Money, banking and the macro-economy - Banks and macro stabilization
3 important questions on Money, banking and the macro-economy - Banks and macro stabilization
How is new investment financed? Where does the money come from?
When output and income go up as a result of the higher investment spending, savings also go up. Households must decide how to allocate their new savings.
Describe the three ways of holding savings
1. Deposits: ideal for transaction purposes but they are not interest-earning.
2. Government bonds
3. Bank shares
2. Government bonds
3. Bank shares
How will the central bank respond to the investment boom?
1. Since new deposits in banks will not be enough to fully fund the new lending, banks will borrow the balance from the money market
2. The total amount that is lent for the new investment will be equal to the amount of additional savings
The central bank will be concerned with the higher inflation caused by the rise in output and fall in unemployment. It will announce a higher policy rate
2. The total amount that is lent for the new investment will be equal to the amount of additional savings
The central bank will be concerned with the higher inflation caused by the rise in output and fall in unemployment. It will announce a higher policy rate
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