Financial Markets and Economic Activity
Three chapters in this part examine the financial sector of the economy and the important role it has in the determination of output and employment. They cover money, banks and banking, financial markets, asset prices and foreign exchange rates. When integrated, these parts of the economy provide the ‘monetary transmission mechanism’ and a framework for the design and implementation of central bank monetary policy. Moreover, the financial sector is the key to price level and inflation rate elasticities in the aggregate demand functions derived in later chapters.
In this chapter we will explore:
8.1 Money and functions of money
8.2 Measures of the Canadian money supply
8.3 Banking in Canada today
8.4 Money created by banks
8.5 The monetary base and the money supply
This chapter and the two chapters which follow examine the financial sector of the economy. They cover money, banks, Canadian banking, financial markets, asset prices, interest rates, and foreign exchange rates.
The financial sector provides the important link between and aggregate expenditure and aggregate demand. It is the key to understanding the slope and position of the AD curve. It also creates the framework for central bank monetary policy.