LECTURE 3 Flashcards
Public Saving
T-G
Private Saving
(Y-T)-C
National Saving (S)
Private+public
=(Y-T)-C + T-G
=Y - C - G = I (from national income accounts)
(saving=investment)
qualifications for money
- store of value that is relatively stable over time
- universally accepted
- facilitate comparison in value
asset vs liability
money is an asset to those who hold money and a liability to those who issue it
money supply
quantity of money available in an economy
Narrow money
M0 and M1: monetary base plus bank deposits which can be used for cash transactions
broad money
M2/M3/M4: Narrow money plus deposits requiring notice and deposits from loans created by banks
how does the central bank increase money supply
central bank buys government bonds from the public so money enters circulation
how does the central bank decrease money supply
sells bonds from own portfolio which takes money out of circulation
central bank
has the power to print currency and influence the amount of money created by commercial banks
maintains and regulated financial system
responsible for monetary policy
commercial banks
operate under license from central bank, can create money through loans subject to liquidity constraints
liquidity ratio
the percentage commercial banks have to keep of reserves to ensure liquidity. the higher the percentage in reserves, the less they can lend to create money.
reserves
deposits that commercial banks receive but don’t loan out
according to Keynes, why do we hold money
- transactions: money to carry out transactions
- speculative: money held to buy speculative assets
- Precaution: money held to insure against an unexpected expense
