Econ Midterm 2

What are the three uses of Money

Store of Value
Medium of Exchange
Unit of Account

Commodity Money

Valuable receipt that can be exchanged

Fiat Money

Trust and confidence in the government (Canadian Dollar)

Private Savings

Y-T+Tr-C

Government Savings

T-Y

M1

Cash + Bank Deposit

Net Capital Inflow (NCI)

I - National Savings

National Savings

Y-C-G OR Private+Public Savings

Bank Runs

A bank run happens when a large number of customers simultaneously try to withdraw their money from a bank out of fear that the institution will fail or run out of funds

Preventing Bank Runs

Deposit Insurance, Reserve Requirements

Disposable Income

Y-T

Net Capital Inflow is Negative

Economy is Lending

Net Capital Inflow is Postive

Economy is Borrowing

Stagflation

High Inflation and High Employment

Present Value Formula

FV/1+r

Present Value

Money today equivalent to the income flow of generated by the bond

Net worth Equations

Assets-Liabilities

Asset

Right to claim flow/income overtime

How reserves work

When cash is deposited, reserve and deposits both rise. Bank keeps a fraction and then lend the rest.

Deposit: Amount of cash/interest
Reserve ratio: deposit x Interest

T Bill

Bond Issued by Government Treasury

Bubble

Bubble is when an assets price rises far above its fundamental value because people expect it to keep rising

Bubble Bursts

Asset prices fall, cutting household wealth, credit collapse

Keynes Argument & Solution

Argued the Great Depression was cause by insufficient aggregate demand: households and firms cut spending, so output and jobs fell. Recommended that the government take intervention through fiscal policy, increasing government spending or cutting taxes to raise demand and employment

Philips Curve

High Inflation = Low unemployment

Argument

No long run trade off.

GDP

C+I+G+(X-IM)

Money supply change

= currency in circulation + Deposits

Net Foriegn Investment (NFI)

X-IM