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Unformatted text preview: ECONOMICS 1 Professor Kenneth Train 11/10/08 Lecture 20 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our 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. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS LECTURE Money & The Interest Rate Well, hello everybody! Today were talking about a topic near and dear to everyones heart: money. This is a continuation of our analysis from last week. We started out with no government, prices fixed and no imports or exports. Last week we added in government; today were going to learn how to determine the interest rate. The story is very straightforward. The demand and supply for money determines the interest rate: Monetary Policy There are two types of policy for government. Last time we talked about fiscal policy, and today well talk about monetary policy . This has an impact because a lower rate means more investmentyou can borrow money for cheaper. This is what our government has been doing to help stop the recession. We want to talk about how this all happens: how the rate gets determined, how it affects us, and how the Fed affects these interest rates. What is Money? So the first question you should be asking is: What is money ? Today well go into a precise definition of it. You can think of money as liquid assets. Assets - Liquid = Money - Illiquid When you have assets (meaning you have saved some of your money), you can choose how to hold those assets. You can hold it in a liquid or illiquid form. Liquid vs. Illiquid Liquid assets can be spent whenever you want. Illiquid ones cannot be accessed when you want. If you had $1000, you could keep $200 in liquid assets to spend. With the other $800 you could buy a treasury bond, a form of illiquid asset. Essentially, you are lending the non-liquid funds to someone else, and you get paid the interest rate. You are paying someone to hold your money. Interest Rate The interest rate can be seen as the price you pay to borrow money, and also the price you receive for lending out your money. Liquid assets are money, ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 11/10/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course....
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- Fall '08