EC140 Lecture Notes - Lecture 24: Market Clearing, Business Cycle, Nairu
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EC140 Full Course Notes
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Document Summary
Key to understanding macroeconomics- feedback effects are critical. Most variables are endogenous (determined within the model) Course is designed to connect all the pieces. Price level and inflation (gdp deflator, cpi inflation, core inflation) Money serves three functions: medium of exchange, store of value, unit of account. Banking system: bank of canada and the commercial banks, money creation depends on reserve ratios, cash drain. Interest rates art h opportunity cost of holding money: also, real gdp and price level affect transactions demand. Increasing the money supply reduces interest rates: reduced interest rates lead to increased investment. Open economy adaptation: decreased interest rates lead to financial market outflows, supply/demand for foreign exchange causes depreciation of the cnd dollar, depreciation of the dollar increases net exports. Bank of canada focuses on interest rates, not the money supply: money demand slope/shifts are unpredictable. Target overnight interest rates: set bank rate0. 25% higher lending to banks, set deposit rate 0. 25% lower interest on reserves.
