I. The Money Market. A. Money Demand (M d ) Handout 9
|
|
- Anthony McCormick
- 5 years ago
- Views:
Transcription
1 University of California-Davis Economics 1B-Intro to Macro Handout 9 TA: Jason Lee jawlee@ucdavis.edu In the last chapter we developed the aggregate demand/aggregate supply model and used it to help explain what caused short-run economic fluctuations. In this chapter we will look at what tools policymakers have to address these short-run fluctuations. As a preview we will see that policymakers have two key tools: (1) Monetary Policy: Monetary policy is the control of the money supply in the economy. The central bank (the Federal Reserve in the United States) has control over the money supply. (2) Fiscal Policy: Fiscal policy is governmental spending and taxation policy. In the United States fiscal policy is determined by the President and Congress. Monetary and fiscal policy are key towards stabilizing the economy because they both cause the aggregate demand curve to shift. In particular, if we have expansionary monetary policy (increase in the money supply) or expansionary fiscal policy (increase in government spending or decrease in taxes) then the aggregate demand curve will shift to the right. On the other hand if we have contractionary monetary policy (decrease in the money supply) or contractionary fiscal policy (decrease in government spending or decrease in taxes) then the aggregate demand curve will shift to the left. I. The Money Market The money market looks at the supply and demand for money. The point at which the supply of money equals the demand for money is where interest rates are determined. Let s take a brief look at the supply and demand for money components. A. Money Demand (M d ) The demand for money is intuitive since you make decisions everyday about how much currency you wish to hold. One of the reasons we like to hold money is because we use it to conduct transactions of goods and services. This is known as the transaction demand for money. However, the problem with holding lots of currency is that you don t earn any interest in holding cash. That can be a problem when interest rates are high. If you could earn 10% interest at a bank, then keeping $1000 in currency will cost you $100 over the year. Thus the interest rate is the opportunity cost of holding money. As interest rates increase, the opportunity cost of holding money increases and thus a rational person will want to hold less money in cash. Conversely, if interest rates decrease then the opportunity cost of holding money is lower and people might want to hold more money. This idea of interest rate acting as the opportunity cost of holding money is captured by the money demand curve. The money demand curve shows the negative relationship associated between the interest rate and the amount of money held.
2 Figure 1 When interest rates change we move along the demand curve for money. While interest rates are a primary determinant of the demand for money, there are other factors. Each of these other factors will cause the demand curve to money to shift. Change in the price level: If prices of all goods were to suddenly double overnight, people will need twice the currency as before to purchase the same amount of goods. This will increase the demand for money. Figure 2 illustrates this change. Figure 2 Suppose we start at an initial point where the economy is at interest rate r o. At that interest rate the amount of money demanded is at M o. Now if the price level were to double that s going to increase the demand for money. At the same interest rate of r o, people are going to demand more money (say M 1 ). We re no longer on our original money demand curve, the curve must shift out to the right. Thus an increase in the price level will increase the demand for money. You can easily see that a decrease in the price level will have the opposite effect. Change in the income level (Y): If suddenly you were to achieve the wealth of Oprah overnight, that will drastically affect your consumption patterns. As income goes up, people tend to purchase more goods and thus will need more currency in order to conduct these transactions. Thus as the income level increases money demand will increase and shift to the right. (Figure 2 illustrates this). B. Money Supply (M s ) The money supply in the economy is determined by the Federal Reserve independent of the interest rate. We assume that the Fed chooses some given amount of money to supply to the economy. Thus the money supply curve is vertical.
3 Shifting the Money Supply Curve Suppose that the Federal Reserve wishes to increase or decrease the amount of money it chooses to supply to the economy. How would it go about achieving this? Open Market Operations: The principal tool at the disposal of the Federal Reserve is something called open market operations. Open market operations is nothing more than the buying and selling of U.S. government securities (bonds). There are two open market operations 1. Open market purchases-when the Federal Reserve wishes to I CREASE THE MO EY SUPPLY they will conduct open market purchases. The way it works is that the Fed will buy bonds and other government securities from individual investors (and sometimes banks directly). What will then happen is that these investors will deposit the money that was given to them by the Fed into their checking accounts. As we saw in Chapter 11, an increase in deposits will lead to an increase in total deposits (and hence money) through the money multiplier. Review Ch. 11 if you re unsure how this process works. 2. Open market sales-when the Federal Reserve wishes to DECREASE THE MO EY SUPPLY they will conduct open market sales. In this process, the Fed will now sell bonds and government securities to individual investors. These investors will write checks to purchase these bonds. Thus the deposits in the bank will decrease and through the money multiplier system will decrease throughout the banking system. Changing the Reserve Requirement Ratio: A tool that is rarely used to change the money supply is to change the reserve requirement ratio. Think about how changing the ratio will affect money supply. Suppose that the Fed decides to increase the reserve requirement ratio. The result would be that the banks will have to hold more of the deposits as reserves and thus will have less to lend out in loans. Thus increasing the reserve requirement ratio will decrease the supply of money. Conversely by decreasing the reserve requirement ratio will increase the supply of money. Changing the Discount Rate: When banks want to borrow from the Federal Reserve the Fed charges them a special interest rate called the discount rate. The discount rate is the interest that the banks have to pay to the Fed. Decreasing the discount rate will increase the supply of money. If the Fed decreases the interest rate it charges banks, banks will be more willing to borrow the money from the Fed. They can then use the money to issue out loans and thus more money is created through the system. An increase in the discount rate will have the opposite effect. C. Money Market Equilibrium Not surprisingly money market equilibrium is going to be where the demand for money curve intersects the supply for money curve.
