专业课资料 练习题 真题 曼昆宏观经济学英文版讲义 Ecn101_lecture16

1 Econ 101 Intermediate Macro Theory Lecture notes Professor Cetorelli UC Davis Fall 2003 Lecture 16 CHAPTER 4CHAPTER 4Money and InflationMoney and Inflation slide 1 From last time CHAPTER 4CHAPTER 4Money and InflationMoney and Inflation slide 2 We have set up the IS LM model This is an important model describing the economy in the short run that is when prices are sticky CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 3 The The ISIS curvecurve def a graph of all combinations of rand Y that result in goods market equilibrium i e actual expenditure output planned expenditure The equation for the IScurve is YC YTI rG 2 CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 4 Y2Y1 Y2Y1 Deriving the Deriving the ISIS curvecurve r I Y E r Y E C I r1 G E C I r2 G r1 r2 E Y IS I E Y CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 5 Y2Y1 Y2Y1 Shifting the Shifting the ISIS curve curve G G At any value of r G E Y Y E r Y E C I r1 G1 E C I r1 G2 r1 E Y IS1 The horizontal distance of the IS shift equals IS2 so the IS curve shifts to the right 1 1 MPC YG Y CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 6 In general anything increasing expenditure will shift the IS to the right Anything reducingexpenditure will shift the IS to the left CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 7 The Theory of Liquidity PreferenceThe Theory of Liquidity Preference Recall from ch 4 People choose how to allocate their income between liquid assets money and interest bearing illiquid assets depending on the level of the interest rate If interest rates go up they will want to hold less money and more assets such as savings accounts stocks bonds etc 3 CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 8 EquilibriumEquilibrium The interest rate adjusts to equate the supply and demand for money M P real money balances r interest rate s M P M P M PL r Y L r Y r1 CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 9 The LM curveThe LM curve M PL r Y The LMcurve is a graph of all combinations of rand Ythat equate the supply and demand for real money balances The equation for the LMcurve is CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 10 Deriving the LM curveDeriving the LM curve M P r 1 M P L r Y1 r1 r2 r Y Y1 r1 L r Y2 r2 Y2 LM a The market for real money balances b The LM curve CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 11 Why the Why the LMLM curve is upwardcurve is upward slopingsloping An increase in income raises money demand Since the supply of real balances is fixed there is now excess demand in the money market at the initial interest rate People will want to liquidate part of their overall wealth in order to fulfill their increased demand for money liquid assets This might mean for instance shifting resources from bond funds into banking checking accounts part of money 4 CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 12 Why the Why the LMLM curve is upwardcurve is upward slopingsloping This point was not clear last time Question was if my income is going up it seems that I already hold the extra cash need to support more transactions Confusion is between realand nominalvariables The increase in Y is measured in units of goods I e people are now endowed with larger amounts of goods than before and they want to exchange them In order to perform this larger volume of transactions more cash is needed in their hands Hence Money Demand increases CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 13 Why the Why the LMLM curve is upwardcurve is upward slopingsloping Another way to provide intuition Suppose you hold a nice portfolio of stocks When real income increases it means that the firms whose stocks you hold are getting larger Hence your stock portfolio increases its value Now you realize that you are richer but in order to go out and buy that secondPorsche Boxter you always wanted you first have to liquidate sell part of your stocks and with the proceedings the cash you can now walk to the Porsche dealer CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 14 Why the Why the LMLM curve is upwardcurve is upward slopingsloping Back to the LM curve If you are selling securities now there is an excess supplyof securities in the market In order to accommodate this excess supply their price have to go down which consequently means the implicit rate of return will go up The securities market finds a new equilibrium where supply equals demand at a higherinterest rate CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 15 How How MMshifts the LM curveshifts the LM curve M P r 1 M P L r Y1 r1 r2 r Y Y1 r1 r2 LM1 a The market for real money balances b The LM curve 2 M P LM2 5 CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 16 Sneak previewSneak preview How does the Fed reduce or increase the money supply To reduce money in circulation the Fed will actually go in the bond market and sell big quantities of government bonds to commercial banks The cash received by banks is not put back in circulation Hence money supply is reduced Also by creating an excess supply of bonds the Fed make their price go down hence the interest rate to