Why is the expected rate of return is greater than r, people would borrow and if the expected rate of return

is less than r people would lend? The expected rate of return (often denoted as E[R]) is a key factor
in investment decisions. Here’s why the comparison with the interest rate r matters: When E[R] > r: If the expected rate of return on an investment is greater than the interest rate, it implies that the investment is likely
to yield more profit than the cost of borrowing. Therefore, individuals and businesses are incentivized to borrow money to invest, expecting that the returns will cover the borrowing costs and leave a surplus. When
E[R] < r: Conversely, if the expected rate of return is less than the interest rate, it suggests that investing would yield less profit than the cost of borrowing. In this case, it would be more beneficial to lend money (e.g.,
by depositing in a savings account or purchasing bonds) and earn interest, rather than investing in lower-yield opportunities. This relationship between the expected rate of return and the interest rate is fundamental to
understanding economic behavior related to savings and investment. It influences how resources are allocated in the economy, affecting overall economic growth and stability.
The disadvantages of GDP as an economic measure include: Non-Market Transactions(Giao dịch không thị trường): GDP does not account(không tính đến) for non-market transactions such as household labor
or black market activities; Income Inequality: It does not reflect income distribution within a country. A high GDP might mask the fact: che giấu thực tế that a large portion of wealth is held by a small percentage of
the population; Quality of Life: GDP does not measure the well-being of a society, such as health, education, and environmental quality; Sustainability: It does not consider whether a nation’s rate of growth is
sustainable in the long term, especially regarding environmental impact and resource depletion:sự cạn kiệt; Economic Bads: GDP counts all economic activity as positive, even when the activity results in negative
outcomes like pollution; Depreciation of Capital(Khấu hao vốn): It does not account for the depreciation of capital, potentially overstating the amount of economic activity.
Có hai cách cần huy động vay vốn, mượn tiện: đó là trực tiếp tham gia vào thị trường tài chính và gián tiếp qua một trung gian như hệ thống ngân hàng. Let’s explore both methods of capital mobilization:
Direct Finance: In direct finance, borrowers: người vay and lenders: người cho vay interact directly in financial markets. Advantages: Lower Costs: Eliminates intermediaries: Loại bỏ trung gian, potentially: có thể
reducing transaction costs. Market Determined Rates(Lãi suất do thị trường quyết định): Interest rates are determined by the market, which can lead to more efficient pricing: định giá hiệu quả hơn. Diverse
Investment Opportunities: Investors have a wide range of securities: chứng khoán to choose from. Disadvantages: Higher Risk: Investors bear the full risk of their investment without any cushioning: sự bảo vệ
from financial intermediaries. Liquidity Issues: It may be harder to sell securities quickly at a fair price. Information Asymmetry(Bất đồng thông tin): Requires investors to perform their own due diligence, which
can be challenging. Example: A company issuing bonds directly to investors through a public offering: đợt chào bán công khai. Indirect Finance: In indirect finance, financial intermediaries like banks mediate
between savers and borrowers. Advantages: Risk Management: Banks can spread risk over a larger number of loans. Economies of Scale: Banks can lower transaction costs due to their size and expertise. Liquidity:
Depositors can withdraw funds on demand, while borrowers have long-term access to capital. Disadvantages: Intermediation Cost: Banks charge fees: thu phí for their services, which can increase the cost of
borrowing. Interest Rate Spread(Chênh lệch lãi suất): The difference between deposit and loan rates can be significant. Regulatory Constraints(Ràng buộc quy định): Banks are subject to: tuân theo regulations
that can limit their operations. Example: A business taking out a loan: vay tiền from a bank, which in turn is funded by the deposits from individual savers: ngân hàng này lại được tài trợ bởi tiền gửi từ các cá nhân
tiết kiệm. EXERCISE CHAP 16: While cleaning your apartment, you look under the sofa cushion and find a $50 bill (and a half-eaten taco). You deposit the bill in your checking account. The
Fed’s reserve requirement is 20% of deposits. What is the maximum/ minimum amount that the money supply could increase? If banks hold no excess reserves, then money multiplier = 1/R = 1/0.2 = 5. The
maximum possible increase in deposits is 5 x $50 = $250. But money supply also includes currency, which falls by $50. Hence, max increase in money supply = $200. Mini value: $0. If your bank makes no loans
from your deposit, currency falls by $50, deposits increase by $50, money supply does not change.
