Semester Final Review Notes
Scarcity
•Unlimited wants and
limited resources
Scarcity Impact
• Scarcity causes the need
for society to make choices
which leads to an
opportunity cost
Factors of Production (Inputs,
resources, factors)
• Capital- (physical) human-made tools that
make other goods (human) the training to use
those tools
• Entrepreneur- The individual who puts the
other factors together to produce a good or
service
• Land- Natural resources that are used in the
process of making a good or service
• Labor- Workers
Examples of
Factors/Inputs/Resources
Property Rights and Efficiency
• Property rights protects individuals’
ownership of resources and
encourages individuals to take risks.
• Efficient use of factors of production
increases our benefits
• Thinking at the Margin- Marginal Analysis
–Analyzing the cost and benefit of
consuming one more additional unit of
something
–An Incremental decision- not an either
or decision
–Production Possibilities Frontier shows
all your choices and the opportunity
costs using marginal analysis
Consumer
• An individual that purchases goods
and services for their own personal
satisfaction.
Producer
• An individual that makes a good and
service to sell to make a profit.
Investor
• An individual that uses their assets to
acquire stocks, bonds or real estate
for the express purpose to increase
their wealth.
Saver
• An individual that puts their money
in a financial institution (bank) to
store for future use.
PPF
120
Guns
100
A
Unattainable
80
60
40
20
B
E
D
Underproduction
inefficient
0
Butter
C
PPC
a) Shows your opportunity cost when you
make a decision
b) Trade-offs or the things you give up when
you want more of one good over another
c) Unattainability are points outside the PPF
d) Efficiency is any point on the PPC and
inefficiency is any point inside the PPC
e) Growth of the PPF shows increased
standard of living through increases in tech
and factors
Opportunity Cost
• The cost of making a choice.
It is the best alternative you
gave up to have the choice
you made.
Opportunity Cost and Trade-offs
• Trade-off all the other options you
had when making a choice and the
opportunity cost is the best
alternative of your trade-offs that
you sacrificed when making a
decision
Market Economy
• Invisible hand- supply and demand sets prices not
some govt. or group.
• Profit Motive
• Consumer Sovereignty
• Competition- Choice
• Growth
• Laissez-faire- government hands off the economy
• Freedom to trade
• Efficiency to compete
• Self-interest
Types of Economies
• Command
– the government decides the three key economic questions
of what goods and services should be produced, how these
goods and services should be produced, and who consumes
these goods and services
• Market
– decisions of what, how and who produces goods and
services are determined by the market
• Traditional
– History and cultural norms (tradition) decide the answers to
the 3 economic questions
• Mixed
– is the market economy with a limited role of government
included
Competition
• Firms that battle against one another to make
a profit which usually causes them (firms) to
keep costs down and efficiency up.
• This leads to lower prices and better quality
of goods and services.
Consumer Sovereignty
• The consumer dictates (decides)
what goods and service should be
produced and what they are
willing to pay for it.
Government Regulation
• Government regulates corporations to stop
unfair business practice to protect consumers
and competition.
• Creates more cost for business and
consumers.
Profit Motive
• The driving force behind a firm
producing a good or service and to
do it as efficiently as possible.
Public Good
• No one owns it. Anyone can use
it. Non-excludable and non-rival.
• Public parks and public school
Private Good
• Owned by someone.
• Excludable and rival
• A Steak or a car.
Mixed-Market Economy
• Invisible hand- supply and demand sets prices not
some govt. or group.
• Profit Motive
• Consumer Sovereignty
• Competition- Choice
• Growth
• Government regulation
• Protection of resourses for future use
• Subsidies
• Safety nets
Laws of demand/supply
• Demand:
–the consumer buys more of a good when its
price decreases and less when its price
increases and vice versa
• Supply:
–the tendency of suppliers to offer more of a
good at a higher price. The higher the price,
the larger quantity produced and vice versa.
Ceteris Paribus
• All other variables are held constant
so we can see what affect the
independent variable will have on
the dependent variable.
• What affect a change in price will
have on a change in quantity
• It causes a movement along the
curves.
