eco202_note03 - Macroeconomics Theory and Policy Masoud...

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Unformatted text preview: 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 Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 In financial market and 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. Buyers Sellers 1- Money: needed for 2- Bonds: not good for Financial market is the market 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 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. Important: Price of bonds, P b , and the interest rate, i, have inverse relationship with each other. 100 1 bond of ice Pr Value Face i = 100 1 P 1000 $ i b = Masoud Anjomshoa 6 Bonds, an example: . 1.10 $1000 P 10% i If b = = = 100 1 P 1000 $ i b = P b = = = = b b P i 1.12 $1000 P 12% i If = = = b b P i 1.08 $1000 P 8% i If 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 = Currency in circulation + 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: ....
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This note was uploaded on 08/12/2010 for the course ECO 202 taught by Professor Anjomshoa during the Spring '08 term at University of Toronto- Toronto.

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eco202_note03 - Macroeconomics Theory and Policy Masoud...

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