Lecture week 7

Lecture week 7 - ECON1102 MACROECONOMICS LECTURE GROUP C...

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ECON1102 MACROECONOMICS LECTURE GROUP C WEEK 7 MONEY, PRICES AND THE RESERVE BANK TEXT REFERENCE Ch 9 OUTLINE: 1. THE SUPPLY OF MONEY 2. BANK CREDIT CREATION 3. MONEY AND PRICES 4. THE RBA AND THE MONEY SUPPLY 5. IMPLEMENTATION OF MONETARY POLICY IN AUSTRALIA
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1. THE SUPPLY OF MONEY Defining the Money Supply Functions: Unit of Account Medium of Exchange Asset: perfectly liquid, no capital value risk but little or no interest Liquidity: ease of conversion, “spendability” FINANCIAL ASSETS RANKED BY LIQUIDITY Notes and Coins (currency) Bank Deposits (ownership transferable by cheque or EFT) Deposits in Non-Bank Financial institutions Government bonds, treasury notes and bills Commercial bills Shares and debentures Mortgages on property etc
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Standard Definitions of Monetary Aggregates M 0 = Base = Liabilities of Central Bank to Pte Sector = MB = Currency with + Cash Reserves Non-Bank Public of Banking System C NB + R R, Reserves of Banking System = Currency with Banks + Banks’ Deposits at Central Bank: ESAs* NCDs* (+ Govt Securities held by Banks with “buy back” by Central Bank – “repos”) *ESAs: Exchange Settlement Accounts (for transactions of private banks between themselves and with Central Bank.) Banks minimise ESA balances by putting cash in the short term money market, “overnight” or “at call”. Cash Rate: rate of interest in this market. *NCDs: Non callable deposits (required for banking licence) M3 = C NB + Bank Deposits of Public, D Broad Money = M3 + lending of NBFI NBFI: Non Bank Financial Institutions (Credit Unions, Finance Companies, Merchant Banks, etc
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2. BANK CREDIT CREATION Since banks can be sure of “re-depositing” (payment by transfer of ownership of deposit) : Fractional Reserve Banking. Banks create deposits by making loans and advances.
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Lecture week 7 - ECON1102 MACROECONOMICS LECTURE GROUP C...

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