Equilibrium
• The point at which supply and demand meet
establishing the price and quantity produced
• A change in the quantity
demanded is caused by a
change in price affecting a
movement along the curve
– Demand by an individual
• A change in demand is a
shift in the entire demand
curve (Caused by five
factors)
Quantity
– Demand by population as a
whole
Quantity
• A change in the quantity supplied refers to the
movement from one point to another on the curve
- Change in price
• A change in supply means the entire supply curve
shifts ( Based on the 6 factors)
4
4
P3
r
i 2
c
1
e
P3
r
i 2
c
1
e
1
2
3 4
Quantity
1
2
3 4
Quantity
Supply and Demand Graph
Which way does the demand line move if demand increases?
Quantity
Is there a new equilibrium point?
YES
Supply and Demand Graph
Which way does the supply line move if supply increases?
Quantity
Is there a new equilibrium point?
YES
Government Price Controls
• Price Ceilings
–Gov’t imposing maximum prices on goods
that are deemed “essential”
–Rent control in NYC
–Can lead to black markets to provide supply
where there is a high demand
Price Ceilings
Government intervention to keep prices low so there is a ceiling
set on prices that they can not go above. There is very little
incentive for firms to supply products at the lower price. This
leads to a shortage.
P1
P2
Excess Demand
Quantity
The price is below the equilibrium point therefore there is a
shortage due to excess demand
Price Floors
–Gov’t imposing minimum prices to
reward suppliers for their efforts or to
keep them in business
–Sometimes referred to as price
supports
–Minimum wage and supports to
agriculture
Price Floors
Government intervention to keep prices high so there is a floor in
which prices can not go below. There is very little incentive for
consumers to demand products at the higher price.
Excess Supply
Quantity
The price is above the equilibrium point therefore there is a
surplus due to excess supply
Supply and demand schedule
Price of Widgets
Number of Widgets People
Want to Buy
Number of Widgets
$1.00
100
10
$2.00
90
40
$3.00
70
70
$4.00
40
140
Equilibrium is where supply and demand equal
Market definition
• Any place where voluntary exchange
occurs between a buyer and a seller
and a good or service is bought and
sold.
Circular Flow
Butter
Firms
Factor Market
Mixed
Economy
Wages
F
a
c
t
o
r
s
$
Butter
Household
Government
Taxes
G
$
&
Money
S
Product Market
Taxes
• Households sell factors of
production (CELL)
• Businesses buy factors to make
goods/services
• Households demand/buy a vast
array of goods and services
• Businesses supply/sellers (of)
these products
Voluntary Exchange
• Individuals are free to buy and sell
what they wish without any coercion.
• Firms and households rely on
each other for the flow to work
properly.
• Government steps in when the
flow is either too slow or too fast.
Rule of Law and Contracts
• Protects property rights and ensures
agreements which provides trust and
security for investors that helps
promote economic development
Four Market Structures
• Perfect Competition
– A market structure in which a large number of firms all
produce the same product
– Low barriers, homogeneous product, perfect knowledge
and price taker
• ex. The market for gasoline comes close to perfect competition
because a large number of gas stations sell gasoline and one
gallon of gas is very much like another
• Monopoly
– A market dominated by a single seller
• ex. One company, Debeers of South Africa, has almost total
control over the world’s diamonds.
Four Market Structures cont.
• Monopolistic Competition
– A market structure in which many companies sell
products that are similar but not identical
– Differentiated product, low barriers and a price searcher
• ex. The market for denim jeans is monopolistically competitive
because jeans can vary by size, color, style, and designer.
• Oligopoly
– A market structure where a few large firms dominate a
market
• ex. Airlines, breakfast foods, and household appliances
Different Types of Monopolies
• Natural monopoly occurs where only one firm
would survive like a gas station in a small town
• Vertical monopoly is where two firms merge that
are from different stages of production of a good.
– Andrew Carnegie when he merged a railroad and iron
ore mine.
• Horizontal monopoly is owning all companies in the
same industry
– John Rockefeller and Standard Oil
Costs to a Firm
• Total Cost = Fixed costs + Variable costs
• Fixed Cost = Cost that does not change no matter
how much of something is being produced. EX.
(Rent will be that same regardless of how much
product is being produced.)
• Variable Cost = A cost that changes depending on
how much of something is produced. The more
product being produced, the more the variable cost.
(Labor)
• Marginal Cost = The cost of producing one more of
something.
Golden rule of profit maximization
• MR=MC
• A firm should increase its output as long as
the marginal revenue earned from the
additional product is more than or equal to
the marginal cost of the product.
