Chapter 27
Chapter 27 contained information on money, banking, and the financial sector. The financial sector is the market where financial assets are created and exchanged (Colander, 2006). It channels flow out of circular flow and back into the circular flow (Colander, 2006). Interest rates, inflation, employment, and oil prices affect the financial sector. First are the interest rates. There are several theories on interest rates. The most popular is the expectations theory defined as the yield or interest rate is derived from expectations. Ultimately people have expectations that the interest rate will prevail. If the rate will prevail then the demand will keep the interest rates up. There is also the force of the Federal system. This usually occurs when a bad economic situation occurs; the Fed will pump money into the economy to stimulate the economy. A perfect example is what is happening now. Many people are receiving tax rebate checks. The government wants to stimulate the economy by giving people money to in turn, spend it. When the Federal Reserve expands the number of dollars, certain sectors get the new Fed money first. Those sectors are (1) the government, and those who do the most business with the government and (2) the banking system, and those who do the most business with banks. This means that people would expect to first see the impact of an expanded money supply in the Big Business and Big Banking sectors. Eventually the new Fed money has to work its way through the entire economy, raising prices on everything people buy. When the FED drops the rate, the US the dollar drops in value. This lowers the interest rate on investment returns; CD's long and short term bonds etc. The market responds to this by buying higher priced overs ...