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l5 - Econ 102 Fall 2006 Lecture 5 Money and Interest 1...

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1 Econ 102 Fall 2006 Lecture 5 Money and Interest
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2 Questions this lecture will address What do banks do? Why are some banks failing How did Friedman modify the Quantity Theory of Money? What the Fed does to control i
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3 Part 1 What do banks do?
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4 Firm Assets Liabilities Capital K F = 90 Bank Loan B = 30 Equity E F = 60 90 90 real financial
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5 Bank Assets Liabilities Capital K B = 10 Deposits D = 40 Bank Equity E B = 10 50 50 real financial Loan B = 30 Cash M = 10
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6 Household Assets Liabilities 110 110 Equity E = 70 Deposit D = 40 real financial Net worth NW = 110
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7 Four different interest rates K i Return to capital – this depends on how well the economy is doing B i Return to corporate debt – this is negotiated in advance D i Return to bank deposit – this is negotiated in advance E i Return to equity – this depends on how well the economy is doing
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8 Competitive Banking If the banking system is competitive the banks equity will equal the value of its physical capital The return to the banks equity will equal the return to capital The return to deposits will be lower than the return to capital
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