Note202_03 - Macroeconomics Theory and Policy Financial...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 Masoud Anjomshoa 1 Financial Market: LM Curve 2 Economy circular flow Firms Revenue Income Factor Payments Private Saving Goods Market Financial Market Factor Market Capital Flow Taxes Firms Households Government Foreigners Investors Budget Deficit Consumption Export-Import Government Spending Investment Borrowing Inventories
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Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 In financial market LENDERS and BORROWERS meet. Two types of assets Financial Market in Short Run: . Assets are used to accumulate Wealth . Wealth is used to transfer consumption over time, i.e. to smooth out the consumption, because income generally fluctuates. Short Run Assumption: Wealth is fixed. 1- Money: needed for 2- Bonds: not good for Financial market is the market to Masoud Anjomshoa 4 Financial Market in Short Run: . Money vs. Bonds: Liquidity vs. Return People decide what share of their wealth should be in form of money, and what share in form of bonds. (Asset Portfolio) M oney B onds W ealth
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Macroeconomics Theory and Policy Masoud Anjomshoa 3 Masoud Anjomshoa 5 Financial Market in Short Run, Bonds: . Assumption : There are only one-year bonds , i.e. if someone buys them and keep them for one year, the face value will be paid. The interest rate, i, is defined as the rate return on the one-year bonds ( it can be imagined as prime rate). 100 1 bond of ice Pr Value Face i × = 100 1 P 1000 $ i b × = Masoud Anjomshoa 6 Bonds, an example: . 10% i If = 100 1 P 1000 $ i b × = ) i 1 ( 1000 $ P b + = 12% i If = 8% i If =
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Macroeconomics Theory and Policy Masoud Anjomshoa 4 Masoud Anjomshoa 7 Financial Market, Money: . What is money? There is no unique definition of money. M 1 = + Personal chequeing accounts at chartered banks + Current accounts at chartered banks (Demand deposits) (Aug 2000) $104.9 B M 1 Masoud Anjomshoa 8 Financial Market, Money: . $104.9B M 1 M 2 = + Personal saving accounts at chartered banks (GIC’s) + Non personal notice deposits at chartered banks (Aug 2000) $487.6B M 2
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Macroeconomics Theory and Policy Masoud Anjomshoa 5 Masoud Anjomshoa 9 $670.4B Financial Market, Money: . $104.9B
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Note202_03 - Macroeconomics Theory and Policy Financial...

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