3 Major types of taxes
• 1. Regressive tax - a tax for which the percentage of
income paid in taxes decreases as income increases.
ex: sales tax
• 2. Progressive tax – a tax for which the percentage
of income paid in taxes increase as income
increases. ex: graduated income tax
• 3. Flat/Proportional tax – a tax for which the
percentage of income paid in taxes remains the
same for all income levels. ex: 6% tax on $30,000
and 6% tax on $500,000.
Marginal Vs. Average Tax Rate
• A marginal tax rate is the tax paid on
additional or incremental income.
• An average tax rate is the total tax paid
divided by total taxable income
–$10,000 in taxes divided by $100,000
income = 10% average tax rate
FICA Tax
• Regressive because they apply to only a fixed
absolute amount of your income
• FICA taxes were 7.65%,
– 6.2% Social Security
• but that only applies to first $115,500 of income. So if you
made $231,000, only 3.825% would be taxed
– 1.45% Medicare
• Individuals over $200,000 pay an additional .9%
• $250,000 for married couples
• Employers also pay 7.65 for you into FICA for a
total 15.30%.
Inflation
• Inflation- General increase in price level
caused by
–cost push (supply shock) or demand pull
(too many dollars chasing too few goods).
–The dollar cannot buy as much as it did
before.
–Three types: chronic, hyper, and creeping.
Deflation
• Deflation- General decrease in price level
making money have more value. You can
buy more with the same amount of
money
Hyperinflation
 Hyperinflation- extreme rapid
inflation
 Countries like Germany in
1922-3 and Zimbabwe today.
 Money is worthless
Tax vs. Subsidy
• Tax is money paid to the
government.
• Subsidy is money received from the
government to encourage you or a
firm to do something.
–A rebate on solar panels
–City funding the building of the new
Cubs stadium.
Peak/Prosperity
Business Cycle
Peak
Trough
Commerce Department
• Supervises and regulates business in
the US. It also collects business data
and is charged with promoting
economic growth.
Bureau of Labor Statistics
• Under the labor department
• Measures inflation and unemployment
Demand Side Economics
• The idea that if you stimulate aggregate
demand by reducing taxes or
government spending that the economy
will return to full production.
• Ideas of John Maynard Keynes
Supply Side Economics
• The idea that the government stimulate
aggregate supply by reducing government
regulation, reducing taxes especially on
business and a stable money supply
• Says Law
– Supply creates its own demand.
Borrower
• Individual that takes out a loan for
either a purchase or an investment
Lender
• An individual or institution that loans
money in return for interest
Fixed Income
• Income that is set for a period of
time like a year. Salary
• Is negatively impacted by
inflation
Cost of Living
• The price for purchase basic
necessities like housing, food and
clothing.
• Inflation causes the cost of living to
rise
• CPI (Consumer Price Index)
–Major price index to measure the price
level of goods and services purchased by
households.
–Calculated by the Bureau of Labor Statistics
–Establishes Cost of Living Adjustments
(COLA)
• Increases as inflation rises
• Allows you to continue to buy the same goods
• CPI (Consumer Price Index)–Index determined by measuring the price of
a standard group of goods meant to
represent the typical “market basket” of a
typical urban consumer. It is used to
measure inflation.,
Unemployment
• Unemployment–An individual who is part of the labor
force who is willing and able to work
but cannot find employment. Full
employment is between 4%-6%
unemployment.
GDP (Gross Domestic Product)• GDP (Gross Domestic Product)–The dollar value of all final goods and
services produced within a country’s
borders in a given year. Anyone who lives
within the boundaries of the US is counted
in our GDP, including foreigners.
• Labor force includes employed and unemployed
individuals who wish to work
• All people who are over 16 years of age, not
institutionalized, and are looking for employment & want
to be employed
• Not in L.F. Housewives/husbands, students, slackers,
military, retirees not included
• About 50% of total pop. is labor force
• Unemployment Rate = (those unemployed) / (labor force)
X 100
• Bureau of Labor Statistics takes survey of 60,000
households each month
• The condition that exists when the
unemployment rate is equal to the
natural unemployment rate.
• It does not equal zero
unemployment.
• Full employment is usually
considered 4%-6% unemployment
• Natural Unemployment
– Frictional Unemployment - Search unemployment I.e. In
between jobs caused by natural frictions in supply and demand.