Leverage(Tận dụng) The use of borrowed funds to supplement existing funds for investment purposes. Leverage ratio: ratio of assets to bank capital. In this example, the leverage ratio = $1000/$50 = 20.
Interpretation: for every $20 in assets, $ 1 is from the bank’s owners, $19 is financed with borrowed money. Suppose bank assets appreciate by 5%, from $1000 to $1050. This increases bank capital from $50 to
$100, doubling owners’ equity. - Instead, if bank assets decrease by 5%, Bank capital falls from $50 to $0. - If bank assets decrease more than 5%, Bank capital is negative, and bank is insolvent. The
reserve requirement is a percentage of the deposits that must be held in reserve, so if the total deposits decrease, the required reserves will also decrease proportionally. The bank must always ensure it has
enough reserves to meet the reserve requirement after any withdrawals.=>SOLUTION: Balancing the T-Account: To balance the T-account and maintain the required reserve ratio, the bank has a few options:
1.Call in Loans: The bank can call in a portion of its loans to replenish its reserves. 2.Borrow Funds: The bank can borrow from other banks or the central bank to meet its reserve requirements. 3.Sell Assets: The
bank can sell some of its assets, like securities, to increase its reserves. In practice, banks manage their assets and liabilities daily to ensure they meet reserve requirements and can accommodate withdrawals by
customers. They also have access to short-term borrowing from the central bank to manage liquidity needs. Excess reserving can lead to a lower money supply than what could be achieved
with only the required reserves. It reduces the bank’s ability to lend, which in turn affects the money creation process and the overall economy. Banks must manage their reserves carefully to support lending while also
meeting regulatory requirements.
Why retaining more than the required reserve reduces a bank's capacity to create money through loans, which can affect the money supply in the economy? => Banks are in the business of
accepting deposits and lending money. The amount they can lend is determined by the reserve requirement set by the central bank. This requirement is a percentage of the bank's deposits that must be kept as reserves
and not lent out. The purpose of this requirement is to ensure that banks have enough funds available to meet the demands of depositors who may want to withdraw their money. The money that banks lend out
essentially becomes new money in the economy. When a bank gives out a loan, it doesn't physically hand over cash; it simply credits the borrower's account with a deposit. This deposit can then be spent and re-
deposited at other banks, creating a chain reaction of lending and depositing that increases the overall money supply. This is known as the money multiplier effect. (For ex., Important rules of the banking system:
create more money supply for the economy Central bank chỉ cung ra 1 ít tiền (100$) và banking system phải tăng nhiều money supply (1000$) VD: national bank supply 100$ to economy by deposit 100$ in the 1st
bank with the reserve ratio 10% the max money that the 1st bank can receive is 90$. Mr. A đến 1st bank mượn 90$ để kinh doanh. Mr. A tiếp tục deposit vào 2nd bank, 2nd bank phải trả 10% reserve ratio 10% (9$) 
Mr. A chỉ gửi vào 2nd bank 81$. Mrs. C đến 2nd bank mượn 81$ sau đó gửi vào 3rd bank với reserve ratio 10%  Mrs. C chỉ gửi vào 3rd bank 72,9$ tính tổng mấy số tiền reserve requirement đó thì từ 100$ ban đầu có
thể tăng lên 1000$.)