go up CHAPTER 10CHAPTER 10Aggregate Demand IAggregate Demand I slide 17 How the Fed raises the interest rateHow the Fed raises the interest rate To increase r Fed reduces M M P real money balances r interest rate 1 M P L r r1 r2 2 M P CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 18 The intersection determines the unique combination of Yand r that satisfies equilibrium in both markets The LMcurve represents money market equilibrium Equilibrium in the Equilibrium in the ISIS LMLM ModelModel The IScurve represents equilibrium in the goods market YC YTI rG M PL r Y IS Y r LM r1 Y1 Remember we are in the short run CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 19 Policy analysis with the Policy analysis with the ISIS LMLM ModelModel Policymakers can affect macroeconomic variables with fiscal policy Gand or T monetary policy M We can use the IS LM model to analyze the effects of these policies YC YTI rG M PL r Y IS Y r LM r1 Y1 6 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 20 causing output income to rise IS1 An increase in government purchasesAn increase in government purchases 1 IScurve shifts right Y r LM r1 Y1 1 by 1 MPCG IS2 Y2 r2 1 2 This raises money demand causing the interest rate to rise 2 3 which reduces investment so the final increase in Y 1 is smaller than 1 MPCG 3 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 21 IS1 1 A tax cutA tax cut Y r LM r1 Y1 IS2 Y2 r2 Because consumers save 1 MPC of the tax cut the initial boost in spending is smaller for T than for an equal G and the IScurve shifts by MPC 1 MPC T 1 2 2 so the effects on rand Y are smaller for a Tthan for an equal G 2 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 22 2 causing the interest rate to fall IS Monetary Policy an increase in Monetary Policy an increase in MM 1 M 0 shifts the LMcurve down or to the right Y r LM1 r1 Y1Y2 r2 LM2 3 which increases investment causing output income to rise CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 23 Interaction between Interaction between monetary fiscal policymonetary fiscal policy Model monetary fiscal policy variables M Gand T are exogenous Real world Monetary policymakers may adjust M in response to changes in fiscal policy or vice versa Such interaction may alter the impact of the original policy change 7 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 24 The Fed s response to The Fed s response to G G 0 0 Suppose Congress increases G Possible Fed responses 1 hold Mconstant 2 hold rconstant 3 hold Yconstant In each case the effects of the G are different CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 25 If Congress raises G the IScurve shifts right IS1 Response 1 hold Response 1 hold MMconstantconstant Y r LM1 r1 Y1 IS2 Y2 r2If Fed holds M constant then LM curve doesn t shift Results 21 YYY 21 rrr CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 26 If Congress raises G the IScurve shifts right IS1 Response 2 hold Response 2 hold r r constantconstant Y r LM1 r1 Y1 IS2 Y2 r2To keep rconstant Fed increases Mto shift LMcurve right 31 YYY 0r LM2 Y3 Results CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 27 If Congress raises G the IScurve shifts right IS1 Response 3 hold Response 3 hold Y Y constantconstant Y r LM1 r1 IS2 Y2 r2To keep Yconstant Fed reduces Mto shift LMcurve left 0Y 31 rrr LM2 Results Y1 r3 8 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 28 Estimates of fiscal policy multipliersEstimates of fiscal policy multipliers from the DRI macroeconometric model Assumption about monetary policy Estimated value of Y G Fed holds nominal interest rate constant Fed holds money supply constant 1 93 0 60 Estimated value of Y T 1 19 0 26 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 29 Shocks in the Shocks in the ISIS LMLM ModelModel ISshocks exogenous changes in the demand for goods services Examples stock market boom or crash change in households wealth C change in business or consumer confidence or expectations Iand or C CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 30 Shocks in the Shocks in the ISIS LMLM ModelModel LMshocks exogenous changes in the demand for money Examples a wave of credit card fraud increases demand for money more ATMs or the Internet reduce money demand CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 31 EXERCISE EXERCISE Analyze shocks with the ISAnalyze shocks with the IS LM modelLM model Use the IS LMmodel to analyze the effects of 1 A boom in the stock market makes consumers wealthier 2 After a wave of credit card fraud consumers use cash more frequently in transactions For each shock a use the IS LMdiagram to show the effects of the shock on Yand r b determine what happens to C I and the unemployment rate 9 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 32 ISIS LM and Aggregate DemandLM and Aggregate Demand So far we ve been using the IS LMmodel to analyze the short run when the price level is assumed fixed However a change in Pwould shift the LMcurve and therefore affect Y The aggregate demand curve introduced in chap 9 captures this relationship between Pand Y CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 33 Monetary policy and the Monetary policy