Lesson_63_Review of Money Supply

Lesson_63_Review of Money Supply - Review of Money Market A...

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1 Lesson 63 1 Review of Money Market A country’s central bank influences aggregate economic activity by controlling the money supply Increasing the money supply reduces interest rates, thereby increasing interest- sensitive components of spending This lesson reviews fundamental aspects of the money market Lesson 63 2 Consider an individual (or organization) with certain amount of wealth Total wealth can be allocated among a variety of assets (stocks, bonds, mutual funds, gold, cash, etc.) The allocation of wealth to these various components constitutes the individual’s portfolio of financial investments Lesson 63 3 Some forms of wealth earn positive returns (dividends, interest, capital gains) But returns could be negative (capital losses) Simplify and assume only two forms of wealth: interest-bearing assets and (non- interest-bearing) money How does individual decide share of wealth to hold in each form?
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2 Lesson 63 4 Benefit of holding money is that it is liquid Can’t spend a U.S. government bond on
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Lesson_63_Review of Money Supply - Review of Money Market A...

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