What is the tradeoff between Savers and Borrowers: (Supply and Demand)
What is this tradeoff typically referred to as?
Financial Markets:
Savers spend less then they earn - and supply money into financial institutions
Financial institutions = Move the economy’s scarce resources from savers to borrowers
Borrowers spend more then they earn - and demand money
What is a bond? What are important factors of the bond market?
Bonds= Are certificates of indebtedness (debt) that specifies the obligations of the borrower and the holder of the bond.
How does it work: The buyer of the bond gives their money to the issuer of the bond in exchange for the promise of payment of interest and the principal.
The term of a bond is the length of time until the bond matures
The interest rate is closely related to the term of the bond
What is Stock? What are the ins and outs of the stock market?
Stock represents ownership in a firm
Owners of stock own claim to a share of the profits that a firm / company makes
publically-traded corporations issue stock by selling shares to the public
What are financial intermediaries?
The bond (lend of money) and stock market (opportunity to buy into company shares) are both examples of financial institutions that involve direct transfer between savers and borrowers
BANKS serves as financial intermediaries whereby savers can indirectly (no contact with the borrower) provide funds to a borrower
What is the equation of the identity of GDP (Saving and investment in National income Accounting)
Y = C + I + G + NX
Y- GDP
C - Consumption
I - Investment
(formation of physical capital not stocks or bonds)
G - Government purchase
(infacstructure, public services and salaries of public employees NOT pensions)
NX - Net Exports (goods and services sold to foreigners)
(If exports > Imports NX = +)
(Where in a closed economy NX = 0)
Explain this equation (Y = C + I + G )
Rearranged it is
(Y-C-G)= I
Which repersents income that remains after consumption and government purchuse.
Therefor investment is equivilant to Saving or National Saving
and can be written as
S =(Y-C-G)
What two categories are created when we introduce tax into our savings / investment equation (S = (Y- C - G))
T = Taxes, or the amount the government collects in taxes, minus the amount it pays to households in transfer payments (tax returns or child benefits)
S = (Y-T-C) + (T-G)
(private saving) (public saving)
What is the difference between Budget Deficits and Surpluses
T = Taxes (minus tax returns and child benefits)
G = Government purchases
- Budget surplus results when T > G
- Budget deficit results from T < G
What 3 functions does money serve?
1) Medium of Exchange
- Used to exchange both in retail and private settings
-Item customer gives in order to receive
2) Acts as a Unit of account
- “yardstick people use to post prices”
- When you list your assets you would do so in dollar value not in comparison to some other good.
3) Acts as a Store of Value
- Money received today still holds value in the future.
Fiat vs. Commodity money (little fact why they stopped producing penny’s)
Fiat Money
= Has NO intrinsic value (meaning the actual item holds little value - money is glossy paper) The value of Fiat money is based on the value the government assigns to it.
Commodity Money
= Has intrinsic value (meaning the actual item used for currency has value)
Example: A Pirates gold coins from their treasure chest.
or
In prison cigarettes are often treated like money and they themselves hold value (you can use them)
The Bank of Canada:
1) Which Prime Minister laid the foundation for the BC
2) Was it founded as a private of public institution?
3) Who was the first governor of Bank of Canada
1) R.B Bennett during the great depression studied banking - results of commission = foundation for the bank of Canada
2) Bank of Canada founded March 1935 as a private institution
3) Nationalized in 1938. The first governor of Canada = Graham F. Towers who helped establish the core functions of the Bank of Canada
What are the bank of Canadas core functions? (4)
1) Monetary policy:
- BoC aims to keep inflation low, stable, and predictable between 1-3%
2) Financial system:
- promotes safe, sound, and efficient finaical systems within Canada and internationally.
3) Currency :
- Issues and distributes Canadas bank notes
4) Funds management:
- Bank of Canada acts as a fiscal agent for the government of Canada, managing its public debt programs and foreign exchange reserves.
What are the 4 jobs of the bank of Canada
1) Issues currency
2) The banker to commercial banks
3) Banker to the Canadian government
4) Controls the money supply in Canada through monetary policy
What are efficiency wages? What are they theorized to encourage?
= Above-equilibrium wages paid by firms in order to increase worker productivity
Believed to lead to:
1) Better health
2) Worker turnover
- Workers may leave a firm if wages are insufficient
- Its costly for firms to deal with turnover
3) Worker effort
- Higher wages give more of an incentive put in more effort to keep job
4) Worker quality (not the quality of their work)
- When a firm offers a lower wage than competitors, high-quality workers will likely apply to the higher-wage firms
Elasticity
= a measure of responsiveness
an elasticity > 1 = Elastic
(Big change in quantity with a change in price)
an elasticity < 1 = Inelastic
(little change with given a change in price)
How do we measure unemployment?
We categorize Adults (those 15 years or older) into 3 sections
1) Employed
= Spent some of the previous week working
2) Unemployed
= Temporary layoff or currently looking for a job
3) Not in the labor force
= Does not fit into either of those categories (retired, stay at home parent)
Whats the difference between discouraged workers and underemployed workers?
discouraged workers = individuals who have tried to find a job but have given up after an unsuccessful search are called discouraged workers.
Underemployed workers = workers who are working part-time when they would like to work full time
How do we calculate unemployment?
1) Labour force
2) Unemployment rate
3) labour force participation rate
1) Labour force =
(# employed + number of unemployed)
2) Unemployment rate =
(# unemployed / labour force) * 100
3) Labour force participation =
(labour force / adult population) * 100
What is the natural rate of unemployment?
The rate of unemployment that the economy tends to return to in the long run
estimated around 6.5%
Types of unemployment (3)
1) Cyclical unemployment
2) Frictional unemployment
3) Structural unemployment
1) Cyclical unemployment
= The deviation of unemployment from the natural rate. Unemployment due to changes in the business cycle
2) Frictional unemployment
= Being unemployed while searching for a new job. Because it takes time for workers to search for the jobs that best suit their tastes and skills
3) Structural unemployment
= Number of jobs available in some labour markets are insufficient to provide a job for everyone who wants one
The market of loanable funds
This market = where all savers go to deposit savings and all borrowers go to borrow money
Loanable funds = all income people have chosen to lend out or save, rather than use towards current-period consumption
one interest rate that applies to this market = Real interest rate
Where does the supply and demand for loanable funds come from? How do interest rates impact this supply and demand?
The supply of loanable funds is derived from savings
The demand for loanable funds is derived from investment
High interest rates = low demand of loanable funds
High interest rates = high supply of loanable funds
What are the central banks three main tools they can use as a monetary policy tool (control of money supply) ?
1) Open-market operations
2) Changes in reserve requirements
3) Changes in the overnight lending rate (main tool for monetary policy)
What happens if a commercial bank does not have enough in its deposits to cover reserves?
It can borrow from the Bank of Canada!
Of course not for free, there are interest rates called Bank rates
If a commercial bank has the opposite (a positive balance in their account) the bank of Canada will actually pay the commercial bank the bank rate minus 50 basis points (at least this was before 2020) AKA Deposit rate
