Intermediate_Macroeconomics_Lecture3.pptVIP

J. Ding, Nankai Univ. Macroeconomics, O. Blanchard Lecture 3 Financial Market The Determination of Interest Rate: The Classical Theory The loanable funds market is a simple supply-demand model of the financial system. One asset: “loanable funds” Demand for funds: investment Supply of funds: saving “price” of funds: real interest rate Real interest rate is determined by the supply and demand of loanable funds. Demand for Loanable Funds The Determination of Interest Rate: The Classical Theory The Determination of Interest Rate: The Classical Theory The Theory of Liquidity Preference Due to John Maynard Keynes. A simple theory in which the interest rate is determined by money supply and money demand. An Overview of Money Money is anything that is generally accepted as a medium of exchange. Money is not income, and money is not wealth. Money is: a means of payment, a store of value, and a unit of account Measuring the Supply of Money The two most common measures of money are M1 and M2. M1, or transactions money is money that can be directly used for transactions. M1 = currency held outside banks + demand deposits + traveler’s checks + other checkable deposits In the end of April, 2002, M1 of US was $1,174.0 billion. M2, or broad money, includes near monies, or close substitutes for transactions money. M2 = M1 + savings accounts + money market accounts + other near monies In the end of April, 2002, M2 of US was $5,480.1 billion. The main advantage of looking at M2 instead of M1 is that M2 is sometimes more stable. The Modern Banking System Financial intermediaries are banks and other financial institutions that act as a link between those who have money to lend and those who want to borrow money. A brief review of accounting: Assets = Liabilities + Net Worth A bank’s most important assets are its loans. Other assets include cash on hand (or vault cash) and deposits with the central bank. A bank’s most important liabilities are its deposits. The Creation of Money Ba