4 Figure 3 Note that we can find equilibrium interest rate, where money supply and money demand intersects. D. The Money Market and Aggregate Demand Back in Chapter 15 we saw that a change in money supply would cause the aggregate demand curve to shift. At the time we gave a very simple answer on why that would be the case. Here we will provide a more complete picture on why an increase (decrease) in money supply will cause the aggregate demand curve to shift to the right (left). Figure 6 Shows the complete process Step #1: The Federal Reserve engages in an open market purchase which increases the supply of money. The money supply curve shifts to the right and the interest rate falls. Step #2: From Ch.12 we know that when interest rates fall (in this case from r o to r 1 ), investment will increase. Step #3: An increase in investment will shift the aggregate demand curve to the right. At any given price level, the amount of output in the economy will
5 be higher since investment is higher. The reason is that Y = C + I + G + X thus if I increases Y must be higher at the same price level. As an exercise to see if you understand the process you should work it in reverse and see what happens when the Fed engages in an open market sale. E. Interest Rate Targets and Fed Policy In practice, the way the Federal Reserve conducts its monetary policy is through targeting the federal funds rate (the interest rate that banks charge one another for short-term loans). But as we shall see changing the targeted federal funds rate is equivalent to changing the money supply. In fact monetary policy can be described either in terms of the money supply or in terms of the interest rate. The reason we can make that claim, is that once the Fed sets its target interest rate, it either buys or sells enough bonds to make sure that the equilibrium interest rate in the money market is equal to the target interest rate. Thus when you hear in the news that the Fed has lowered interest rate to 1% from 2% keep in mind what it must be doing behind the scenes. In order to lower the interest rate, it must purchase bonds in the open market, which injects reserves into the banking system and would increase the money supply. In the graph of the money market the money supply curve will shift to the right and lower the interest rate to the target interest rate. II. Fiscal Policy and Aggregate Demand We now turn to the other tool that policymakers have and that is fiscal policy (increasing government spending or changing taxes). As we saw in the last chapter, changes in government spending or taxes will clearly have an effect on aggregate demand. If government spending increases (or if taxes decreases) this will shift the aggregate demand curve to the right, while if government spending decreases (or if taxes increases) this will shift the aggregate demand curve to the left. However, the question of interest here is by how much would the aggregate demand curve shift given a change in either government spending or taxes. A. Government Purchases Multiplier An important point is that a $1 increase in government spending will result in a greater than $1 increase in real GDP. This fact is known as the multiplier effect. The reason is relatively straightforward. If the government increases spending by $100 it will have an immediate impact of increasing Y by $100. However, since consumption depends on Y, an increase of Y by $100 will increase consumption which in turns increase Y even more. This further increase in Y will increase consumption again and so forth. It turns out the government purchases multiplier is calculated as Y/ G (how much real GDP changes from a change in government spending) 1 which can be found to be. where mpc is equal to the marginal propensity to consumer. 1 mpc Key Point: An increase in government spending by $X will increase output by more than $X due to the positive feedback outlined above. This is known as the government multiplier effect.