and the ADAD curvecurve Y P IS LM M2 P1 LM M1 P1 AD1 P1 Y1 Y1 Y2 Y2 r1 r2 The Fed can increase aggregate demand M LMshifts right AD2 Y r r I Yat each value of P CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 34 Y2 Y2 r2 Y1 Y1 r1 Fiscal policy and the Fiscal policy and the ADAD curvecurve Y r Y P IS1 LM AD1 P1 Expansionary fiscal policy Gand or T increases agg demand T C IS shifts right Yat each value of P AD2 IS2 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 35 ISIS LMLM and and ADAD AS AS in the short run long runin the short run long run Recall from Chapter 9 The force that moves the economy from the short run to the long run is the gradual adjustment of prices YY YY YY rise fall remain constant In the short run equilibrium if then over time the price level will 10 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 36 The SR and LR effects of an The SR and LR effects of an ISIS shockshock A negative ISshock shifts ISand ADleft causing Yto fall Y r Y PLRAS Y LRAS Y IS1 SRAS1 P1 LM P1 IS2 AD2 AD1 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 37 The SR and LR effects of an The SR and LR effects of an ISIS shockshock Y r Y PLRAS Y LRAS Y IS1 SRAS1 P1 LM P1 IS2 AD2 AD1 In the new short run equilibrium YY CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 38 The SR and LR effects of an The SR and LR effects of an ISIS shockshock Y r Y PLRAS Y LRAS Y IS1 SRAS1 P1 LM P1 IS2 AD2 AD1 In the new short run equilibrium YY Over time Pgradually falls which causes SRASto move down M Pto increase which causes LM to move down CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 39 AD2 The SR and LR effects of an The SR and LR effects of an ISIS shockshock Y r Y PLRAS Y LRAS Y IS1 SRAS1 P1 LM P1 IS2 AD1 Over time Pgradually falls which causes SRASto move down M Pto increase which causes LM to move down SRAS2 P2 LM P2 11 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 40 AD2 SRAS2 P2 LM P2 The SR and LR effects of an The SR and LR effects of an ISIS shockshock Y r Y PLRAS Y LRAS Y IS1 SRAS1 P1 LM P1 IS2 AD1 This process continues until economy reaches a long run equilibrium with YY CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 41 EXERCISE EXERCISE Analyze SR LR effects of Analyze SR LR effects of MM a Draw the IS LMand AD AS diagrams as shown here b Suppose Fed increases M Show the short run effects on your graphs c Show what happens in the transition from the short run to the long run d How do the new long run equilibrium values of the endogenous variables compare to their initial values Y r Y PLRAS Y LRAS Y IS SRAS1 P1 LM M1 P1 AD1 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 42 The Great DepressionThe Great Depression 120 140 160 180 200 220 240 192919311933193519371939 billions of 1958 dollars 0 5 10 15 20 25 30 percent of labor force Unemployment right scale Real GNP left scale CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 43 The Spending Hypothesis The Spending Hypothesis Shocks to the IS CurveShocks to the IS Curve asserts that the Depression was largely due to an exogenous fall in the demand for goods services a leftward shift of the IS curve evidence output and interest rates both fell which is what a leftward ISshift would cause 12 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 44 The Spending Hypothesis The Spending Hypothesis Reasons for the IS shiftReasons for the IS shift 1 Stock market crash exogenous C Oct Dec 1929 S P 500 fell 17 Oct 1929 Dec 1933 S P 500 fell 71 2 Drop in investment correction after overbuilding in the 1920s widespread bank failures made it harder to obtain financing for investment 3 Contractionary fiscal policy in the face of falling tax revenues and increasing deficits politicians raised tax rates and cut spending CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 45 The Money Hypothesis The Money Hypothesis A Shock to the LM CurveA Shock to the LM Curve asserts that the Depression was largely due to huge fall in the money supply evidence M1 fell 25 during 1929 33 But two problems with this hypothesis 1 Pfell even more so M Pactually rose slightly during 1929 31 2 nominal interest rates fell which is the opposite of what would result from a leftward LMshift CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 46 The Money Hypothesis Again The Money Hypothesis Again The Effects of Falling PricesThe Effects of Falling Prices asserts that the severity of the Depression was due to a huge deflation Pfell 25 during 1929 33 This deflation was probably caused by the fall in M so perhaps money played an important role after all In what ways does a deflation affect the economy CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 47 The Money Hypothesis Again The Money Hypothesis Again The Effects of Falling PricesThe Effects of Falling Prices The stabilizing effects of deflation P M P LMshifts right Y Pigou effect P M P consumers wealth C ISshifts right Y 13 CHAPTER 11CHAPTER 11Aggregate Demand IIAggregate Demand II slide 48 The Money Hypothesis Again The Money Hypothesis Again The Effects of Falling PricesThe Effects of Falling Prices The destabilizing effects of unexpected deflation debt deflation theory P if unexpected tran