10 - DEMAND FOR INVESTMENT The second major component of...

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1 DEMAND FOR INVESTMENT The second major component of aggregate desired expenditure In economics, investment refers to the addition of physical capital or inventories Why do businesses invest? Businesses invest in capital because they expect the action will bring them profit.
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2 INTEREST RATE AND DESIRED INVESTMENT Interest is the payment made for the use of money. The interest rate is expressed in %. i Investment (I) i’ i’’ I’ I’’ The decline in interest rate increases the qty of investment demanded
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3 TOPIC 10 MONEY AND BANKING
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4 TOPICS THE EVOLUTION OF MONEY THE DEMAND FOR MONEY BANKING AND THE SUPPLY OF MONEY CENTRAL BANKING AND MONETARY POLICY
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5 THE EVOLUTION OF MONEY Barter and the double coincidence of wants two traders are willing to exchange their products directly Commodity Money anything that serves both as money and as a commodity Modern Money
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6 Money is defined as a commodity that can act as: 1. Medium of exchange Money is generally accepted in exchange for goods and services. 2. Unit of account Money is an agreed measure for stating the prices of goods and services. 3. Store of value (or wealth) Money can be held and exchanged later for goods and services. The Function of Money
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7 Components of Money Supply 1. Narrow (Transaction) Money: M1 a. Notes and Coins b. Checking Accounts Demand deposit held in commercial banks, on which you can write checks. 2. Near money: E.g. Savings deposits and time deposits. Near money cannot serve as medium of exchange, but can serve as store of wealth. Liquidity is the property of being instantly convertible into means of payment with little loss in value.
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8 Definitions of money in Hong Kong M1: Notes and coins held by the public, plus customers’ demand deposits with licensed banks M2: M1 plus customers’ savings and time deposits with licensed banks, plus negotiable certificates of deposits (NCDs) issued by licensed banks and held outside the monetary sector M3: M2 plus customers’ deposits with restricted licensed banks (RLBs) and deposit taking companies (DTCs) plus NCDs issued by RLBs and DTCs held outside the monetary sector MS = Cash + Deposit Money
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9 The Demand for Money Three motives for holding money: 1. Transaction motive People hold money in order to undertake transactions. ( Transaction demand for money ) 2. Precautionary motive Money is held as a precaution against unexpected events that require unplanned purchases to be made. 3. Speculative motive People hold money in order to avoid losses from holding stocks or bonds that are expected to fall in value. ( Asset demand for money )
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1. Price level (P) As the general price level increases , people have to hold more money for transaction. 2.
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10 - DEMAND FOR INVESTMENT The second major component of...

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