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0 y gdp pae planned aggregate expenditure pae c i p g

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0 Y (= GDP) PAE (planned aggregate expenditure) PAE = C + I P + G + NX Y e Y* Monetary Policy Reduce r (i) or increase M s
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28 . 0 Y (= GDP) PAE (planned aggregate expenditure) PAE = C + I P + G + NX Y e Y* Monetary Policy Increase r (i) or reduce M s
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29 interest rate (i) money 0 M D M S Monetary policy set M S or i * i *
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Money is ..a commodity/token accepted as a means of payment because it fulfills 3 main functions: Medium of exchange Unit of account Store of value 30
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Good or asset whose primary purpose is to purchase other goods. goods → money → goods Why not directly trade goods for goods? i.e. Barter Barter tends to be inefficient. If I want to buy a new computer I will have to find a supplier who would be willing to accept a series of economics lectures in exchange 31
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For barter to occur: Person 1 wants to accept goods supplied by Person 2 Person 2 wants to accept goods supplied by Person 1 With a medium of exchange each person: Sells their goods for medium of exchange Uses medium of exchange to buy goods they want Significant reduction in costs of search 32
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Good that is used to compare the value of all other goods and services Standard to use medium of exchange as the unit of account 33
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Good or asset that serves as a means of holding (or transferring) wealth over time. Many goods and assets can serve as a store of value (e.g. land, bonds, stocks) but do possess the medium of exchange or unit of account functions of money. 34
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How much money is there in the economy? several alternative definitions of money which vary in how broadly money is defined: 1. Currency : notes and coins on issue (excluding holdings of currency by banks). 2. M1: currency plus current deposits held by banks. [Current deposits are money held in cheque and savings accounts]. 3. M3: M1 plus all bank deposits of the private non-bank sector. 4. Broad money: M3 plus deposits held by non banks. 35
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How much money is there in the economy? several alternative definitions of money which vary in how broadly money is defined: 1. Currency : notes and coins on issue (excluding holdings of currency by banks). Notes and coins held by households and businesses 2. M1: currency plus current deposits of households and businesses held by banks. [Current deposits are money held in cheque and savings accounts]. 3. M3: M1 plus all bank deposits of the private non-bank sector. (currency + bank deposits of households and businesses in cheque and savings accounts + all other bank deposits held by households and businesses) 4. Broad money: M3 plus deposits of households and businesses held by non banks (building societies, credit unions). 36
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