High school and college graduates seeking 1st full-time
employment are included
– Structural - Change in the structure of consumer demand and
change in technology. Example
• Change from typewriters to computers, automation in auto industry caused
by long-lasting shift in demand
• Unnatural Unemployment
– Cyclical - Caused by recession part of cycle
• Seasonal - Orange picker, but it is winter
• Unemployment = Nat. unemployment + Cyclical
• Discouraged worker is one who has quit looking –no longer part of
the labor force
• Underemployed - working at a job you are overqualified for
Impact of Unemployment
• High unemployment reduces a nation’s output and
standard of living
• It negatively impacts wages because the supply of
workers is greater than the demand
• High unemployment usually reduces inflation
because wages tend to fall which is a cost of
production. Reduced cost of wages increases supply
reducing prices
• Economic growth is negatively affected by
unemployment because of the reduced production.
Fiscal policy
• Government (President and Congress)
involvement in the economy is to either
stimulate the economy out of a recession or
slow the economy during a period of inflation.
• The two tools of fiscal policy are
– Changes in taxes
– Changes in spending on government
projects/programs
Two tools to affect the economy
• Expansionary Fiscal Policy- to fight a
recession- decreasing taxes and/or increasing
spending to stimulate the economy.
• Contractionary Fiscal Policy- to fight
inflation- increasing taxes and/or decrease
spending to slow the economy down
Crowding Out
• Government spending pushes up
interest rates and eliminates
opportunities for business crowding
the businesses out of the
marketplace
• Public education crowded out private
education.
• The “Fed” is an Independent Regulatory
Agency in control of our money supply
– This gives it the ability to make politically
sensitive decisions without the fear of
political interference or pressure.
• Not all banks are members of the Fed.
All national banks (banks that have
branches in more than one state) must
be a member. Just over one-third of all
banks are members.
6 Responsibilities of the FED
1. Regulating the Money Supply
2. Maintaining the reserve
requirement
3. Clearing Checks
4. Replacing and Supplying Paper
Currency
5. Financial agent (banker) for the
U.S. Government
6. Supervises member banks
3 functions of money
• 1. Medium of Exchange: replaced barter system,
anything used to determine value in the exchange
of goods and services.
• 2. Unit of Account: means for comparing the values
of goods and services, makes price shopping and
comparisons possible.
• 3. Store of Value: keeps its value over time, can be
stored rather than used. Inflation can be a challenge
to this function.
6 characteristics of money
• 1. Durability: can withstand physical wear and tear,
will not spoil like wheat or olive oil. There are still
Roman coins around that are over 2,000 years old,
durability.
• 2. Portability: needs to be portable, easy to carry
with people as they travel and go about their
business. Gold bars are not very portable.
• 3. Uniformity: any two units of money must be
uniform, or the same in what they will buy. This is
why dried fish wouldn’t work well; they are different
sizes and you wouldn’t get as much for a small fish as
you would get a large fish. They are not uniform.
Fiat vs. Representative money
• Fiat money is also called “legal tender” and it
has value because the government says it has
value–It may not have any intrinsic value, but
has value because of faith in government
• Representative money: objects that have
value because the holder can exchange them
for something else of value. Examples would
be an I.O.U., or a receipt that allows the
holder to exchange it for gold or silver. U.S.
silver certificates
• Liquid money- easy to use
immediately to buy
• Currency (Cash) in circulation
• checking accounts (demand
deposits)
• travelers’ checks
• currently about $1.1 trillion
• Broader measure of amount of
money in economy
• “Near Money”
• All M1 money +
–savings accounts
–money-market funds
–small deposits (less than
$100,000) CD’s
Three tools of the Federal Reserve/How
they expand and contract the economy
• Open-market operations-buying and
selling of government securities:
–Expansionary- Buy bonds which increases
the money supply lowering interest rates
and stimulating aggregate demand
–Contractionary- Sell bonds which decreases
the money supply raising interest rates and
slowing aggregate demand
Three tools of the Federal Reserve/How
they expand and contract the economy
• Discount Rate – raising or lowering the
interest rate to banks:
– Expansionary• Lower the discount rate to banks, this enables banks
to lower interest rates to consumers which
encourages consumers to borrow money for
purchases which expands the economy.
– Contractionary• Raise the discount rate to banks which makes interest
rates higher for consumers. This slows borrowing and
spending and causes the economy to contract.
