Академический Документы
Профессиональный Документы
Культура Документы
34
Economics
N. Gregory
PRINCIPLES OF
Mankiw
2011
update
In this chapter,
look for the answers to these
questions:
Introduction
Earlier chapters covered:
the long-run effects of fiscal policy
on interest rates, investment, economic growth
the long-run effects of monetary policy
on the price level and inflation rate
Aggregate Demand
Recall, the AD curve slopes downward for three
reasons:
The wealth effect
The interest-rate effect
The exchange-rate effect
Next:
A supply-demand model that helps explain the
interest-rate effect and how monetary policy
affects aggregate demand.
Money Demand
Suppose real income (Y) rises. Other things equal,
what happens to money demand?
If Y rises:
Households want to buy more g&s,
so they need more money.
To get this money, they attempt to sell some of
their bonds.
ACTIVE LEARNING 1
ACTIVE LEARNING 1
Answers
A. Suppose r rises, but Y and P are unchanged.
ACTIVE LEARNING 1
Answers
B. Suppose P rises, but Y and r are unchanged.
How r Is Determined
Interest
rate
MS curve is vertical:
Changes in r do not
affect MS, which is
fixed by the Fed.
MS
r1
Eqm
interest
rate
MD1
MD curve is
downward sloping:
A fall in r increases
money demand.
M
Quantity fixed
by the Fed
THE INFLUENCE OF MONETARY AND FISCAL POLICY
11
MS
r1
r2
P1
MD1
P2
AD
MD2
M
Y1
Y2
12
13
Interest
rate
MS2 MS1
r2
P1
r1
AD1
MD
M
AD2
Y2
Y1
14
ACTIVE LEARNING 2
Monetary policy
For each of the events below,
- determine the short-run effects on output
- determine how the Fed should adjust the money
supply and interest rates to stabilize output
A. Congress tries to balance the budget by cutting
govt spending.
B. A stock market boom increases household
wealth.
C. War breaks out in the Middle East,
15
ACTIVE LEARNING 2
Answers
A. Congress tries to balance the budget by
16
ACTIVE LEARNING 2
Answers
B. A stock market boom increases household
wealth.
This event would increase agg demand,
raising output above its natural rate.
To offset this event, the Fed should reduce MS
and increase r to reduce agg demand.
17
ACTIVE LEARNING 2
Answers
C. War breaks out in the Middle East,
18
19
20
The increase in Y
causes C to rise,
which shifts AD
further to the right.
AD1
AD3
AD2
P1
$20 billion
Y1
Y2
Y3
21
Marginal Propensity to
Consume
22
identity
Y = C + G
Y = MPC Y + G
because C = MPC Y
1
Y =
G
1 MPC
solved for Y
The multiplier
THE INFLUENCE OF MONETARY AND FISCAL POLICY
23
if MPC = 0.5
if MPC = 0.75
if MPC = 0.9
1
Y =
G
1 MPC
The multiplier
multiplier = 2
multiplier = 4
multiplier = 10
A bigger MPC means
changes in Y cause
bigger changes in C,
which in turn cause
more changes in Y.
24
25
26
Interest
rate
MS
AD2
AD
3
AD1
r2
r1
P1
$20 billion
MD2
MD1
M
Y1
Y3
Y2
27
Changes in Taxes
A tax cut increases households take-home pay.
Households respond by spending a portion of this
extra income, shifting AD to the right.
28
ACTIVE LEARNING 3
Exercise
The economy is in recession.
Shifting the AD curve rightward by $200b
would end the recession.
A. If MPC = .8 and there is no crowding out,
29
ACTIVE LEARNING 3
Answers
The economy is in recession.
Shifting the AD curve rightward by $200b
would end the recession.
A. If MPC = .8 and there is no crowding out,
ACTIVE LEARNING 3
Answers
The economy is in recession.
Shifting the AD curve rightward by $200b
would end the recession.
B. If there is crowding out, will Congress need to
31
32
Example:
Govt increases spending on roads.
Better roads may increase business productivity,
which increases the quantity of g&s supplied,
shifts AS to the right.
33
34
35
36
2009:
Barack Obama pushed for
spending increases and tax cuts
to increase agg demand in the
face of a deep recession.
THE INFLUENCE OF MONETARY AND FISCAL POLICY
37
38
39
Automatic Stabilizers
Automatic stabilizers:
changes in fiscal policy that stimulate
agg demand when economy goes into recession,
without policymakers having to take any
deliberate action
40
Automatic Stabilizers:
Examples
Govt spending
In recession, more people apply for public
assistance (welfare, unemployment insurance).
Govt spending on these programs automatically
rises, which stimulates agg demand.
41
CONCLUSION
Policymakers need to consider all the effects of
their actions. For example,
42
CHAPTER SUMMARY
In the theory of liquidity preference,
the interest rate adjusts to balance
the demand for money with the supply of money.
CHAPTER SUMMARY
An increase in the money supply causes the
interest rate to fall, which stimulates investment
and shifts the aggregate demand curve rightward.
44
CHAPTER SUMMARY
45
CHAPTER SUMMARY
46