3 tools that central bank use to control the money supply: 1. Open – market operations (OMOs) (quan trọng nhất) o Central bank buy government bond = central bank bơm (pump) thêm tiền cho nền kinh tế
bằng cách giảm interest rate để tăng GDP=>value of money giảm=>inflation tăng. o Central bank sold government bond = central bank withdraws (rút) tiền ra khỏi nền kinh tế và tăng interest rate để kiểm soát
inflation (giảm) vì value of money tăng=> nhưng GDP giảm.  This method is the most effective. o Central bank kiểm soát money supply/interest rate=>gov kiểm soát operation of firm=>gov kiểm soát toàn bộ
economy. 2. Reserves ratio requirement o Central bank có charge commercial bank khoản reserves ratio là 5%, thì commercial bank có lại 95% tiền cho economy=>có nhiều tiền trong nền kinh tế=>value of money
giảm=> inflation tăng. o Nếu central bank muốn kiểm soát inflation thì tăng khoản reserves ratio là 15%, thì commercial bank chỉ có lại 85% tiền cho economy=>có ít tiền trong nền kinh tế=>value of money tăng=>
inflation giảm. Cách này không hiệu quả lắm 3. The discount rate: Khi commercial bank mượn tiền của central bank với interest rate thì cái interest rate này là discount rate. - Control money supply:  để pump thêm
tiền cho economy thì commercial bank mượn tiền từ central bank với discount rate thấp commercial bank có nhiều tiền hơn.  để kiểm soát inflation thì central bank tăng discount rate lên thì commercial bank không
muốn mượn tiền nữa (stop pump money to the economy). Trong thực tế thì không dùng cách này. How are maturity and interest rates related? What is the relationship between interest rates and risk? Is
the relationship inverse or positive? The relationship between maturity and interest rates, and between interest rates and risk, are fundamental concepts in finance. Here’s an explanation of both: Maturity and
Interest Rates: The term structure of interest rates, also known as the yield curve, shows the relationship between the interest rates (or yields) of bonds with the same credit quality but different maturities; Generally,
longer-term bonds have higher yields to compensate investors for the increased risk of holding the bond over a longer period. This is because the longer the maturity, the greater the chance that changes in the market
could negatively affect the bond; An upward-sloping yield curve, where yields increase with maturity, is considered normal and suggests that the economy is in an expansionary mode; Conversely, a downward-sloping
(inverted) yield curve, where short-term yields are higher than long-term yields, can signal that the economy is heading into a recession. Interest Rates and Risk: Interest rate risk is the potential for investment losses
due to changes in interest rates. For fixed-income investments like bonds, there is an inverse relationship between interest rates and bond prices. When interest rates rise, the market price of existing bonds typically
falls, and vice versa. This is because new bonds are issued at the new, higher rates, making the older, lower-yielding bonds less attractive; Bonds with longer maturities face greater interest rate risk than short-term ones
because the longer time frame increases the likelihood of changes in the interest rate environment. Risk Premium:The risk premium is the extra yield over a risk-free rate (like U.S. Treasury bonds) that investors
demand to compensate them for the risk of holding a riskier asset; Higher risk generally leads to higher interest rates on loans or bonds to compensate lenders or investors for the increased risk they are taking on. In
summary, the relationship between maturity and interest rates is generally positive, meaning longer maturities usually come with higher interest rates. The relationship between interest rates and risk is inverse for bond
prices; as interest rates increase, bond prices decrease, reflecting higher risk. The risk premium is the additional return required by investors for taking on higher risk, which is also positively related to interest rates.
What’s money? In macro, “money” refers to anything that is widely accepted as a medium of exchange in an economy. It’s a fundamental component of the economy, influencing various macroeconomic goals like
economic growth, low unemployment, and stable prices. It serves three primary functions: 1. Medium of Exchange: Money facilitates transactions by eliminating the need for a barter system. 2. Unit of Account: It
provides a standard measure of value, which makes it easier to compare the worth of different goods and services. 3. Store of Value: Money can be saved and retrieved in the future, retaining its value over time.
There are different measures of money supply, commonly referred to as M0, M1, M2, etc.: M0: This is the total of all physical currency (coins and notes) plus accounts at the central bank that can
be exchanged for physical currency. M1: Includes all of M0 plus the amount in demand accounts, which are checkable or negotiable account balances. M2: Encompasses all of M1 plus savings accounts, time deposits
under $100,000, and non-institutional money market accounts.
