ECO2004S Summary that will change everything! (1).pdf

Private savings public savings want to invest will be

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= Private savings + Public savings want to invest will be equal to what govern ve end on income -C 1 ) and s up being esult in an rnment and Multi boosts Z/Y > the increase in C
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Marginal propensity to In equilibrium I = S + (T CHAPTER 4: THE FINAN Demand for Money Stock of money = finan 2 determinants: 1. Le 2. In Demand for money = a M d in the economy is th M d depends on: 1. Le ($ 2. T Shift: change in nomin Movement along: cha o Save (MPS) = (1-C 1 ) or 1 – MPC T-G) NCIAL MARKET ncial wealth evel of transactions: MONEY - Interest arte = 0% - Two types: currency and chec deposits nterest rate: BONDS - Interest > 0 - Not used for transactions amount that people want to hold in money ( he sum the demand of individuals evel of transactions in the economy, nomin $Y) The interest rate (i) M d = $YL(i) nal income ($Y) ange i ckable (M d ) nal income
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Equilibrium in the Money M M s = M (SARB supply) Money supply M s = Mo M = $YL(i) - The inter be willin - Increase - Decrease Open Market Operations OM 1. 2 Types of OMO: Contractionary: sell bonds circulating in the economy Exapnsioanry: buy bonds i system 2. People want to hold bo 3. Inverse relationship b - High bon - Low bon i = F Money supply is constant set by the Market (LM realtion) oney demand M d rest rate must be at a level that for a given ng to hold the amount of money M e in i results in increased savings e in i results in decarsed savings MO s in exchange for money = a decrease in mo y in exchange for money = an injection of mo ond because it pays interest as opposed to c between the price of bonds (P B ) and the in nd price low interest arte nd price high interest rate Future payment of the bond - P B P B e SARB Increase in nominal inc $Y people will oney oney into the cash nterest rate i come
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1. Demand for money se rate Demand for Money Continu 2. There are two decisions in 1. How much m 2. How much m checkable d 3. Consider Demand for currency Demand for checkable ell bonds bond supply bond prices ued nvolved in the demand for money: money to hold as opposed to bonds money to hold in currency (CU d ) and how m deposits (D d ) M d = $YL(i) CU d = c.M d deposits D d = (1-c)M d s interest much in
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Demand for Reserves 4. The larger the amount of c need to be in order to facil Consider: the reserve of banks Where: θ = the reserve ratio D = the amount of checkable d And given that the demand for Then the demand for reserves The demand for Central ban 5. H d is equal to the sum of th Tw Demand by consumers checkable deposits the larger the reserves o litate consumers potential demand for thei s (R) R = θD d deposits r checkable deposits is : D d = (1-c)M d s by banks is : R d = θ (1-c)M d nk Money H d he demand for currency and the demand fo wo Alternative Demand by banks of the bank’s ir money or reserve Supply by SARB
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way to look at equilibrium Look at equilibrium as The market for reserve The interest is the fede H Now divide both sides by: [c (C Overall supply is equal multiplier CHAPTER 5: THE IS-LM Short Run Equilibrium
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