6 B. Deriving the Government Purchases Multiplier For those interested here is a straightforward proof for the government purchases multiplier. We first have to introduce the consumption function. The consumption function is an equation that tells us how much households are willing to consumer for a given level of disposable income. Formally it can be written as: C = C 0 + mpc(y-t) Where C 0 = intercept term which represents additional factors that could affect consumption mpc = the marginal propensity to consume. This is the slope of the consumption function. The marginal propensity to consume is the fraction of disposable income that households consumer. For example if mpc = 0.75 this implies that out of each dollar the households receives in disposable income, the household will spend $0.75 in consumption. (Y-T) = disposable income. We know that an increase in G will have an immediate impact on Y. Suppose that government spending increases by $1000 ( G = $1000). is used as a shorthand notation for change. This increase in $1000 will cause Y to increase by $1000 since Y = C + I + G + NX. Y = G (the change in real GDP is equal to the change in government spending) However it doesn t end there. Looking at the consumption function, we see that any increase in output will cause consumption to go up. How much will consumption increase? To simplify matters let s put some hypothetical numbers. Let s have C 0 = $1000 and T = $500 let Y = 1000 (initially) and mpc = 0.80 Initial consumption (before the increase in government spending) was C = $ ( ) = $1400 What happens after government spending increases by $1000? We know that output level increases by $1000 initially. So Y = Everything else is assumed to be held constant. How much has consumption changed? C = $ ( ) = $2200 C = $800 Because of the increase in government spending consumption has increased by $800 from before. This is equivalent to mpc( G) = 0.80($1000). Thus since C increased by $800, Y must also increase by $800 since Y = C + I + G + NX. However an increase in Y by $800 will once again affect consumption. Real GDP is now $2800. C = $ ( ) = $2840
7 C = $640 which is equivalent to (mpc) 2 G We could continue on in a similar fashion. Note that initially real GDP increased by G Then real GDP increased by (mpc) G Then real GDP increased by (mpc) 2 G Y = (1 + mpc + mpc 2 + mpc 3 + ) G Using some algebra we get (1/(1-mpc)) G 1/(1-mpc) is known as the government purchases multiplier A similar multiplier effect also exists for a change in taxes. The tax multiplier is calculated as mpc Y/ T or. You should be able to prove this multiplier using the steps outlined above. 1 mpc C. Fiscal Policies and Stabilization There are times when the economy is not at full employment (potential) output. Current output could be below potential output (a recession) or current output might be above potential output (an expansion). Fiscal policies are useful in bringing current output back to potential output. As we saw in the last handout one way in which output could be increased is through expansionary fiscal policies. Expansionary fiscal policies are either an increase in government spending or a decrease in taxes. The result of these policies is a shift of the Aggregate Demand curve to the right. Thus whenever current output is below potential output, policymakers might want to use expansionary fiscal policies. Conversely, a way in which output could be decreased is through contractionary fiscal policies. Contractionary fiscal policies are either a decrease in government spending or an increase in taxes. The result of these policies is a shift of the Aggregate Demand curve to the left. In cases when the economy has current output above potential output, contractionary fiscal policies would be effective in bringing about stabilization. Unfortunately for policymakers, the use of fiscal policies to move the economy back to potential output is not easy as it might appear. The central problem are that fiscal policies are not instantaneous and it takes time before these policies can take effect. At worse, these the time lag can be so long, that by the time the fiscal policies start working, the economic fluctuation no longer exists. There are two reasons why it takes time for fiscal policies to be effective: (1) Inside Lags: The time it takes to identify an economic fluctuation and come up with a policy solution.
8 The first problem is that the fact that policymakers have to first identify an economic fluctuation. With so much economic data available, just being able to identify a recession or boom may be difficult. Even when policymakers can finally identify an economic fluctuation, finding a solution is problematic. It takes time to pass tax or spending bills through Congress. Inside lags are the main reason why fiscal policies take time to be effective. (2) Outside Lags: Time it takes for the fiscal policy to work after it has been enacted. Typically outside lags do not last very long.
