theme5 Flashcards
net lender of funds or net borrower of funds
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
Household and firms position
- Households will always be in a net lending position (net supply of funds)
- Firms will always be in a position of net financing need (net demand for funds
NX
Y – T – C + T – G - I = NX
(Y – T -C) + (T – G) – I = NX
Sp + Sg – I = NX
S – I = NX
Net exporter (EX>IM)
S > I, so S – I >0 and NX > 0
Net importer (IM>EX)
S< I, so S – I < 0 and NX < 0
(SLF) Supply of household funds is influenced by
- The interest rate (+)
- Disposable income (+)
- Anticipated future disposable income (-)
- Wealth effects (-)
- Marginal propensity to save/income inequality (+)
- (T-G) (+)
(DLF) Firms’ demand for funds (I) is determined by:
- The interest rate (-)
- Anticipated future profits (+)
level of savings “S” and “I”
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
Small open economy
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
Long-run real interest rate for a small open economy
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
Steps to find effects
1: Find the effect of the events on r, S, I* in the world economy
Money
- Means of exchange
- Unit of account
- 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
4 main responsibilities of the central bank of Canada:
- Issuance of banknotes
- Government financial agent
- To serve as the bank of banks
- Monetary policy
Banking panic:
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
Money multiplier
m = 1/R
Increase in Ms
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.
Long-run monetary neutrality:
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
Quantity demanded of money and interest rates
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 ↑
Price and money demand
move in the same direction
When prices ↓; we need LESS money to settle transactions
Price↑ ; ↑ demand for money
Price ↓; ↓ demand for money
GDP and money demand
move in the same direction
Real GDP ↑; ↑Money supply needed
Demand for money:
Md = PL (i, Y)
L= demand for liquidity
P= price level
↑ i; L ↓; Md ↓
Money market in SR
interest rate is determined in the money market
Changes in nominal interest rate (i) affect the real interest rate (Fisher equation)
Interest rates
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
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?
Montant de base * (1-rate)**t-1
