econ ch4

econ ch4 - The Short Run part II The financial market(Ch 4...

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The Short Run: part II The financial market ( Ch. 4) Prof. Davide Debortoli UCSD Econ 110A Outline ! Goal: determine equilibrium interest rate ! The demand for money ! Equilibrium in a simple example ! How the central bank operates ! Private banks and the transmission of monetary policy
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Financial Assets ! Money ! Don’t confuse money with income … (read Focus Box) ! Bonds ! Stocks, investment funds, options, futures, derivatives,… ! Focus only on two types of assets ! Money: can be used for payments, but not paying interest ! Currency ! Checkable Deposits ! Bonds: paying interest, but less liquid Money or Bonds ? ! Total Wealth = Bond + Money ! Which would you prefer? ! Tradeoff: Transactions (Liquidity) vs. Earning Interests ! Relevant factors ? ! How much cash I need every day? ! Interest rate ! Transaction fees to buy/sell a bond ! Timing ! How much money to hold ? Money demand ! … and the rest is invested in bonds
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What determines Money Demand? ! M d = $ YL (i) ! Demand for Money may increase because ! i ! (… thus Bonds are less attractive) ! $Y # (… less transactions, either prices or quantities increase) - Money Demand in a Graph Money, M Interest rate, i M d ( $Y) $Y’>$Y M d ( $Y’) M M’ i
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econ ch4 - The Short Run part II The financial market(Ch 4...

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