II. Determinants of Asset Demand. Figure 1
University of California, Merced EC 121-Money and Banking Chapter 5 Lecture otes Professor Jason Lee I. Introduction Figure 1 shows the interest rates for 3 month treasury bills. As evidenced by the figure,
More informationLesson 12 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Lesson 12 The Influence of Monetary and Fiscal Policy on Aggregate Demand Henan University of Technology Sino-British College Transfer Abroad Undergraduate Programme 0 In this lesson, look for the answers
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F. N. Gregory Mankiw. Introduction
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F Economics N. Gregory Mankiw Introduction This chapter focuses on the short-run effects of fiscal
More informationIn this chapter, look for the answers to these questions
In this chapter, look for the answers to these questions How does the interest-rate effect help explain the slope of the aggregate-demand curve? How can the central bank use monetary policy to shift the
More informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5
Economics 2 Spring 2017 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1. The tool we use to analyze the determination of the normal real interest rate and normal investment
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand. Premium PowerPoint Slides by Ron Cronovich
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2009 South-Western, a part
More informationEconomics 102 Discussion Handout Week 13 Fall Introduction to Keynesian Model: Income and Expenditure. The Consumption Function
Economics 102 Discussion Handout Week 13 Fall 2017 Introduction to Keynesian Model: Income and Expenditure The Consumption Function The consumption function is an equation which describes how a household
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand 34 Aggregate Demand Many factors influence aggregate demand besides monetary and fiscal policy. In particular, desired spending by households
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
21 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationEconomics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary
Economics 102 Discussion Handout Week 14 Spring 2018 Aggregate Supply and Demand: Summary The Aggregate Demand Curve The aggregate demand curve (AD) shows the relationship between the aggregate price level
More informationArchimedean Upper Conservatory Economics, October 2016
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is equal to: A. the proportion of consumer spending as a function of
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
20 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More information9. ISLM model. Introduction to Economic Fluctuations CHAPTER 9. slide 0
9. ISLM model slide 0 In this lecture, you will learn an introduction to business cycle and aggregate demand the IS curve, and its relation to the Keynesian cross the loanable funds model the LM curve,
More informationThe influence of Monetary And Fiscal Policy on Aggregate Demand
Lecture 11 The influence of Monetary And Fiscal Policy on Aggregate Demand Prof. Samuel Moon Jung Introduction Earlier chapters covered: the long-run effects of fiscal policy on interest rates, investment,
More informationEconomics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary
Economics 102 Discussion Handout Week 14 Spring 2018 Aggregate Supply and Demand: Summary The Aggregate Demand Curve The aggregate demand curve (AD) shows the relationship between the aggregate price level
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand. Lecture
The Influence of Monetary and Fiscal Policy on Aggregate Demand Lecture 10 28.4.2015 Previous Lecture Short Run Economic Fluctuations Short Run vs. Long Run The classical dichotomy and monetary neutrality
More informationThe Goods Market and the Aggregate Expenditures Model
The Goods Market and the Aggregate Expenditures Model Chapter 8 The Historical Development of Modern Macroeconomics The Great Depression of the 1930s led to the development of macroeconomics and aggregate
More informationMacroeconomics Sixth Edition
N. Gregory Mankiw Principles of Macroeconomics Sixth Edition 21 The Influence of Monetary and Fiscal Policy on Aggregate Demand Premium PowerPoint Slides by Ron Cronovich 2012 UPDATE In this chapter, look
More informationEcon 98- Chiu Spring 2005 Final Exam Review: Macroeconomics
Disclaimer: The review may help you prepare for the exam. The review is not comprehensive and the selected topics may not be representative of the exam. In fact, we do not know what will be on the exam.
More informationInternational Monetary Policy
International Monetary Policy 7 IS-LM Model 1 Michele Piffer London School of Economics 1 Course prepared for the Shanghai Normal University, College of Finance, April 2011 Michele Piffer (London School
More informationProblem Set #2. Intermediate Macroeconomics 101 Due 20/8/12
Problem Set #2 Intermediate Macroeconomics 101 Due 20/8/12 Question 1. (Ch3. Q9) The paradox of saving revisited You should be able to complete this question without doing any algebra, although you may
More informationMacroeconomics. The Influence of Monetary and Fiscal Policy on Aggregate Demand. Introduction
C H A P T E R 21 The Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F Macroeconomics N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2010 South-Western,
More informationECO 2013: Macroeconomics Valencia Community College
ECO 2013: Macroeconomics Valencia Community College Exam 3 Fall 2008 1. The most important determinant of consumer spending is: A. the level of household debt. B. consumer expectations. C. the stock of
More informationEconomics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007
Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007 Answer all of the following questions by selecting the most appropriate answer on
More informationKeynesian Theory (IS-LM Model): how GDP and interest rates are determined in Short Run with Sticky Prices.
Keynesian Theory (IS-LM Model): how GDP and interest rates are determined in Short Run with Sticky Prices. Historical background: The Keynesian Theory was proposed to show what could be done to shorten
More informationECO 209Y MACROECONOMIC THEORY AND POLICY LECTURE 3: AGGREGATE EXPENDITURE AND EQUILIBRIUM INCOME
ECO 209Y MACROECONOMIC THEORY AND POLICY LECTURE 3: AGGREGATE EXPENDITURE AND EQUILIBRIUM INCOME Gustavo Indart Slide 1 ASSUMPTIONS We will assume that: There is no depreciation There are no indirect taxes
More informationChapter 10 Aggregate Demand I CHAPTER 10 0
Chapter 10 Aggregate Demand I CHAPTER 10 0 1 CHAPTER 10 1 2 Learning Objectives Chapter 9 introduced the model of aggregate demand and aggregate supply. Long run (Classical Theory) prices flexible output
More informationa. What is your interpretation of the slope of the consumption function?