Three tools of the Federal Reserve/How
they expand and contract the economy
• Reserve Requirements – the percentage of deposits
a bank must hold in reserve for customer
withdrawal needs:
– Expansionary
• lower the reserve requirement. This makes more money
available in excess reserves for loans which increases the
money supply and expands the economy.
– Contractionary
• increase the reserve requirement . This makes less money
available in excess reserves for loans which reduces the money
supply which causes the economy to contract.
Standard of Living and Investment
• The level of quality of life that individuals expect.
House, spouse, 2 cars and happy life.
• We expect our standard of living to improve with
age.
• Standard of living improves with increase in
investment of capital. Output increases and
productivity increases which improves our standard
of living.
Specialization and Trade
• Becoming very good and efficient at
producing one good or service so that you are
competitive and resources are not wasted.
• Countries specialize and then trade when they
have a comparative advantage.
• Trade is exchanging goods and services with
other country’s citizens
International Trade
• Why trade
–Increases our standard of living and
allows us to have more than what we
can produce
–Through specialization we can have
more
Trade Quotas
• Import quotas: limit the amount of a
good that can be imported.
–Import quotas reduce foreign competition,
protect jobs, and punish countries.
Trade Barriers
• Any restriction on trade that limits
goods and services being exchanged
between countries
• Used to
–protect domestic firms and workers
from foreign competition
–Raise tax revenue
–Punish other countries
Tariffs
• Tariff (custom duties): tax on imports also
called protectionism.
– Tariffs are used to raise tax revenue, reduce
foreign competition, protect jobs and punish
countries.
– Protectionism can reduce a country’s standard of
living by denying citizens in that country cheap
foreign goods
• Embargos- stop trade
Country’s Economic Development
• Developed country such as the US, most of western Europe
or Japan, are grouped under the term newly industrialized
countries.
• Per capita GDP Greater than $10,000
• Developing Nations: countries with more advanced
economies than other countries, but which have no yet fully
demonstrated the signs of a developed country
• have maintained sustained economic growth other the years and
exhibit good economic potential are termed as emerging markets.
• The Big Emerging Market (BEM) economies are Argentina, Brazil,
Chile, China, Egypt, India, Indonesia, Mexico, Philippines, Poland,
Russia, South Africa, and South Korea.
• Per capita GDP btween $3,000-$10,000
• Less Developed such Sub-Saharan Africa, most of Asia and
Central America
• Per capita GDP less than $3,000
2 free trade agreements
• NAFTA (North American Free Trade Agreement):
eliminate all tariffs and other trade barriers between
Canada, Mexico and the United States by 2009
• European Union
• APEC (Asian-Pacific Economic Corporation): nonbinding
agreement to reduce trade barriers along the Pacific
Rim including the United Stated, Mexico, and Canada.
• MERCOSUR: The Southern Common Market is similar to
the European Union that includes Brazil, Argentina,
Paraguay and Uruguay.
• CARICOM: The Caribbean Community and Common
Market from South America and the Caribbean.
Compare investment options
• Savings:
–retaining some of one’s income rather
than spending all of it.
• Spending:
–Using your income to satisfy wants
•
•
Short goals
– Emergency funds/Rainy day
– High liquidity
– Achieve short-term goals like a car or prom dress
– Save for special occasion
– Personal safety net
Long goals
– Retirement (Early)
– Larger purchases like a house
– Reduce S.S. dependency
– Comfortable retirement/ with toys
Want vs. Need
• Need is something you can not live without
– Food, water, clothing, medicine and shelter
• Want is something you wished you had but
may not be able to afford it after you have
satisfied your needs.
– Vacation trips, going out to dinner and
entertainment
Rule of 72- Affects of Compound Interest
•
Rule of 72- invest early and your $ grows larger
– 72/ (interest x 100 ) = time it takes for your
investment to double
– Example - $10,000 investment at 9% =.09
• 72/(.09 x 100) = 8 years
– Practice
• 10% with a $10,000 investment – how long will it take to
double?
• 3% with a $10,000 investment- how long will it take to
double?
• $10,000 will double to $20,000 in 6 years – what is the
interest rate?
• $10,000 will double to $20,000 in 12 years – what is the
interest rate?
• $20,000 initial investment has grown to $80,000 in 16
years- what is the interest rate?
• $20,000 initial investment has grown to $320,000 in 24
years- what is the interest rate?
