Examine the monetary policies of the
  Federal Reserve.
• I. Journal 48 pt. A
• -Read The Global Economy p.420
• -Answer questions (1-3) p.420
• II. Journal 48 pt. B
• -questions on the Federal Reserve Video
• III. Homework due next Thursday (5/26/05)
• 1.) Read Chapter14 section1 p.374-380
• -answer questions (3-6) p.380
• 2.) Read Chapter15 section2 p.415-424
• -Answer questions (3-6) p.424
• 3.) Chapter12 Review

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Fed Video

• 1.) What is the role of the Fed?
• 2.) What causes inflation?
• 3.) What happened to the cost of a bagel when the
  money supply was increased?
• 4.) How does the Fed determine the money supply?
• 5.) Why do people spend money when inflation
  hits?
• 6.) What were fears of the Fed if inflation
  continued to rise?
• 7.) What portion of the money supply is in the
  form of cash and coins?

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• 8.) What was the prime rate in 1980?
• 9.) What did this rate do to the housing and auto
  industry?
• 10.) What happened to the unemployment rate when
  the money supply shrank?
• 11.) What happened to the inflation rate?
• 12.) What happened to the unemployment rate in
  1984?
• 13.) What role does the Federal Reserve District
  President play?
• 14.) How has the Globalization of the economy
  effected the role of the Fed?