8 during the 08 09 recession the fed has sought to

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Unformatted text preview: curve. 6. The demand for loanable funds is determined by those who demand loans form the banking system: firms and households. So anything that makes firms or households want to demand more or less loans from banks will shift the demand curve: changing conditions in the economy, tax credits from the government to firms for them to invest, etc. 7. Crowding out refers to the reduction of available funds for private investment as a consequence of budget deficits. By running a deficit, the government spends more than what they raise in taxes (G>T). They finance this excess expenditure by issuing bonds, which financial institutions like banks buy. So banks use their resources to buy bonds and finance the government, instead of giving loans. This reduces the available funds they have for loans, which raises the interest rate, financing less investment projects. Chapter 16 1. Money is defined broadly to include all three functions: medium of exchange, unit of account and store of value. 2. Liquidity refers to the ease with which an asset can be converted into cash. 3. M1/M2 are measures of money. They group monetary concepts according to how liquid they are. M1 is more liquid than M2 and M2 includes M1 plus other less liquid assets. 4. Banks play an important role in creating money in the economy. If we assume that banks keep no excess reserves and that people keep no currency in their hands, banks can “create money” by giving out loans from the deposits they get. The idea is that, because that money doesn’t leave the banking system (because we’re assuming that people don’t keep cash in their hands, they deposit all their cash into their bank account), banks can keep loaning it out (because banks don’t keep excess reserves, they loan all the deposits that they can, after satisfying...
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