Economics 100B - 9 (2-13-07)

Economics 100B - 9 (2-13-07) - Economics 100B Professor...

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Economics 100B Professor Steven Wood 2/13/07 Lecture 9 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course ANNOUNCEMENTS Your exam will be on Thursday. The government’s report on international trade came out this morning. The trade deficit for December was $61.2 billion with $125.5 billion in exports and $186.7 billion in imports. For the year, there was a trade deficit of $763.6 billion, this is effectively how much we are borrowing from the rest of the world. Until the late 1990s, we had a fairly small deficit no more than $200 billion per year. Afterwards however, the amount we borrowed grew exponentially. The negative aspect of this is that we are living beyond our means and have to borrow funds from abroad. On a positive note though is that foreigners are willing to loan us this money at low interest rates. Our trade deficit with China before 1990 was essentially 0. Now it accounts for about 28% of our trade balance. China is not the only reason why we have this serious trade deficit however. We run deficits with Europe, Canada, Mexico, Japan, and many others. Basically, as long as someone is willing to lend us money, we take it, and we take it at attractive rates! LECTURE Monetary Policy in the Long Run Æ Money and Inflation Æ The Quantity Theory of Money Æ The Long-Run or Classical Dichotomy Money and Inflation What causes inflation? First we make an observation that countries with high inflation rates also have high growth rates in their money supply. Rapid price increases are accompanied by rapid money growth. What is Money? 1) Money is a financial asset. a. Real assets have a productive capability like a factory or land. A financial asset however is more just a piece of paper that represents value. b. There are many financial assets such as stocks, bonds, certificates of deposits, paper money, etc. c. We want to make a distinction based on liquidity however. 2) Liquidity is the quickness, easiness, and cheapness of exchanging one asset for another. We are talking about how easy it is to transform one asset into another. Cash is easy to transform into other assets.
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ASUC Lecture Notes Online Economics 100B 2/13/07 Sharing or copying these notes is illegal and could end note taking for this course 2 Houses are more difficult to exchange for other assets, it requires more time and effort. We are going to rank assets based on their liquidity. Money serves three functions:
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Economics 100B - 9 (2-13-07) - Economics 100B Professor...

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