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Lecture 2- I

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McGill University
Economics (Arts)
ECON 205
Tom Velk

In the NewsCentral Bank in EU is going to pay a negative rate of interest to commercial banksgovt is buying up govt bonds with paper money govt has private banks keep deposits with the govt central bank are supposed to be a safety factor to keep the commercial banks liquid and safemost govts are irresponsible and banks dont want to keep their money there in the past govt would pay positive rate of interest now they pay negative rate of interestone way to stimulate the economy is to pack the commercial banks with money which can then be lent to business people banks are stuffed with cash and not lending it the negative rate of interest is meant to fine banks for holding the money in excess reserve Goldberg and Tinberg Modeldirection towards big govtbalance sheet view of stimulusgiving someone spending powergovt gets money through tax or borrowing negative series of contractionstax meaning a reverse process of not spending by the guy who has to pay the tax borrowed the people pay the interest on the loan the new money is created one way or another that still burdens Mr Joneswhen new money is created the central bank buys things and does so with new money paper moneyif you get that paper money youve got extra money you didnt have before inflation all kinds of assets have risen in price you get a twisting of normal price relationships across the economyof how much you need to put aside for pension or how much to budget to buy a houseeconomics mean reversion occurs and the standard relationships eventually return to the market new form of inflation is not about hamburger prices but about assets the model is about redistribution from Smith to JonesSmith is no longer motivated
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