ECO102H1 Lecture Notes - Lecture 19: Opportunity Cost, Overnight Rate, Money Supply
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ECO102H1 Full Course Notes
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Assumption: only 2 assets, money and bonds. In equilibrium, the yield of the bond is the rate of interest (i) in the economy. The opportunity cost of holding money is the interest forgone (i) by not holding bonds instead. Expectations about returns on other assets (bonds) The demand for money is a function of the rate of interest, real gdp, and the price level. The demand for money is negatively related to i. The demand for money is positively related to the level of y. The demand for money is positively related to p. We will assume, however, that p is fixed. Effect of an increase in the level of real gdp. The bank of canada has two alternative approaches for implementing its monetary policy. The bank of canada cannot directly control the money supply. It can influence the money supply by changing the cash reserves in the banking system.