Economics
edit the order
Money supply is M divided by the Price level P. We are interested in Reak Money supply not nominal money supply.
AD = Y= C+I+G+(X-M)
3 possibilities
1) Horizontal section is the situation where the economy is at less than full capacity
a) government has the power to spend more: incrases G
B) cut taxes: C increase, and I increases
2) We are in the intermediate part of the curve
a) an increase in G spending is going to incrase Y, but also create inflation: P goes up
3) we are in the vertical part of the curve
What happens if G increases Ad9 moves to the right at AD1, Y stays the same and P increases.
When we are in the vertical part of the supply curve moving to the right only creates inflation.
AD = Y = C + I +G +(X-M)
How does the bank of Canada creates money.
What to banks do with their money? Out of 75000 they can lend 40000. What do they do with the remaining 35000. they have to park it somewhere. Buying government bonds. Bank in the portfolio have a mix of loans and bonds. Bank of Canada will buy back thoses bonds. What does that do. Banks now have more cash, or more deposits.
AD = Y = C + I +G +(X-M)
A decrease in money supply:
shift money supply to the left, increases interest rate, decrease investments, shift the AD to the left, gives a decrease in GDP and a decrease in price level.
AD = Y = C + I +G +(X-M)
An increase in money supply: will lower interest rates, which will increase Investment, which will increase AD, which will increase GDP(if we are not in the vertical part of the supply slope) which will increase Price level.
i
M/P
Y
i
Po
I
LRAS
P
SRAS
AD1
Yp
P
Po
AD2
AD1
Y2
Y = C+I+G+(X-M)
Yo
Yp
P
P1
Po
AD2
AD1
Yo
Y = C+I+G+(X-M)
Yp
Y2
P
P1
AD1
Po
ADo
Y = C+I+G+(X-M)
Yp
Yo
MS
i
io
MD
i1
Mo/Po
M1/Po
Y
i
Po
Io
I1
I
LRAS
P
SRAS
AD1
ADo
Yp
MS
i1
io
MD
Mo/Po
M1/Po
Y
i
Po
Io
I1
I
LRAS
P
SRAS
P1
ADo
Yp
Y1
MS
i
io
I 1
MD
Mo/Po
Y
i
Po
Io
I1
I
LRAS
P
SRAS
P1
AD1
ADo
Y1 Money
Objectives;
Describe money and describe its functions
Describe the monetary system
Describe the functions of the Bank of Canada
Money performs three vital functions:
Medium of exchange
Unit of account
Store of value
Medium of exchange is an object that is generally accepted in return for goods and services.
A unit of account is an agreed-upon measure for stating the prices of goods and services.
Any commodity or token that can be held and exchanged later for goods and services is called a store of value.
Official measures of money
The bank of Canada is Canadas central bank.
A central bank is a public authority that provides banking services to banks and regulates financial finstitutions and markets.
A central bank does not provide banking services to business and individual citizens.
The Banks of Canadas ultimate monetary policy objective is to keep inflation arete inside a target range of between 1 percent and 3 percent a year.
By keeping the inflation rate steady and low, the Bank seeks to maintain full employment, moderate the business cycle, and contribute towards achieving faster and sustained economic growth.
Money creation and control
the deposit multiplier is the number by which an increase in bank reserves is multiplied to find the resulting increase in bank deposits.
Change in deposits = deposit multiplier x change in reserves
In the previous example that weve just worked through, the deposit multiplier is 4. The $100,000 increase in reservis brought a $400 000 increase in deposits.
Deposit multiplier =
1
Desired reserve ratio
Deposit multiplier = 1 / 0.25 = 4
Money, interest and inflation
The demand for money is the total amount of money that the public wishes to hold for all purposes.
Three important services that are provided by money give rise to three motives for holding money: the transactions, precautionary and speculative motive.
The transactions motive
Most transactions require money. Money passes from households to firms to pay for the goods and services produced by firms; money passes from firms to households to pay for the factor services supplied by households to firms.
The larger the value of national income, the more transactions ar emade and thus the larger will be the value of transactions balances.
The precautionary motive
The precautionary arises because housholds and firms are uncertain about the timing of payments and receipts.
The speculative motive
Money can laso be held to provide a hedge against the uncertainty innherent in fluctuating prices of other financial assets.
The speculative motive implies that the demand for money varies negatively with the interest rate.
The following shows the demand for money as a function of interest rates, income, and the price level.
Real money supply M0 = M/P (m is nominal quantity of money and P is the price level)
Monetary equilibrium occurs when the quantity of money demanded equals the quantity of money supplied.
the transmission mechanism: a mechanism by which changes in the demand for and supply of money affect aggregate demand.
It operates in three stages: the first is le link between monetary equilibrium and the interest rate, the second is the link between the interest rate and investment expenditure, and the third is the link between investment expenditure and agregate demand.
Exercises
PAGE
14
Global Economics: money