Economics 102 Spring 2017 Homework #5 Due May 4, 2017 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly).
More informationMacroeconomics Mankiw 6th Edition
N. Gregory Mankiw Lecture notes, ECON 1150 Macroeconomics Mankiw 6th Edition 21 & 22 The Influence of Monetary and Fiscal Policy on Aggregate Demand Premium PowerPoint Slides by Ron Cronovich 2012 UPDATE
More information2. Suppose a family s annual disposable income is $8000 of which it saves $2000. (a) What is their APC?
REVIEW Chapters 10 and 13 Fiscal Policy 1. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and (c) all saving is personal saving. Level of output and income Consumption
More informationQuestions and Answers
Questions and Answers Ch 1 (continued) Q1: MCQ Aggregate Demand 1) The aggregate demand curve shows A) total expenditures at different levels of national income. B) the quantity of real GDP demanded at
More informationEconomics 307: Intermediate Macroeconomic Theory A Brief Mathematical Primer
Economics 07: Intermediate Macroeconomic Theory A Brief Mathematical Primer Calculus: Much of economics is based upon mathematical models that attempt to describe various economic relationships. You have
More informationECON 102 Tutorial 3. TA: Iain Snoddy 18 May Vancouver School of Economics
ECON 102 Tutorial 3 TA: Iain Snoddy 18 May 2015 Vancouver School of Economics Questions Questions 1-3 set-up Y C I G X M 1.00 1.00 0.5 0.7 0.45 0.15 2.00 1.65 0.5 0.7 0.45 0.30 3.00 2.30 0.5 0.7 0.45 0.45
More informationShort run Output and Expenditure
Short run Output and Expenditure Short-run Output and Expenditure The Learning Objectives in this presentation are covered in Chapter 19: Output and Expenditure in the Short Run LEARNING OBJECTIVES 1 To
More informationa) Calculate the value of government savings (Sg). Is the government running a budget deficit or a budget surplus? Show how you got your answer.
Economics 102 Spring 2018 Answers to Homework #5 Due 5/3/2018 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 20 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be
More informationSOLUTION ECO 202Y - L5101 MACROECONOMIC THEORY. Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER. University of Toronto June 18, 2002 INSTRUCTIONS:
Department of Economics Prof. Gustavo Indart University of Toronto June 18, 2002 SOLUTION ECO 202Y - L5101 MACROECONOMIC THEORY Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total
More informationIntroduction to Economic Fluctuations
Chapter 9 Introduction to Economic Fluctuations slide 0 In this chapter, you will learn facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 34 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be
More informationShanghai Livingston American School Quarterly / Trimester Plan 2
Shanghai Livingston American School Quarterly / Trimester Plan 2 Concept / Topic To Teach: Specific Objectives: Week 1 Week 2 Week 3 Week 4 Unit 3 Module 16 INCOME AND EXPENDITURES Comprehend the nature
More informationSimple Notes on the ISLM Model (The Mundell-Fleming Model)
Simple Notes on the ISLM Model (The Mundell-Fleming Model) This is a model that describes the dynamics of economies in the short run. It has million of critiques, and rightfully so. However, even though
More information13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts
Chapter 3 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded.
More informationChapter 12 Aggregate Demand II: Applying the IS -LM Model
Chapter 12 Aggregate Demand II: Applying the IS -LM Model Modified by un Wang Eco 3203 Intermediate Macroeconomics Florida International University Summer 2017 2016 Worth Publishers, all rights reserved
More informationEconomics 102 Summer 2014 Answers to Homework #5 Due June 21, 2017
Economics 102 Summer 2014 Answers to Homework #5 Due June 21, 2017 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the
More informationFinal Exam - Answers April 26, 2004
Page 1 of 9 Final Exam - Answers April 26, 2004 Answer all questions, on these sheets in the spaces provided (use the blank space on page 9 if you need more). In questions where it is appropriate, show
More informationOVERVIEW. 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided.
