1
Chapter 4
Financial Market
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90 91 92 93 94 95 96 97 98 99 00
Topics to be Discussed
? 4.1 Introduction
? 4.2 Banking system & monetary market
? 4.3 The interest rate & national income
4.1 Introduction
?Physical assets & financial assets
?Money & statistic caliber
?Bonds
?Stocks
?Physical assets & financial assets
? Basic concepts
?Physical asset
equipments,factory buildings,automobiles,
products,and product material…
?Financial assets
money,bonds,stocks …
4.1 Introduction
?physical assets & financial assets
?Functions of financial assets
?Information transfer
?Lessen exchange cost
4.1 Introduction
?Money & statistic caliber
?Function of money
?Transaction Form
?Measurement of Value
?Means of Payment and Means of Hoard
4.1 Introduction
?Money & statistic caliber
?M0,Cash & Currency (Cu)
?M1,
DCM u ??1
4.1 Introduction
? Money & statistic caliber
?M2,M1,Savings Deposits (Ds),
Personal Term Deposits (Dt)
ts DDMM ??? 12
4.1 Introduction
?Money & statistic caliber
?M3,M2,Non-Personal Term Deposits
and Deposits in Foreign Currency,etc,Dn
nDMM ?? 23
4.1 Introduction
?Money & statistic caliber
?Currency Deposit Ratio
?The determination of Currency Deposit Ratio
-----the behavior of the family and the firm
10 ??? ??,
D
C u
4.1 Introduction
Case1:Money & statistic caliber
Source,Mankiw,Macroeconomics,5th Edition,P36
? Bonds
?Definition
?Characteristics,
? Reimburse ? negotiability
? Beneficial ? security
4.1 Introduction
? Stocks
?Definition
?Characteristics,
?Non-reimburse ? Participation
?Negotiability ? Beneficial
?Security ? risk
4.1 Introduction
4.2 Banking System & Monetary Market
? Banking System
? The asset and debt Commercial bank
? the deposit creation
?The Demand and supply for Money
? Banking System
?Central bank
?Issuing bank
?Banks’ bank
?Government’s bank
?The independence to government
?The independence to banks
4.2 Banking System & Monetary Market
? Banking System
?Commercial Banks
?The Reserves
4.2 Banking System & Monetary Market
? The asset and debt
? Commercial bank
? Asset business
? discounting
? credit
? securities
? Debt business
? Absorb deposition
4.2 Banking System & Monetary Market
Assets-debts of monetary market
Source,Yuan Zhigang,”Macroeconomics”,(2nd edition),P82
Public
（ families and firms）
Commercial
banks
Central bank
Asset debt asset debt Asset Debt
Cu Cu
D D
Re Re
Loans Loans
Bonds Bonds
? Money Base (Mb)
?Components,Cu,R (RR & ER）
? High-powered money,H
ERRRCHM ub ????
4.2 Banking System & Monetary Market
?Monetary base & money supply
DCM u ??
DERDRRDC
DC
ERRRC
DC
H
M
M
M
u
u
u
u
b ///
1/
??
??
??
???
ERRRCHM ub ????
4.2 Banking System & Monetary Market
?Monetary Base Multiplier (mm)
u
b b u
M M C / D 1
mm
M M C / D R R / D E R / D
??
? ? ?
? ? ?
4.2 Banking System & Monetary Market
Monetary base and the quantity
Source,Yuan Zhigang,“macroeconomics”,(2nd edition),P115
M o
Mb
K
mm1tan 1?
M?
bM?
Depositor Bank’s
deposits
Bank’
loans
Reserve
（ 1） （ 2） =（ 3） +（ 4） （ 3） =（ 2） x0.8 （ 4） =（ 2） x0.2
A 100 80 20
B 80 64 16
C 64 51.2 12.8
… … … …
TOTAL 500 400 100
4.2 Banking System & Monetary Market
? The deposit’s creation
? The demand for money
? Keynesian three motive for money,
? The transaction motive
? The precautionary motive
? The speculative motive
PhrkyM d )( ??
4.2 Banking System & Monetary Market
The equilibrium of monetary market
M 0
R Ms
R*
M*
Md
E*
Source,Yuan Zhigang,“macroeconomics”,(2nd edition),P119
The Increase of supply leads
the interest rate decreases
M 0
R Ms
R*
M*
Md
E*
R**
M**
E**
Sources,Yuan Zhigang,“Macroeconomics”,(2nd edition),P119,
m=M/P 0
r ms
r*
m*
md
E*
The relation
between the real
money supply
and real interest
rate
r**
m**
E**
The Increase of supply leads
the interest rate decreases
What will
happen if
the demand
increase?
The relation
between the real
money supply
and real interest
rate
m=M/P 0
r ms
r*
m*
md
E*
r**
m**
E**
The Increase of supply leads
the rate decrease
4.3 The Interest Rate & National
Income
? Marginal Efficiency of Investment ( MEI )
r
MEI
r1
r0
I e d r??
I I1 I2
30
Chapter 4
The End
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90 91 92 93 94 95 96 97 98 99 00