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Financial
Financial Markets
Markets
CHAPTER 4
Markets
Chapter 4: Financial
Pr ep ar ed b y:
and Y vonn Quijano
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M d = $Y L(i)
( )
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Markets
Chapter 4: Financial
Chapter 4: Financial
Markets
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M = $YL(i )
d
( )
Figure 4 - 1
Clearly some currency was held by firms rather than by households. And
some was held by those involved in the underground economy or in illegal
activities. However, this leaves 66% of the total unaccounted for. The
balance of which is abroad and held by foreigners.
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Markets
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Chapter 4: Financial
Chapter 4: Financial
Markets
The fact that foreigners hold such a high proportion of the dollar bills in
circulation has two main macroeconomic implications.
First, the rest of the world, by being willing to hold U.S. currency, is making
in effect an interest-free loan to the United States of $500 billion.
Second, while we shall think of money demand as being determined by
the interest rate and the level of transactions in the country, it is clear that
U.S. money demand also depends on other factors.
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Markets
This equilibrium
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Chapter 4: Financial
Chapter 4: Financial
Markets
M = $Y L(i)
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Chapter 4: Financial
Chapter 4: Financial
Markets
The Effects of an
Increase in the Money
Supply on the Interest
Rate
Markets
The Effects of an
Increase in Nominal
Income on the Interest
Rate
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Chapter 4: Financial
Markets
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Figure 4 - 3
Chapter 4: Financial
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If we are given the interest rate, we can figure out the price
of the bond using the same formula.
i=
$100 $ PB
$ PB
$ PB =
Markets
$100
1+ i
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Chapter 4: Financial
Chapter 4: Financial
Markets
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Markets
Figure 4 - 4
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Chapter 4: Financial
Markets
Chapter 4: Financial
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What Banks Do
What Banks Do
Markets
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Markets
Chapter 4: Financial
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What Banks Do
What Banks Do
Figure 4 - 6
The Balance Sheet of
Banks and the Balance
Sheet of the Central
Bank, Revisited
Markets
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Chapter 4: Financial
Chapter 4: Financial
Markets
The assets of the central bank are the bonds it holds. The
liabilities of the central bank are the money it has issued,
central bank money. The new feature is that not all of central
bank money is held as currency by the public. Some of it is
held as reserves by banks.
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Markets
Determinants of the
Demand and the Supply
of Central Bank Money
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Markets
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Lets think in terms of the supply and the demand for central
bank money.
Chapter 4: Financial
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Bank Runs
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Chapter 4: Financial
Chapter 4: Financial
Markets
Rumors that a bank is not doing well and some loans will
not be repaid, will lead people to close their accounts at
that bank. If enough people do so, the bank will run out
of reservesa bank run.
CU = c M
D d = (1 c) M d
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H d = CU d + R d
Rd =
(1
c) M d
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(1 c )
Md
Hd = c+
(1 c )
$Y L ( i )
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(1
c ) $Y L ( i )
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Chapter 4: Financial
Hd = c+
Markets
Or restated as:
Markets
= c+
H = Hd
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1
H = $Y L(i)
[c + (1 c)]
H CU d = R d
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Chapter 4: Financial
Markets
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Markets
Chapter 4: Financial
(1 c ) M
Chapter 4: Financial
H d = cM d +
Markets
Chapter 4: Financial
Chapter 4: Financial
Markets
R= D
1/ ( c +
(1 c ) )
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Key Terms
Markets
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Chapter 4: Financial
Chapter 4: Financial
Markets
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