P e. 1 + i t (1 + i t ) This year. Next year. Goods 1 good (1 1 r t. Definition of. goods. the real rate: ) 5 (1 1 i t ) P t. (1 1 i t.

Transcription

1

2 i t t t t + i t ( + i t ( + i t P t P e t+ This yea Next yea Definition of the eal ate: Goods good ( t goods ( t 5 ( i t P t P e t Deivation of the eal ate: Goods ( i good t P t goods P e t P t dollas ( i t P t dollas If i t is the one-yea nominal inteest ate the inteest ate in tems of dollas and if you boow P t dollas, you will have to epay + i t 2P t dollas next yea. This is

3 + t = ( + i t Pt P P e t+ e t+ P t = + πt+ e + t = + i t + π e t+ t i t π e t+ t i t π e t+ πt+ e = 0 i t = t πt+ e > 0 i t > t ī t πt+ e t i i i π

4 i π e = i π e i i 0 π e π e > 0 π e

5 i i + x p x + i = ( p( + i + x + (p(0 x = ( + ip p i = 4 p = 2

6 = C( T + I(, i + x π e + G i = ī = i π e = C( T + I(, + x + G = Inteest ate, Output, The two equations ae epesented in Figue 6-5. The policy ate is measued on the vetical axis and output on the hoizontal axis. The cuve is dawn fo given values of G, T, and x. ll othe things equal, an incease in the eal policy ate deceases spending and in tun output: The cuve is downwad sloping. The is just a hoizontal line at

7 Figue 6-6 Financial Shocks, Monetay Policy, and Output Policy ate, If sufficiently lage, a decease in the policy ate can in pinciple offset the incease in the isk pemium. The zeo lowe bound may howeve put a limit on the decease in the eal policy ate. 0 MyEconLab nimation Output, in Chapte 4, namely the constaint aising fom the zeo lowe bound on the nominal inteest ate. Given the zeo lowe bound on the nominal ate, the lowest eal ate the cental bank can achieve is given by = i - p e = 0 - p e = -p e. In wods, the lowest eal Figue policy 6-9 ate the cental bank can achieve is the negative of inflation. If inflation is high enough, say fo example 5%, then a zeo nominal ate implies a eal ate of -5%, which is likely to be low enough to offset the incease in x. But, if inflation is low o even negative, then the lowest eal ate the cental bank can achieve may not be enough to offset Policies the incease in x. It may not be enough to etun the economy to its initial equilibium. s we shall see, two chaacteistics B of the ecent cisis wee indeed a lage incease in x and low actual and expected inflation, limiting how much cental banks could use monetay policy to offset the incease in x. We now have the elements we need to undestand what tiggeed the financial cisis in 2008, and how it mophed into a majo macoeconomic cisis. This is the topic of the next and last section of this chapte. Inteest ate, Output, 6-5 Fom a Housing Poblem to a Financial Cisis Fiscal Policy When housing the size of pices the advese stated shock declining became in clea, the the United U.S. govenment States in 2006, tuned most to fiscal economists foecast policy. When that this the Obama would lead administation to a decease assumed in demand office in and 2009, a its slowdown fist pioity in gowth. was Few economists to design a anticipated fiscal pogam that that it would incease lead to demand a majo and macoeconomic educe the size cisis. of the ecession. not anticipated Such a fiscal was pogam, the effect called the of the meican decline Recovey of housing and pices Reinvestment on the financial What most had ct, was passed in Febuay It called fo $780 billion in new measues, in system, and in tun, the effect on the economy. This is the focus of this section. the fom of both tax eductions and spending inceases, ove 2009 and 200. The The Financial Cisis, and the Use of Financial, Fiscal, and Monetay The financial cisis led to a shift of the to the left. Financial and fiscal policies led to some shift back of the to the ight. Monetay policy led to a shift of the cuve down. Policies wee not enough howeve to avoid a majo ecession. MyEconLab nimation

8 This yea $ Next yea $( i t $ $ i t $ $ ( i t ( i t 2 yeas fom now $ $( i t ( i t + i t +i t +i t ( + i t = ( + i t( + i t+ (+i t (+i t+ This yea $ Next yea $( i t 2 yeas fom now $ $ i t $ $( i t ( i t $ $ ( i t ( i t ( + i t i t V t = z t + z t+ + + i t ( + i t ( + i t+ z t

9 V t = z t + z e t+ + + i t ( + i t ( + i t+ ze t V t = z t + ze t+ + i + ze t+2 ( + i z [ V t = + ] + i + ( + i ( + i n z ( n +i V t = z +i