Unit 10 Flashcards
(32 cards)
What is Money?
Money is a medium of exchange consisting of bank notes and bank deposits, or anything else used to purchase g+s.
Where does money act as an important role
as a bartering tool, and therefore allows for many more exchanges. Accepted as payment as others can use it for the same purpose.
Model in this unit
Consumption now versus later, with feasible frontier sloping downwards, steeper when interest rate is higher
How much is repayment?
R = P +Pr
R = P(1+r)
P is the principal payment, R is the repayment, r is the interest rate.
Slope of FF
- SLOPE is the MRT = 1+r
- If she goes from 0 now to 1 now, she needs to pay back 1.10 later due to 10% interest rate, which means her consumption later will be 98.9.
Indifference curve shape
As we get further to right very shallow, left is very steep on IC, people would generally much prefer a consistent level of consumption, split between both. This is as people have DMR of consumption.
Pure impatience
Myopia: People dont think about the future, only focus on the present
Prudence: what if I’m not around later on - consume now YOLO
Will make it so that if they have to take a cut in consume now, need more proportionally later.
All captured by a persons discount rate:
how much she values an extra unit of consumption now over an extra unit of consumption later. This is the slope of her IC between consumption now and consumption later minus one.
MRS = 1+P
Depends on
- desire to smooth consumption
- pure impatience
desire to smooth consumption
affected by the situation she’s in
Pure impatience as a person depends on
subjective discount rate because it is based part on her psychology
Will choose point where
MRS = MRT. I.e. 1+p = MRT. 1+P=1+r, so p=r, willingness to trade off consumption now and later on = ability to trade off now and later on.
borrowing, lending, storing and investing are ways of
moving goods consumption forward or backwards.
- increase utility by smoothing consumption, or if impatient, move consumption to present
- Can increase consumption in both periods
People differ because:
- differences in situation
- Differ in level of pure impatience
Balance sheet shows
what owned or owed.
Assets and Liabilities
Assets = what you own and what people owe you
Liability = what you owe others.
Assets = net worth + Liability
A bank is
firm that makes profits through its lending and borrowing activities.
Types of money
Base money
Bank money
Broad money
Base money
cash held by households, firms and banks and reserves. Liability of central bank
Bank money
money in the form of bank deposit is created by commercial banks when they extend credit. Is the liability of commercial banks
Broad money
amount of broad money in economy measure by stock of money in circulation.
Loans on a balance sheet
Added to both assets and liabilities as you have to pay it back.
Bank makes money as
value of assets including interest minus value of liabilities which is the principal loan allows them to create positive net worth
LIQUIDITY RISK
might not be able to supply all of demanded assets, taking time to switch illiquid assets to liquid.
DEFAULT RISK
loans not repaid