24 KEYNESIAN CROSS OVERVIEW 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided. 2. Initially, both the consumption function and
More informationGDP accounting. GDP: market value of all newly produced goods and services produced in a given location in a specific time period
IS Curve GDP accounting GDP: market value of all newly produced goods and services produced in a given location in a specific time period GDP accounting GDP: market value of all newly produced goods and
More informationECO 209Y MACROECONOMIC THEORY AND POLICY
Department of Economics Prof. Gustavo Indart University of Toronto October 22, 2010 ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER Circle your section of the
More informationChapter 10 Aggregate Demand I
Chapter 10 In this chapter, We focus on the short run, and temporarily set aside the question of whether the economy has the resources to produce the output demanded. We examine the determination of r
More information11 EXPENDITURE MULTIPLIERS* Chapt er. Key Concepts. Fixed Prices and Expenditure Plans1
Chapt er EXPENDITURE MULTIPLIERS* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded. As a result: The price
More informationThe Core of Macroeconomic Theory
PART III The Core of Macroeconomic Theory 1 of 33 The level of GDP, the overall price level, and the level of employment three chief concerns of macroeconomists are influenced by events in three broadly
More informationDisposable income (in billions)
Section 4 version 2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. An increase in the MPC: A. increases the multiplier. B. shifts the autonomous investment
More informationHomework Assignment #6. Due Tuesday, 11/28/06. Multiple Choice Questions:
Homework Assignment #6. Due Tuesday, 11/28/06 Multiple Choice Questions: 1. When the inflation rate is expected to be zero, Steve plans to lend money if the interest rate is at least 4 percent a year and
More informationECON 1002 E. Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work.
It is most beneficial to you to write this mock midterm UNDER EXAM CONDITIONS. This means: Complete the midterm in 2.5 hour(s). Work on your own. Keep your notes and textbook closed. Attempt every question.
More informationEcon 98- Chiu Spring Midterm 2 Review: Macroeconomics
Disclaimer: The review may help you prepare for the exam. The review is not comprehensive and the selected topics may not be representative of the exam. In fact, we do not know what will be on the exam.
More information1. When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:
1. When the Federal government uses taxation and spending actions to stimulate the economy it is conducting: A. Fiscal policy B. Incomes policy C. Monetary policy D. Employment policy 2. When the Federal
More informationAt the height of the financial crisis in December 2008, the Federal Open Market
WEB chapter W E B C H A P T E R 2 The Monetary Policy and Aggregate Demand Curves 1 2 The Monetary Policy and Aggregate Demand Curves Preview At the height of the financial crisis in December 2008, the
More informationTWO VIEWS OF THE ECONOMY
TWO VIEWS OF THE ECONOMY Macroeconomics is the study of economics from an overall point of view. Instead of looking so much at individual people and businesses and their economic decisions, macroeconomics
More informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5
Economics 2 Spring 2016 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1. The left-hand diagram below shows the situation when there is a negotiated real wage,, that
More informationPutting the Economy Together
Putting the Economy Together Topic 6 1 Goals of Topic 6 Today we will lay down the first layer of analysis of an aggregate macro model. Derivation and study of the IS-LM Equilibrium. The Goods and the
More information1 Figure 1 (A) shows what the IS LM model looks like for the case in which the Fed holds the
1 Figure 1 (A) shows what the IS LM model looks like for the case in which the Fed holds the money supply constant. Figure 1 (B) shows what the model looks like if the Fed adjusts the money supply to hold
More informationEconS 102: Mid Term 3 Date: July 14th, Name: WSU ID:
EconS 102: Mid Term 3 Date: July 14th, 2017 Instructions Write your name and WSU ID on the paper. All questions are worth 1 point. You have 40 minutes. This test is out of 15 points. There is a total of
More informationECON 209 FINAL EXAM COURSE PACK FALL 2017
ECON 209 FINAL EXAM COURSE PACK FALL 2017 www.sleepingpolarbear.ca HANDCRAFTED WITH IN THE NORTH POLE ~ TABLE OF CONTENTS ~ ECON 209: FINAL EXAM COURSE PACK SECTION 1 (CH 19-20): INTRO TO MACRO & GDP ACCOUNTING...
More information5 AGGREGATE DEMAND AND INFLATION. Part Review. Reading Between the Lines WHERE WILL INTEREST RATES GO IN 2002?
Part Review 5 AGGREGATE DEMAND AND INFLATION Reading Between the Lines WHERE WILL INTEREST RATES GO IN 2002? On May 6, 2002 the FOMC met in Washington D.C. To combat the recession that started in 2001,
More informationLecture 22. Aggregate demand and aggregate supply
Lecture 22 Aggregate demand and aggregate supply By the end of this lecture, you should understand: three key facts about short-run economic fluctuations how the economy in the short run differs from the
More informationThe text was adapted by The Saylor Foundation under the CC BY-NC-SA without attribution as requested by the works original creator or licensee
the CC BY-NC-SA without attribution as requested by the works original creator or licensee 1 of 19 Chapter 21 IS-LM C H A P T E R O B J E C T I V E S By the end of this chapter, students should be able
More informationKOÇ UNIVERSITY ECON 202 Macroeconomics Fall Problem Set VI C = (Y T) I = 380 G = 400 T = 0.20Y Y = C + I + G.
