Lecture6 - Lecture 6 We will discuss 6.1 Money Prices and...

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ECON1002 Introductory Macroeconomics 1 Lecture 6 We will discuss…… 6.1: Money, Prices and the Reserve Bank What is money? Money and the banking system Money and inflation Reserve Bank of Australia and the determination of interest rates 6.2: The Reserve Bank and the Economy Bond prices and interest rates How does the RBA affect all interest rates in the economy? Can the RBA affect the real interest rate? How does monetary policy affect the economy?
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ECON1002 Introductory Macroeconomics 2 1. Medium of Exchange Purchase goods & services. 2. Unit of Account Wages and prices expressed in dollars. 3. Store of Value As an asset. Without money, we would have to rely on barter. Money is also a unique asset as it is supplied by a monopoly – the government Money What is Money $$$?
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ECON1002 Introductory Macroeconomics 3 Currency = notes + coins M1 = Currency + current deposits M3 = M1 + all bank deposits Broad Money = M3 + borrowings by Non-Bank depository corporations less holdings of currency and deposits of Non-Bank depository corporations Less Liquid Money: Definitions
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ECON1002 Introductory Macroeconomics 4 Reserves to deposits ratio = 100% Money and Banks Balance Sheet of Witch Bank: Initial
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ECON1002 Introductory Macroeconomics 5 Reserves to deposits ratio = 10% Money and Banks Target Balance Sheet of Witch Bank: after one round of loans
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ECON1002 Introductory Macroeconomics 6 Reserves to deposits ratio = 53% Money and Banks Balance Sheet of Witch Bank: after a re-deposit of the loan
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ECON1002 Introductory Macroeconomics 7 Reserves to deposits ratio = 10% Money and Banks New loans this time = $81 Balance Sheet of Witch Bank: after a new loan again
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ECON1002 Introductory Macroeconomics 8 Reserves to deposits ratio = 36% Money and Banks Balance Sheet of Witch Bank continually changing………
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ECON1002 Introductory Macroeconomics 9 Reserves to deposits ratio = 10% Money and Banks New loans this time = $73 Balance Sheet of Witch Bank continually changing………
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