Money serves three functions: medium of exchange, unit of account, and store of value. There are two types of money: commodity money has intrinsic value; fiat money does not. In a fractional reserve banking
system, banks create money when they make loans. Bank reserves have a multiplier effect on the money supply. Because banks are highly leveraged, a small change in the value of a bank’s assets causes a large
change in bank capital. To protect depositors from bank insolvency, regulators impose minimum capital requirements. The Federal Reserve is the central bank of the U.S. The Fed is responsible for regulating the
monetary system. The Fed controls the money supply mainly through open-market operations. Purchasing government bonds increases the money supply, selling government bonds decreases it. In recent years, the
Fed has set monetary policy by choosing a target for the federal funds rate. The money supply (or money stock): Quantity of money available in the economy. Currency: Paper bills and coins in the hands of the
(non-bank) public. Demand deposits: Balances in bank accounts that depositors can access on demand by writing a check. M1 = $3.2 trillion (May 2016): Currency, demand deposits, traveler’s checks, and other
checkable deposits. M2 =$12.7 trillion (May 2016): Everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories. The distinction between M1 and
M2 will often not matter when we talk about “the money supply” in this course. CENTRAL BANKS: Institution that oversees the banking system and regulates the money supply. The central bank has the
following two tasks: 1. Operate the economy based on monetary policy by intervening in the monetary framework. Increase or decrease the money frame, withdraw money from the market or inject money to run the
economy. 2. Provide regulations to ensure liquidity, safety, and stability of the financial system. What is the difference between bonds and stocks? Stocks represent ownership in a company and offer potential
growth with higher risk, while bonds are debt investments providing fixed income with lower risk. Stocks can yield dividends and appreciate in value but come with voting rights and are riskier in bankruptcy. Bonds
offer stable interest payments without ownership or voting rights and have priority over stocks in bankruptcy repayment. EX: Investing $1,000 in Company XYZ’s stock means owning a part of the company with
potential gains or losses based on its performance. Buying a bond from Company ABC means lending them money with a fixed return, offering more security than stocks, especially in bankruptcy situations. Why
don’t banks hold 100 percent reserves? How is the amount of reserves banks hold related to the amount of money the banking system creates? Answer: Banks do not hold 100% reserves because it is more
profitable to use the reserves to make loans, which earn interest, instead of leaving the money as reserves, which earn no interest. The amount of reserves banks hold is related to the amount of money the banking
system creates through the money multiplier. The smaller the fraction of reserves banks hold, the larger the money multiplier, because each dollar of reserves is used to create more money. Suppose that the reserve
requirement for checking deposits is 10 percent and that bank does not hold any excess reserve a. If the central bank sells $1 million of government bonds, what is the effect on the economy’s reserves and
money supply? b. Now suppose the Central Bank lowers the reserve requirement to 5%, but banks choose to hold another 8% of deposits as reserves. Why might banks do so? What is the overall change in
the money multiplier and the money supply as a result of these actions? a. With a required reserve ratio of 10 percent and no excess reserves, the money multiplier is 1/.10 = 10. If the Fed sells $1 million of bonds,
reserves will decline by $1 million and the money supply will contract by 10 x $1 million = $10 million. b. Banks might wish to hold excess reserves if they need to hold the reserves for their day-to-day operations,
such as paying other banks for customers' transactions, making change, cashing paychecks, withdrawing from depositors and so on. If banks increase excess reserves such that there is no overall change in the total
reserve ratio, then the money multiplier does not change and there is no effect on the money stock.
Use the balance sheet for the following questions. Bank A holds $250 million in deposits and maintains a reserve ratio of 10 percent. a. Show a T-account for Bank A. b. Now suppose that Bank A's largest
depositor withdraws $10 million in cash from her account. If Bank A decides to restore its reserve ratio by reducing the amount of loans outstanding, show its new T-account. c. Explain what effect Bank A's
action will have on other banks. As the bank A reduce the amount of loans outstanding, the money supply will decrease by 9 million x 1/10% = 90 million dollars. By then, other banks will lose a large amount of
money due to the money supply reduce. d. Why might it be difficult for Bank A to take the action described in part (b)? Discuss another way for Bank A to return to its original reserve ratio. It might be
difficult for Bank A to reduce loans because loans are contractual agreements that cannot typically be called in early. Instead, Bank A could borrow from the central bank or other banks, or it could sell assets to quickly
raise reserves. This would allow Bank A to meet its reserve requirements without having to reduce its loans.
EX: Here's the breakdown:bảng phân tích: Initial deposit: $100 -> Reserve requirement (10% of $100): $10 -> Actual reserves held by the bank: $15 -> The amount available to lend out: $85 -> Now,
when you withdraw $10 from your deposit, the bank's total deposits decrease to $90, and the amount it must keep in reserves also decreases. -> The new reserve requirement is 10% of $90, which is $9.
-> However, because the bank initially kept $15 in reserves and you withdraw $10, the bank’s reserves would decrease by the same amount you withdraw, leaving the bank with $5 in reserves ($15 - $10
= $5). -> Here’s the updated breakdown after the withdrawal: New total deposits: $90 -> New reserve requirement (10% of $90): $9 -> Reserves after withdrawal: $5 -> Since the bank now has $5 in
reserves but needs $9 to meet the new reserve requirement, it must acquire an additional $4 to meet this requirement.