KOÇ UNIVERSITY ECON 202 Macroeconomics Fall 2007 Problem Set VI 1. Consider the following model of an economy: C = 20 + 0.75(Y T) I = 380 G = 400 T = 0.20Y Y = C + I + G. (a) What is the value of the MPC
More informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5
Economics 2 Spring 2018 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1.a. The change in the marginal tax rate that households pay will affect their labor supply. Recall
More informationECNS Fall 2009 Practice Examination Opportunity
ECNS 202 -- Fall 2009 Practice Examination Opportunity Mark the answer on the provided scantron sheet using a #2 lead pencil. Erase completely. I am not responsible for poorly marked or poorly erased asnwers.
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Final Exam Practice Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In an economy with no government or foreign sector, it is always true
More informationChapter 23. The Keynesian Framework. Learning Objectives. Learning Objectives (Cont.)
Chapter 23 The Keynesian Framework Learning Objectives See the differences among saving, investment, desired saving, and desired investment and explain how these differences can generate short run fluctuations
More informationThe level of consumption and saving in the United States is higher today than a decade ago because real GDP and income are higher.
Chapter 27 Basic Macroeconomic Relationships QUESTIONS 1. What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely
More informationQUIZ 4: Macro Winter Question 1. Would you expect a country to have a larger Deficit/GDP ratio or a Debt/GDP ratio?
Name: QUIZ 4: Macro Winter 2011 You must always show your thinking to get full credit. Question 1 Would you expect a country to have a larger Deficit/GDP ratio or a Debt/GDP ratio? You would expect the
More informationThis is Appendix B: Extensions of the Aggregate Expenditures Model, appendix 2 from the book Economics Principles (index.html) (v. 2.0).
This is Appendix B: Extensions of the Aggregate Expenditures Model, appendix 2 from the book Economics Principles (index.html) (v. 2.0). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/
More informationExam 3 ECON Thurs. Nov. 14, :30 a.m. Form A
Exam 3 ECON 2105 Thurs. Nov. 14, 2002 9:30 a.m. Name: ID #: Form A There are 30 multiple choice questions, worth 2.5 points each (for a total of 75 points). The short answer questions are worth 25 points.
More informationClass 5. The IS-LM model and Aggregate Demand
Class 5. The IS-LM model and Aggregate Demand 1. Use the Keynesian cross to predict the impact of: a) An increase in government purchases. b) An increase in taxes. c) An equal increase in government purchases
More informationChapter 23. Aggregate Supply and Aggregate Demand in the Short Run. In this chapter you will learn to. The Demand Side of the Economy
Chapter 23 Aggregate Supply and Aggregate Demand in the Short Run In this chapter you will learn to 1. Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium
More informationThe Aggregate Demand/Aggregate Supply Model
CHAPTER 27 The Aggregate Demand/Aggregate Supply Model The Theory of Economics... is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw
More informationChapter 4. Consumption and Saving. Copyright 2009 Pearson Education Canada
Chapter 4 Consumption and Saving Copyright 2009 Pearson Education Canada Where we are going? Here we will be looking at two major components of aggregate demand: Aggregate consumption or what is the same
More informationNotes for Econ FALL 2010 Midterm 1 Exam
Notes for Econ 302-001 FALL 2010 Midterm 1 Exam The Fall 2010 Econ 302-001 course used Hall and Papell, Macroeconomics (Norton) as a textbook. The notation differs from Blanchard, Macroeconomics 5/2 (Pearson).
More informationMacroeconomics in an Open Economy
Chapter 17 (29) Macroeconomics in an Open Economy Chapter Summary Nearly all economies are open economies that trade with and invest in other economies. A closed economy has no interactions in trade or
More informationTraining costs. More production eventually demands hiring more workers, who in general should be trained to be able to operate efficiently.
1. The aggregate supply, aggregate demand AS AD model The AS AD model is an orthodox model built to analyze the fluctuations of real GDP and the inflation rate. The model can be used to provide explanations
More informationThis is IS-LM, chapter 21 from the book Finance, Banking, and Money (index.html) (v. 1.1).
This is IS-LM, chapter 21 from the book Finance, Banking, and Money (index.html) (v. 1.1). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/ 3.0/)
More informationEcon 302 Fall Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work.
