A Nation’s consumer spending Is affected by: 1. Current disposable income, measured in APC/APS 2. Permanent Income (life-cycle model), measured in MPC/MPS 3.Wealth: assets-liabilities (i.E. Home-mortgage) of a country which= sum total of the individual resident’s Wealth
Investment is affected by:1.Revenues. Firms will invest if they are selling what they’re already producing. 2.Costs. When production costs go up, Investments go down 3.Expectations. Also called “market Sentiment”. Consumer expectations (interesting firms) are measured through Consumer Confidence Index,
Supply of Money: Different Measurements. A) M1: Money for transactions (more liquid money) looks at: 1.Metal coins 2.Paper money 3. Checking accounts (or “demand deposits), meaning money to be Returned upon demand (once checks, now debts cards) B) M2: Broad Money ( looks At liquid money+smthg else) 1.M1 2.Saving accounts (or Time Deposits*). Less Liquid bcs when you need money back have to give bank a notice*bcs you receive Your money back after a certain amount of time 3.Certificates of deposit . Clients can buy CDs from bank and receive higher interest rates than those that They would receive from saving accounts.
Price of Money. Interest rates depend on: 1.Maturity: The longer a loan, the higher the interest rate 2.Risk: The higher The risk, the higher the interest rate. As long as there is a collateral. 3.Liquidity: Capability of debitor To give the money back anytime, meaning high liquidity, decreases interest Rates. 4.Administrative costs: High administrative costs gives higher interest rates.
Interest rates: -Nominal: official on paper price -Real:
Money bank will give you, variable inflation rate r Real interest rates = r Nominal interest
Rates – i Inflation
Why do people demand for money? Because Money is: 1. Medium of Exchange, 2. Store of Value 3.Unit of account.
Why do we have money in our pocket? 1.Transaction of
Money: liquid money we have i.E. In our pocket because we plan to spend it.
Depends on level of income and interest rates