Eco 202 ch 35 monetary fiscal aggregate demand

  • 333 views
Uploaded on

 

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
333
On Slideshare
0
From Embeds
0
Number of Embeds
2

Actions

Shares
Downloads
1
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Chapter 35Monetary PolicyFiscal PolicyandAggregate Demand
  • 2. Key Termstheory of liquidity preferencefiscal policesmultiplier effectcrowding-out effectautomatic stabilizers
  • 3. Economic Cycle
  • 4. Aggregate DemandWealth EffectInterest-Rate EffectExchange-Rate Effect
  • 5. John Maynard Keynes(1883 - 1946)Father of MacroeconomicsThe GeneralTheory ofEmployment,Interest and MoneyThe ideas of economists and politicalphilosophers are more powerful thancommonly understood; indeed theworld is ruled by little else.
  • 6. Theory of LiquidityPreferenceInterest rates adjust tobring money supply andmoney demanded intobalance
  • 7. Interest RatesNominal = Real + InflationIf inflation is zero, thennominal = real
  • 8. Money SupplyDiscount RateBond MarketReserve Ratio
  • 9. InterestRateQuantity of MoneyMD1Money MarketMD2r1r2MoneySupplyMoneyDemandQuantity fixedby the CentralBankEquilibriumInterestRate
  • 10. Liquidity Theory1. Money Supply is fixed by central bank withpolicy tools (Debt Instrument Market, DiscountRate, Reserve Requirement)2. Money Demand - Liquidity - Interest rate isthe opportunity cost of holding money.3. Equilibrium pressures
  • 11. InterestRateQuantity of MoneyMoney Marketr2MoneySupplyMoneyDemandQuantity fixedby the CentralBankr1r3
  • 12. MoneyDemandInterestRateQuantity of MoneyMoney Marketr2MoneySupplyQuantity fixedby the CentralBankr1r3
  • 13. MoneyDemandInterestRateQuantity of MoneyMoney Marketr2MoneySupplyr1r3
  • 14. InterestRate1. Price level increases2. Increases demand for money3. Increases interest rate4. Reduces quantity demand of outputMoney Marketr2MoneySupplyMoneyDemandQuantityfixed by theCentral Bankr1PriceLevelP2AggregateDemandOutputY2P1Y1Aggregate Demand
  • 15. Fiscal PoliciesLevel of governmentspending and taxing
  • 16. Multiplier EffectAdditional shifts inaggregate demand due toexpansionary governmentspending
  • 17. Marginal Propensity to ConsumeMPCNew income = spend + saveHow much do you spend?75 percentThen you will be saving 25 percent
  • 18. Marginal Propensity to ConsumeplusMarginal Propensity to Saveequals oneMPC + MPS = 11- MPS = MPC1- MPC = MPS
  • 19. Earn Spend Total Spending1 100.0 75.0 75.02 75.0 56.3 131.33 56.3 42.2 173.44 42.2 31.6 205.15 31.6 23.7 228.86 23.7 17.8 246.67 17.8 13.3 260.08 13.3 10.0 270.09 10.0 7.5 277.510 7.5 5.6 283.111 5.6 4.2 287.3Multiplier1/(1-MPC)Remember1-MPC = MPSThereforeMultiplieralso1/MPS
  • 20. MPC MPS Total Spending1.00 0.00 infinite0.90 0.10 10.000.80 0.20 5.000.75 0.25 4.000.60 0.40 2.500.50 0.50 2.000.40 0.60 1.670.30 0.70 1.430.25 0.75 1.330.10 0.90 1.110.50 0.50 2.00Multiplier1/(1-MPC)Remember1-MPC = MPSThereforeMultiplieralso1/MPS
  • 21. Multiplier Effect1.Works with C, I, G, andNX2. Goes both ways
  • 22. Where does the moneycome from?TaxBorrowPrintReduces IncomeIncreases interestInflation
  • 23. Crowding-Out can belarger than theMultiplierAggregate Demand shiftsleft
  • 24. Crowding-out EffectOffsetting aggregatedemand when fiscalexpansion raises interestrates and reduces spending
  • 25. Automatic StabilizersChanges in fiscal policy thatstimulate aggregate demandwhen the economy goesinto a recession