(Bonds and stocks are both types of investments, but they represent different things and come with different levels of risk and potential returns. Here’s a detailed comparison: Ownership vs. Debt: Stocks: When you
buy stocks, also known as equities, you’re purchasing a share of ownership in a company. As a shareholder, you may benefit from the company’s growth and profitability through capital appreciation and dividends.
Bonds: Bonds are a form of debt investment. When you purchase a bond, you’re lending money to the issuer, which could be a corporation, a municipality, or a government. In return, the issuer agrees to pay you back
the principal amount on a specified maturity date and makes periodic interest payments at a fixed rate. Risk and Return: Stocks: Generally carry higher risk because their value can fluctuate significantly based on the
company’s performance and market conditions. However, they also offer the potential for higher returns, especially over the long term. Bonds: Tend to be less risky than stocks because they provide fixed interest
payments. The risk associated with bonds varies depending on the creditworthiness of the issuer, but overall, bonds are considered a more stable investment with lower returns compared to stocks. Income vs. Growth:
Stocks: Investors often look to stocks for growth in the value of their investment. While some stocks pay dividends, providing a source of income, the primary attraction is the potential for the stock’s price to increase
over time. Bonds: Are typically favored by investors seeking steady income. The interest payments from bonds provide a predictable stream of income, which can be especially appealing during periods of market
volatility or for retirees. Voting Rights: Stocks: Common stockholders usually have voting rights in company decisions, such as electing the board of directors. Preferred stockholders generally do not have voting
rights but may have priority over common stockholders for dividend payments and asset distribution in case of liquidation. Bonds: Bondholders do not have voting rights because they are not owners of the company.
Their relationship with the issuer is that of a creditor and borrower. Priority in Case of Bankruptcy: Stocks: Shareholders are last in line to be paid if a company goes bankrupt and its assets are liquidated. This means
they face a higher risk of losing their investment in such scenarios. Bonds: Bondholders are creditors, so they have a higher claim on assets than shareholders. In the event of bankruptcy, bondholders are more likely to
be repaid, at least partially, before shareholders. In summary, stocks offer ownership and the potential for higher returns with greater risk, while bonds offer a creditor relationship with fixed income and generally
lower risk. Investors often balance their portfolios with a mix of both to manage risk and achieve their financial goals.)
Why are some countries rich and some countries poor? Do rich countries yield higher interest rates? At the same time, rich countries produce more products, they make more products, they bring them to
market and earn more profits. So more money means higher income. If they keep that pace for a very long time, they will quickly become a very rich country. Is that true? It involves a combination of
historical, economic, political, and social factors…In summary, rich countries are often those that have managed to capitalize on a combination of these factors to create a virtuous cycle of investment, innovation, and
growth. Poor countries may have been hindered by historical disadvantages, lack of resources, poor governance, or other challenges that have stunted their economic development. It’s important to note that wealth and
productivity are not the only measures of a country’s success. Other factors, such as income equality, quality of life, and environmental sustainability, are also important indicators of a nation’s well-being. The path to
becoming a “rich” country is complex and requires a holistic approach that considers all these aspects. If you’re interested in a specific aspect or factor, I can provide more detailed information.
The world is now divided into two types of population: European, American, Japanese and Korean countries are experiencing population aging, meaning the labor force is decreasing, while some countries
like China and Vietnam have Abundant human resources, on the African side, the population growth rate is very high. So the problem here is, if the labor force increases or decreases, how will it affect a
country's economy?Increasing Labor Force:Economic Growth: A growing labor force can boost economic output if jobs are available. Innovation and Entrepreneurship: More workers can drive innovation and
create new businesses.Decreasing Labor Force:Labor Shortages: Shrinking labor force may lead to shortages in certain sectors. Wage Pressure: Fewer workers can cause wages to rise, impacting business costs and
potentially leading to inflation. Economic Contraction: Over time, declining labor force can reduce economic output. Aging Population:Higher Dependency Ratio: More retirees rely on fewer workers, straining public
finances. Increased Demand for Healthcare and Pensions. Youthful Populations: Growth Potential: Young population can drive rapid economic growth with education and jobs. Risk of Unemployment: Without job
creation, youth unemployment can lead to instability. Productivity: Rich Countries: Higher productivity compensates for smaller labor force. Developing Countries: Larger labor force can drive growth if education is
prioritized.The economic impact of labor force changes hinges on job creation, workforce education, and policies. Developing countries can grow by leveraging their large labor forces with education and supportive
business policies. Both growing and shrinking labor forces offer distinct prospects and hurdles for development.