Key consumer terms defined
• Return
– The money you earn from an investment
• Liquidity
– How quickly you can convert an asset into cash and how quickly
money changes hands
• Risk/Return (Reward) Relationship
– The higher the risk the greater the return
– The lower the risk the lower the return
• Risk/Return (Reward) with Liquidity Relationship
– The higher the risk the greater the return the lower liquidity
– The lower the risk the lower the return the higher the liquidity
Short-term Vs. Long-term Investment
Vehicles
•
•
•
•
Savings Account
Money Market
Short-term CD’s
Saving is storing for the
immediate future
consumption
•
•
•
•
•
•
•
•
Mutual Funds
Long-term CD’s
IRA’s
Roth IRA’s
Real Estate
Collectables
Bonds
Investing is putting money
into the stock, bond
markets or other
investments for the purpose
of making money
Federal Deposit Insurance Corporation
• Insures deposits up to $250,000 per person
per institution in case a bank goes
bankrupt.
Compare investment options (cont.)
• Stocks: A certificate of ownership in a corporation.
The purchase of corporate stock may result in
dividends from the company or capital gain if the
stock is sold at a higher price than it was purchased
at.
Compare investment options (cont.)
• Bonds: A loan to a govt or business.
Treasury bills, T-notes, and T-bonds are
all bonds issued by the federal
government (actually, the FED) to
creditors.
–Also corporate bonds and municipal bonds
Diversification
• Spreading money out over a variety of
different investments to reduce the risk
if one of the investments does poorly.
Portfolio
• Is the entirety of your investments and other
assets.
Mutual Funds
• Mutual Funds: A purchase of a mutual
fund is actually the purchase of a stock in
a company that purchases stocks, bonds
and savings from other companies. A
mutual fund is a more diversified
investment than that of buying
corporate stocks or bonds.
Maturity
• When bonds become due and the
principle to be repaid.
Yield
• The return on an investment. How
much money your money made after
taxes and fees.
Return
• What your investment earned in a year before
taxes and fees.
Common Stock
Voting rights- one vote per share
Paid dividends but receive them after
preferred stockholders
Most common stock
Preferred Stock
Have first rights after bankruptcy of all
stockholders
Get dividends first
Have no voting rights
Usually are special shareholders
• Bull vs. the Bear Market
– Bull - market is rising steadily- brokers and investors
are buying
– Bear- market is declining steadily- brokers and
investors are selling
• Dow Jones Industrial Average
– 30 companies stock prices on NYSE
• S & P 500
– 500 companies that combine NYSE, NASDAQ-AMEX
and OTC stocks
•
•
•
Savings Bonds
– Issued by the federal gov’t.
– Very safe but low yield
– Interest payments each year are not sent to the bondholder
– Purchaser buys the bond below the par value and at maturity
is given the par value
• $100 savings bond bought at $50 for 20 years pays $100 @
maturity
Treasury Bonds-10to 30 yrs. Maturity( T Bills-3-12 mon. or T
Notes-1-10 yrs)
– Issued by the Treasury Dept. of the federal gov’t
– Safe but low yield
– Exempt from all taxes but federal taxes
Municipal Bonds ( Munis)
– State and local bonds that cities or counties sell to raise funds
– Usually safe (but rated) and tax exempt from state and federal
•
Corporate Bonds
– Sold by corporations to expand business
– Taxable like income
– Moderate risk depending on the stability of the
corp.
– Watched By the Securities and Exchange Comm.
(SEC)
• independent govt. agency that regulates the financial
markets
• Junk Bonds
– High risk, low rated and high yield bonds
– Allows high risk companies to find funding that are
in financial trouble
• Why should you care about a bond’s
rating?
– Rated by two companies
1. Moody’s
2.Standard & Poor
– AAA rated bond is a very little risk
investment but also yields a low
return.
– D rated bonds have a high risk of you
losing your investment but also has a
high rate of return.
• Risk vs. Reward
– Usually a direct relationship
• as return rises usually risk rises as well
– Liquidity- how quickly I can get my money or
move my money (inverse relationship with
risk)
• the more liquid the lower the return
• Affects on Investments
– Taxes- income vs. capital gains
– Loss of investment
– Inflation is your enemy if your return on your
investment is less than the inflation rate
• Your money is eaten by inflation
– Fees of brokers