Econ 302 Fall 2005 Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work. Homework #1; Chapter 1. This homework has three parts (A, B, C). Each part
More information4.2 Fiscal Policy.notebook May 02, Fiscal Policy
4.2 Fiscal Policy How do we achieve our three economic objectives? Economic Growth Full Employment Steady inflation With Monetary and Fiscal Policy! Review of the Business Cycle A cycle goes through a
More informationPart 1: Short answer, 60 points possible Part 2: Analytical problems, 40 points possible
Midterm #1 ECON 322, Prof. DeBacker September 25, 2018 INSTRUCTIONS: Please read each question below carefully and respond to the questions in the space provided (use the back of pages if necessary). You
More information14.02 Principles of Macroeconomics Problem Set # 2, Answers
14.0 Principles of Macroeconomics Problem Set #, Answers Part I 1. False. The multiplier is 1/ [1- c 1 (1- t)]. The effect of an increase in autonomous spending is dampened because taxes respond proportionally
More informationEC2105, Professor Laury EXAM 3, FORM A (4/10/02)
EC2105, Professor Laury EXAM 3, FORM A (4/10/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each
More informationUNIT 4 READING GUIDES CHAPTERS 16-20
UNIT 4 READING GUIDES CHAPTERS 16-20 Take your own notes on the reading guides. You WILL be able to use them on the test BUT ONLY IF YOU DO ALL OF THEM. These will be turned in after the UNIT 4 TEST for
More informationPrinciple of Macroeconomics, Summer B Practice Exam
Principle of Macroeconomics, Summer B 2017 Practice Exam 1) If real GDP in a small country in 2015 is $8 billion and real GDP in the same country in 2016 is $8.3 billion, the growth rate of real GDP between
More informationUnit 3: Aggregate Demand and Supply and Fiscal Policy
Unit 3: Aggregate Demand and Supply and Fiscal Policy 1 Aggregate Demand 2 What is Aggregate Demand? Aggregate means added all together. When we use aggregates we combine all prices and all quantities.
More informationMACROECONOMICS - CLUTCH CH DERIVING THE AGGREGATE EXPENDITURES MODEL
!! www.clutchprep.com CONCEPT: AGGREGATE EXPENDITURES MODEL AND MACROECONOMIC EQUILIBRIUM Aggregate expenditures (AE) represent the total in an economy The aggregate expenditures model describes the relationship
More informationMacro Problem Set 3 Fall 2017
Macro Problem Set 3 Fall 2017 Directions: Choose the single best answer for each question. Answers should be turned in on the Scantron form at the beginning of class. True=A/False=B 15 points 1) Savings
More informationPrinciples of Macroeconomics December 17th, 2005 name: Final Exam (100 points)
EC132.02 Serge Kasyanenko Principles of Macroeconomics December 17th, 2005 name: Final Exam (100 points) This is a closed-book exam - you may not use your notes and textbooks. Calculators are not allowed.
More informationNATIONAL INCOME DETERMINATION WORK SCHEDULE (TEXT CHAPTER: 8)
DAY 1: NATIONAL INCOME DETERMINATION WORK SCHEDULE (TEXT CHAPTER: 8) Objective: Create a circular flow of demand in the Macroeconomy and identify leakages and infections within the economy. DAY 2: Assign:
More informationThe Multiplier Model
The Multiplier Model Allin Cottrell March 3, 208 Introduction The basic idea behind the multiplier model is that up to the limit set by full employment or potential GDP the actual level of employment and
More informationIII. 9. IS LM: the basic framework to understand macro policy continued Text, ch 11
Objectives: To apply IS-LM analysis to understand the causes of short-run fluctuations in real GDP and the short-run impact of monetary and fiscal policies on the economy. To use the IS-LM model to analyse
More informationFiscal policy in the goods market. Screen 1
Fiscal policy in the goods market Screen 1 In this presentation we look at the impact of fiscal policy on the goods market. Make sure that you are thoroughly familiar with the goods market before you start
More informationmacro macroeconomics Aggregate Demand I N. Gregory Mankiw CHAPTER TEN PowerPoint Slides by Ron Cronovich fifth edition
macro CHAPTER TEN Aggregate Demand I macroeconomics fifth edition N. Gregory Mankiw PowerPoint Slides by Ron Cronovich 2002 Worth Publishers, all rights reserved In this chapter you will learn the IS curve,
More informationECON Intermediate Macroeconomic Theory
ECON 3510 - Intermediate Macroeconomic Theory Fall 2015 Mankiw, Macroeconomics, 8th ed., Chapter 12 Chapter 12: Aggregate Demand 2: Applying the IS-LM Model Key points: Policy in the IS LM model: Monetary
More information