Lecture 5: The role of the government and the central bank in the Financial market. This lecture’s aim is to help students understand: What the government.

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Lecture 5: The role of the government and the central bank in the Financial market. This lecture’s aim is to help students understand: What the government and the central bank can do to affect the financial market through their policy? The concept of equilibrium. The concept of Aggregate Output (GDP) and Aggregate Income. Method to calculate GDP growth rate of a country. The concept of real interest rate and real income.

5.1 How government and Central bank affect the financial market? Goals of fiscal policy High employment. Economic growth Price stability in the economy Income distribution. Goals of monetary policy High employment. Economic growth. Stability of financial market. (stock market, foreign exchange market…) Stability of the interest rate. The government and Central bank affect the financial market in different ways using their own policies: Fiscal policy and monetary policy

5.1 How government and Central bank…(cont) Financial market Government Central bank Economy-GDP Fiscal policy Monetary policy strongweak REVENUE

5.2.a Advantage and disadvantages of the fiscal policy Advantages Can bring a direct effect to the Job market and economy growth. Help to distribute income equally to people in the country. Directly protect the domestic market and promote export. Disadvantages High budget deficit due to overspending may weaken the domestic currency, reduce the faith of people in domestic currency. Overspending from public sectors may lead to a high inflation. Depend on foreign loads and increase the government liability.

5.2.b Advantage and disadvantages of the monetary policy Advantages Any decision made by central bank can be executed in a very short time (no time lag) Do not depend on politics pressure. Have a better ability to stabilize price and inflation. Disadvantages The effect of monetary policy on the job market and public sector is not as quick as fiscal policy. Discrete policy made by central bank may have a adverse effect on the economy, damage the credibility of the central bank.

Insert the Video: England slash interest rate

5.3 The concept of equilibrium. priceInterest rate (i) Quantity of Treasury Bond Bd1Bd1 Bs1Bs1 p1p1 i1i1 1 Definition: In the above histogram, point 1 is the equilibrium point at which the price that the Bond buyers are willing to pay meet the price that the Bond sellers are willing to sell. Purple line p2 i2