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Question 1

net lender of funds or net borrower of funds

Answer 1

net lender of funds or in net financing capacity when: sum of its savings > sum of its borrowings

A sector of the economy is said to be a net borrower of funds
when: sum of its savings < sum of its borrowings

Question 2

Household and firms position

Answer 2

1. Households will always be in a net lending position (net supply of funds)
2. Firms will always be in a position of net financing need (net demand for funds

Question 3

NX

Answer 3

Y – T – C + T – G - I = NX
(Y – T -C) + (T – G) – I = NX
Sp + Sg – I = NX
S – I = NX

Question 4

Net exporter (EX>IM)

Answer 4

S > I, so S – I >0 and NX > 0

Question 5

Net importer (IM>EX)

Answer 5

S< I, so S – I < 0 and NX < 0

Question 6

(SLF) Supply of household funds is influenced by

Answer 6

1. The interest rate (+)
2. Disposable income (+)
3. Anticipated future disposable income (-)
4. Wealth effects (-)
5. Marginal propensity to save/income inequality (+)
6. (T-G) (+)

Question 7

(DLF) Firms’ demand for funds (I) is determined by:

Answer 7

1. The interest rate (-)
2. Anticipated future profits (+)

Question 8

level of savings “S” and “I”

Answer 8

The level of savings “S” is determined by the intersection of the interest rate “r” and the supply curve of loanable funds, SLF

Level of investment “I” is determined by the intersection of the interest rate “r” and the demand curve of loanable funds, DLF

NX is determined by S – I = NX

Question 9

Small open economy

Answer 9

world interest rate (r*) is imposed on the domestic economy
Domestic interest rate can’t diverge from the world rate unless it has a risk premium

Question 10

Long-run real interest rate for a small open economy

Answer 10

r = r* + θ

In the LR, the real interest rate of an economy is given by the supply and demand of loanable funds at the global level and by the risk premium specific to that economy

Question 11

Steps to find effects

Answer 11

1: Find the effect of the events on r, S, I* in the world economy

Question 12

Money

Answer 12

1. Means of exchange
2. Unit of account
3. Store of value

M0 : Sum of all coins and bills in circulation in the hands of the public or in the form of commercial bank deposits held in the central bank’s reserves.

M1+ : Sum of all coins and bills in circulation + sum of all liquid deposits in the economy

Question 13

4 main responsibilities of the central bank of Canada:

Answer 13

1. Issuance of banknotes
2. Government financial agent
3. To serve as the bank of banks
4. Monetary policy

Question 14

Banking panic:

Answer 14

Crisis where all customers would ask to withdraw their funds at the same time, to put their bank account balance in forms of bank bills and/or send their funds to another country

Question 15

Money multiplier

Answer 15

m = 1/R

Question 16

Increase in Ms

Answer 16

An increase in the money supply corresponds to an increase in bank deposits, which become “demand” throughout the economy
This sudden demand cannot be easily accommodated by the economy’s production and this puts upward pressure on all prices in the economy. Inflation is related to the growth of the money supply.

Question 17

Long-run monetary neutrality:

Answer 17

Money has no real effect in the LR. We can create all the money we want and distribute it to everyone, our economy will not be more productive, etc.

In the LR, nominal variables (such as money and prices) (CPI) don’t influence real variables such as real GDP and productivity

Question 18

Quantity demanded of money and interest rates

Answer 18

Quantity demanded of money is inversely correlated with interest rates

When interest rate ↓; opportunity cost of holding money ↓; benefit of holding money becomes more attractive (↑); Quantity of money demanded ↑

Question 19

Price and money demand

Answer 19

move in the same direction

When prices ↓; we need LESS money to settle transactions
Price↑ ; ↑ demand for money
Price ↓; ↓ demand for money

Question 20

GDP and money demand

Answer 20

move in the same direction

Real GDP ↑; ↑Money supply needed

Question 21

Demand for money:

Answer 21

Md = PL (i, Y)
L= demand for liquidity
P= price level
↑ i; L ↓; Md ↓

Question 22

Money market in SR

Answer 22

interest rate is determined in the money market

Changes in nominal interest rate (i) affect the real interest rate (Fisher equation)

Question 23

Interest rates

Answer 23

Real interest rate (r)
LR: r = r*+ θ
SR: r = i - π

Nominal interest rate (i)
LR: i = r + π
SR: Determined by money market

Question 24

The central bank buys 1000 billion dollars in financial assets from commercial banks. If
the reserve ratio of banks is 7% of all deposits from the public, what will be the amount of
the 3
rd loan made by the banking system as a whole?

Answer 24

Montant de base * (1-rate)**t-1