ECO102 Tutorial 10
- On test
- Basic AE model, change in NX, offset with G
- Solow growth model.
- AS/AD question
- 1
coupon bond. of - Price is
. - Yield is?
- Face Value: How much they're lending to you.
- How much that has to get repaid, minimum.
- Matures in 1 year. So you have to pay
in 1 year. - You require interest rate as a compensation for lending money to someone else. In this market it's
This doesn't correlate / influence price of bond. - Yield:
is the yield.
- 2
- This adds a stipulation to the bond.
- Coupon payments.
- They used to come in pieces of paper with coupons at the bottom.
- Then you used to go to the bank and cash those coupons in for money.
- Matures in 2 years.
- Let's say every year we need to pay
. : Cash flow. - Year 1:
- Year 2:
+ (face value)
- Year 1:
- Discount the cash based on interest rates and 'expected' rates of return basically.
- Par value is Equilibrium price.
- If face value is
- And price is
, then it's above par. - In the first question the price was
and the face value was , so it was below par.
- 3
- GDP growth is
- Quantity theory of money
- GDP growth is
- 4
- Cash drainage
- And reserve ratio
- Target reserve of
- Cash drainage is
- Money supply isn't how much we issue into the economy
- It depends on cash drainage and reserve ratio.
- 5
- Calculate the equilibrium interest rate.
- Supply and demand for money
interest rate - Doesn't make sense, but this is the real solution.
- 6
- Equilibrium interest rate are parity
- Provide a pair of diagrams of MD and MS and interest rate parity to explain the relationship between the interest rate and the exchange rate. Point A
- BOC buys
from the private sector, how does everything change? Point B - Point A:
interest rate ??!??!?!?! - Correct though
- Exchange rate is determined by interest rate parity.
- Don't use decimals in this case.
- So the exchange rate is
.
- Point B:
- We have to adjust the money supply because the BOC is buying
from the private sector. - This is quantitative easing. Taking money out of the market to stimulate the economy.
- We do
because we've taken out of the market for years ( is maturity on bonds).
- We do
interest rate ?!?!?!
- Interest rate parity
-
-
So the exchange rate is
. left=-10; right=1300; top=70; bottom=-10; --- x=1200-20y x=600|dashed x=800|dashed y=20|dashed y=30|dashed (600,30) (800,20) -
IRP always has a curve
left=-2; right=10; top=40; bottom=-2; --- y = e^{-(x - (\ln(20) + 0.75))} y=20|dashed y=30|dashed x=0.75|dashed x=0.5|dashed (0.75,20) (0.5,30)
-
- We have to adjust the money supply because the BOC is buying