24. Determination of national income equilibrium in the Keynesian analysis. The multiplier effect and multiplier coefficient.

Determination of Y

Equilibrioum level-is a situation where there is no tendency to change.

2 ways of finding Ye:

1.W=J (S-I)

2.Y=E, Cd+W=Cd+J

Equil of Y doesn’t mean unchanges in Y.Keynes argues that changes in J,W and E including Cd lead to multiplied changes.

1.Inj multplier-the number of times by which a rise in income exceeds the rise in J that caused it:k=∆Y/∆J

2.W multiplier- #of times by which a rise in Y exceed the decrease in W that caused it=∆Y/∆W

The flatter the W function → the less is mpw, the greater k.

3.Expenditure approach-#of times by which the rise in Yexceed the rise in E=∆Y/∆E

The greater mpc (which determ Cd) the greater is k.

Multiplier coef(k)=1/mpw=1/(1-mpc).

The logical expl of mult effect :

1. 1.spending for 1 person is alwats income for others

2. 2.spending of 1 person causes spendings of others

Conclusions from theory:

1. ↑C/↑E → ↑Y→ faster ec. growth, higher living standard.2. ↑S/↑W→ ↓Y→ slower ec. growth, lower living standard .Keynes formulated the paradox of thrift: ↑S→ ↑W→ ↓Y(multi)→ ↓S(in future)

If individuals save more, they will increase their consumption possibilities in the future. If society saves more, this may reduce its future income and C. As people save more, they will spend less. Firms will thus produce less. There will thus be a multiplied fall in income. The phenomenon of higher saving leading to lower national income is known as ‘the paradox of thrift’. But this not at all. Far from the extra S encouraging more I, the lower cons will discourage firms from investing. If I falls, the J line will shift downwards. There will then be a further multiplied fall in Y.

25. Keynesian explanation of inflation and business fluctuations.

26. Fiscal policy: types and effectiveness.

1. Financial sector or financial intermediaries is the sum of financial institutions such as banks, which act as a means of channeling funds from depositors to borrowers.

Typical structure of financial system.

Head of it - central bank.

Then:

1) commercial banks (retail banks = high street banks; wholesale = investment banks - specialized in large scale deposits and loans)

2) saving banks, thrift institutions

3) other financial institutions (building societies - loans; finance houses - loans for purchasing durable goods and capital equipment; pension fund; discount houses - provide bills of exchange)

Functions of financial institutions(FA):

1) Maturity transformation. They provide lending for long period independently on period of borrowing.

Transfer short-term deposits into long term loans.

2) Risk transformation.

Financial institutions take risk of lending, possible non-payment, by having large number of depositors.

3) Transmission of payments. FI transfer money from one account to another without having cash. (= безналичный расчет).

4) Expert advice. FI can advise their clients the best ways of deposits (according to financial situation, etc).

5) Expertese in channeling funds. FI are able to channel their funds to the most profitable areas of the economy.

2. Banks balance sheet - is the list of assets and claims on bank.

Liabilities + net worth

ASSETS

Liabilities - all legal claims that outsiders have on bank. Claims held by banks on outsiders. 1) Deposits including Demand deposits Time deposits Certificates of deposits (CD) - issued by banks for fixed term influenced bearing deposits. Sale and repurchase agreements (or 'repos') - a selling banks assets to other banks and repurchasing them at a fixed price on a fixed date. 2) Capital and other funds Include shareholder's funds Bank's internal funds

1) Actual or total reserves Till money (кассовые деньги) = vote cash Required reserves or statuatury reserves or minimum reserves - are the minimum level of reserves that are required to be held in Central Bank in order to : A) To control bank's activity. Required reserves = RequiredReservesRatio * Deposits B) To clear mutual payments between banks. One bank has a debt, other has a debt, it may be cleared - called clearing - в России - расчетная палата. C) To insure deposits. Excess reserves - the amount of bank's reserves held in CB over and above the minimum amount required. Excess reserves = Actual Reserves - Required reserves. All in common: balances in the central bank. 2. Loans. a) Short-term loans (include: - market loans: - money at call - 24 hours; short-notice - few days; certificates of deposits in other banks. Also - bills of exchange and - reverse repos) b) Longer term loans (or advances) (include: - fixed term loans, - overdrafts without fixed date, - mortgages (ипотека или закладная форма). 3. Investment in government securities. 4. Banks property.

Main aims of bank activity:

In contrast: there are 2 aims:

• Profitability banks profit = (interest from lending - interest paid to depositors) + Revenue from other bank's Services - TC.

• Liquidity or safety. Bank should maintain sufficient liquidity in order to: 1) meet possible mess-demand of depositors; 2) in order to have money for more profitable loans.

Aims of profitability and liquidity tend to conflict: the more liquid asses, the less profitable it is, and vice versa.

3. CB functions.

CB is a banker for other banks and for government.