fiscal policy and exam prep EC210 LTW11 Luke Milsom March 18, 2018

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1 fiscal policy and exam prep EC210 LTW11 Luke Milsom March 18, 2018

2 the plan Discuss/ debate the discussion question. Do 2016Q15 1

3 problem set

4 discussion question ps10 Q: Deficits should rise during a recession. For: Keynesianism, governments should actively attempt to stabalise the cycle. When in a resession C falls, in order to stop Y from falling as much should increase G. Tax smoothing. We know that consumers what to consumption smooth and therefore policy makers should tax smooth, that is avoid variance in the rate of taxation. Also taxation should be kept constant to minimise distortions. Therefore if the rate of taxation is constant but Y falls, the tax base falls so T falls. Also G increases on benefits etc, so the deficit rises. Against: Politicians are hyperbolic discounters, that is every period they borrow too much as preffer spending today. Thus the deficit will be unsustainably large. Thus limits on the deficit may improve welfare by preventing such behaviour. 3

5 exam prep

6 2016 q15 [a] Q: Plot the IS and LM relations in (Y,r) space. Intuitively justify their slopes.[3] Translation: Draw the IS and LM curves. Write the equations as r =. Say what the slopes are, and bring some intuition. Notes: 2/3 marks here are textbook. Final mark on intuition of LM slope is harder. 5

7 2016 q15 [b] Q: As part of rebuilding East Germany, the government raises public spending in infrastructure and other projects while keeping taxes unchanged. What happens to output and the real interest rate in response? [2] Translation: Map what the question says onto model parameters, how do the IS and LM curves shift, draw it. State what happens to r and Y. Notes: All textbook. 6

8 2016 q15 [c] Q: What happens to public savings, private savings and total savings [4]. Translation: State what public savings are and what happens to them. State what private savings are and what happens to them. State what total savings are and what happens to them. Notes: 2/4 marks are textbook if obscure, memory may fail you here. Last two marks are harder. 7

9 2016 q15 [d] Q: The Bundesbank worried that this policy would generate inflation. It responded by contracting the money supply to make sure that income was close to unchanged with the mix of monetary and fiscal policies. Show the new equilibrium in the IS-LM diagram. What happens to the real interest rate? [3] Translation: What does contracting the money supply map to in the model. What curve shifts. Draw the graph, carefully label the new equilibrium. State what the outcome is, how r and Y have shifted. Notes: 3/3 marks here are textbook. 8

10 2016 q15 [e] Q: With this fiscal-monetary policy mix, G has gone up and Y has not changed. After the implementation of these two policies: What happens to consumption C (up/down/unchanged)? What happens to investment I (up/down/unchanged)? Is there no/partial/full crowding out in this economy? [4] Translation: State what consumption is and what happens to it. State what investment is and what happens to it. State what crowding out is, and to what extent it is visible here. Note: 2/4 textbook, 2/4 textbook if you remember what crowding out is. 9

11 2016 q15 [f] Q: England had its currency pegged to the German currency. What had to happen to monetary policy in England in order to keep to the peg? What was the effect of this monetary policy by the Bank of England on English output if England s economy is also characterized by an IS-LM model? [4] Translation: What must UK r do to keep peg (trilemma). How would UK implement this within IS-LM model. Draw the IS-LM curves for the UK with this policy enacted. What is the impact on r and Y. Notes: 0/4 textbook here. This is the main differentiating question. 10

12 summary of question: 2016q15 Concepts you need to know: IS-LM, maths and intuition as well as ability to map question to parameters. Public, private and total savings. Marginal propensity to consume. Crowding out. The trilemma. How to use MP to increase r. Mark distribution: Textbook: 13 (65%) Non-standard: 7 11

13 revision tips Do lots of it. Make notes, do every PS (2,3 times), do all PP questions, mark carefully and harshly. me if you have questions. Take breaks! Revision has diminishing returns. Remember: you are not lesser if you revise harder than your friend, in the real world the ability to work hard and self motivate is much more valuable than a natural knack with exams. Finally: EC210 and macroeconomics may not be your cup of tea, but hopefully you understand a little more about how the world works from this course - it s not all about the exam. If you are interested in taking anything further (macro or economics more generally) me! 12

14 THANK YOU For being a great first class, I ve had fun, hopefully one or two of you have too :) 13

Monetary Macroeconomics Lecture 3. Mark Hayes

Diploma Macro Paper 2 Monetary Macroeconomics Lecture 3 Aggregate demand: Investment and the IS-LM model Mark Hayes slide 1 Outline Introduction Map of the AD-AS model This lecture, continue explaining