ECON102 Lecture Notes - Lecture 18: Nominal Interest Rate, Reserve Currency, Reserve Requirement

• School: University of Waterloo
• Department: Economics
• Course: ECON102
• Professor: Joseph Dejuan

Document Summary

Consumption function - c = 10 + 0. 9yd (yd is the disposable income, yd = y -t) Tax function - t = 10 + 0. 1y (where 0. 1 is the marginal / income tax rate) Aggregate expenditure equation - ae = c + i + g + x - m. Equilibrium condition/ y = ae (solve for y!) Sub the new g into the original equation! Cash holding is depreciating by the inflation rate. Currency drain ratio = currency/ deposits (decided by households) Actual reserve = desired reserve + excess reserve (banks want to try and minimize excess reserves! Money multiplier: cr + 1 / cr + rd. Cr (currency deposit ratio or currency drain ratio) M = c + d (money = currency + deposits) Only the boc can create money but banks can create deposits! Mb (monetary base) = r + c (reserve + currency) Quantity theory of money equation = mv = py.