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Canada (509,327)
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ECO102H1 (155)

ECO100 - MAR 4

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James Pesando

Review of Last Class ● Monetary Policy ○ Using the money supply to impact AD ○ Money Supply = currency + deposits ● Chartered Banks: controls the Money supply ○ Multiple deposit creation motivated by profits ● Central Bank: controls the money supply ○ currency (changes the reserves at the chartered banks) ○ Interest rate manipulation ■ changing the physical amount of money -> creates a different interest rate equilibrium Money Demand ● Money supply (MS) and money demand (Md) determine the interest rate (i) ○ The interest rate is conceptually similar to the price of money ○ MD is often called liquidity preference (LP) ● MS is determined by ○ a) The creation and destruction of currency by the Bank of Canada (BoC) ○ b) Multiple deposit creation by chartered banks ■ Loans earn interest and thus profit for banks ● MD is determined by: ○ a) price level ■ positive relationship with MD ○ b) income level ■ how it contributes to your own personal preference ■ positive relationship with MD ○ c) interest rate ■ inverse relationship with MD ● Suppose households hold 2 assets ○ Money (currency + deposits): pay no interest ○ Bonds: pay the market interest rate ● Would you increase or decrease your money holdings if: ○ a) Prices in the economy increase? ■ Increase b/c the dollar volume of transaction increases ○ b) Your income rises? ■ Real GDP rises ■ Increase b/c the real volume of transactions increase ○ c) The interest rises from 3% to 18%? ■ Interest is the opportunity cost of holding money (foregone earnings) ■ Fall because the cost of money has increased ● When all else is equal: ○ a) price level changes shift MD ○ b) income level changes shift MD ○ c) interest rate changes are movement along MD ● If P of Y increase, MD shifts to the right Bonds ● How does i act as the opportunity cost of money? ● Recall household hold 2 assets: ○ Money (Currency + Deposits): pay no interest ○ Bonds: pay the market interest rate ● The simplest bond is a single payment one year bond ○ Buy a bond today, receive a fixed coupon payment in one year ○ The price of the bond today is its Present Value ■ Present Value = (coupon payment in one
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