1 APPENDIX 3 TO CHAPTER 4 Supply and Demand in the arket for oney: The Liquidity Preference Framework Whereas the loanable funds framework determines the equilibrium interest rate using the supply of and demand for bonds, an alternative model developed by John aynard Keynes, known as the liquidity preference framework, determines the equilibrium interest rate in terms of the supply of and demand for money. Although the two frameworks look different, the liquidity preference analysis of the market for money is closely related to the loanable funds framework of the bond market. The starting point of Keynes s analysis is his assumption that there are two main categories of assets that people use to store their wealth: money and bonds. Therefore, total wealth in the economy must equal the total quantity of bonds plus money in the economy, which equals the quantity of bonds supplied B s plus the quantity of money supplied s. The quantity of bonds B d and money d that people want to hold and thus demand must also equal the total amount of wealth because people cannot purchase more assets than their available resources allow. The conclusion is that the quantity of bonds and money supplied must equal the quantity of bonds and money demanded: B s + s = B d + d () Collecting the bond terms on one side of the equation and the money terms on the other, this equation can be rewritten as B s B d = l s (2) The rewritten equation tells us that if the market for money is in equilibrium ( s = d ), the right-hand side of Equation 2 equals zero, implying that B s = B d, meaning that the bond market is also in equilibrium. Thus it is the same to think about determining the equilibrium interest rate by equating the supply and demand for bonds or by equating the supply and demand for money. In this sense, the liquidity preference framework, which Note that the term market for money refers to the market for the medium of exchange, money. This market differs from the money market referred to by finance practitioners, which is the financial market in which short-term debt instruments are traded. W-27
2 W-28 Appendix 3 to Chapter 4 analyzes the market for money, is equivalent to the loanable funds framework, which analyzes the bond market. In practice, the approaches differ because by assuming that there are only two kinds of assets, money and bonds, the liquidity preference approach implicitly ignores any effects on interest rates that arise from changes in the expected returns on real assets such as automobiles and houses. In most instances, both frameworks yield the same predictions. The reason that we approach the determination of interest rates with both frameworks is that the loanable funds framework is easier to use when analyzing the effects from changes in expected inflation, whereas the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of money. Because the definition of money that Keynes used includes currency (which earns no interest) and checking account deposits (which in his time typically earned little or no interest), he assumed that money has a zero rate of return. Bonds, the only alternative asset to money in Keynes s framework, have an expected return equal to the interest rate i. 2 As this interest rate rises (holding everything else unchanged), the expected return on money falls relative to the expected return on bonds, and this causes the demand for money to fall. We can also see that the demand for money and the interest rate should be negatively related by using the concept of opportunity cost, the amount of interest (expected return) sacrificed by not holding the alternative asset in this case, a bond. As the interest rate on bonds i rises, the opportunity cost of holding money rises, and so money is less desirable and the quantity of money demanded must fall. Figure shows the quantity of money demanded at a number of interest rates, with all other economic variables, such as income and the price level, held constant. At an interest rate of 25%, point A shows that the quantity of money demanded is $00 billion. If the interest rate is at the lower rate of 20%, the opportunity cost of money is lower, and the quantity of money demanded rises to $200 billion, as indicated by the move from point A to point B. If the interest rate is even lower, the quantity of money demanded is even higher, as is indicated by points C, D, and E. The curve d connecting these points is the demand curve for money, and it slopes downward. At this point in our analysis, we will assume that a central bank controls the amount of money supplied at a fixed quantity of $300 billion, so the supply curve for money s in the figure is a vertical line at $300 billion. The equilibrium where the quantity of money demanded equals the quantity of money supplied occurs at the intersection of the supply and demand curves at point C, where d = s (3) The resulting equilibrium interest rate is at i* = 5%. We can again see that there is a tendency to approach this equilibrium by first looking at the relationship of money demand and supply when the interest rate is above the equilibrium interest rate. When the interest rate is 25%, the quantity of money demanded at point A is $00 billion, yet the quantity of money supplied is $300 billion. The excess supply of money means that people are holding more money than they desire, so they will try to get rid of their excess money balances by trying 2Keynes did not actually assume that the expected returns on bonds equaled the interest rate but rather argued that they were closely related. This distinction makes no appreciable difference in our analysis.
3 SUPPLY AND DEAND IN THE ARKET FOR ONEY: THE LIQUIDITY PREFERENCE FRAEWORK W-29 (%) 30 s 25 A 20 B i *= 5 C 0 D 5 E d FIGURE Equilibrium in the arket for oney Quantity of oney, ($ billions) to buy bonds. Accordingly, they will bid up the price of bonds, and as the bond price rises, the interest rate will fall toward the equilibrium interest rate of 5%. This tendency is shown by the downward arrow drawn at the interest rate of 25%. Likewise, if the interest rate is 5%, the quantity of money demanded at point E is $500 billion, but the quantity of money supplied is only $300 billion. There is now an excess demand for money because people want to hold more money than they currently have. To try to get the money, they will sell their only other asset bonds and the price will fall. As the price of bonds falls, the interest rate will rise toward the equilibrium rate of 5%. Only when the interest rate is at its equilibrium value will there be no tendency for it to move further, and the interest rate will settle to its equilibrium value. Changes in Equilibrium Interest Rates Analyzing how the equilibrium interest rate changes using the liquidity preference framework requires that we understand what causes the demand and supply curves for money to shift. Study Guide Learning the liquidity preference framework also requires practicing applications. When there is a case in the text to examine how the interest rate changes because some economic variable increases, see if you can draw the appropriate shifts in the supply and demand curves when this same economic variable decreases. And remember to use the ceteris paribus assumption: When examining the effect of a change in one variable, hold all other variables constant.
4 W-30 Appendix 3 to Chapter 4 Shifts in the Demand for oney In Keynes s liquidity preference analysis, two factors cause the demand curve for money to shift: income and the price level. Income Effect In Keynes s view, there were two reasons why income would affect the demand for money. First, as an economy expands and income rises, wealth increases and people will want to hold more money as a store of value. Second, as the economy expands and income rises, people will want to carry out more transactions using money, with the result that they will also want to hold more money. The conclusion is that a higher level of income causes the demand for money to increase and the demand curve to shift to the right. Price-Level Effect Keynes took the view that people care about the amount of money they hold in real terms, that is, in terms of the goods and services that it can buy. When the price level rises, the same nominal quantity of money is no longer as valuable; it cannot be used to purchase as many real goods or services. To restore their holdings of money in real terms to its former level, people will want to hold a greater nominal quantity of money, so a rise in the price level causes the demand for money to increase and the demand curve to shift to the right. Shifts in the Supply of oney We will assume that the supply of money is completely controlled by the central bank, which in the United States is the Federal Reserve. (Actually, the process that determines the money supply is substantially more complicated and involves banks, depositors, and borrowers from banks. We will study it in more detail later in the book.) For now, all we need to know is that an increase in the money supply engineered by the Federal Reserve will shift the supply curve for money to the right. Case CHANGES IN THE EQUILIBRIU INTEREST RATE DUE TO CHANGES IN INCOE, THE PRICE LEVEL, OR THE ONEY SUPPLY To see how the liquidity preference framework can be used to analyze the movement of interest rates, we will again look at several cases that will be useful in evaluating the effect of monetary policy on interest rates. (As a study aid, Table summarizes the shifts in the demand and supply curves for money.) Changes in Income When income is rising during a business cycle expansion, we have seen that the demand for money will rise. It is shown in Figure 2 by the shift rightward d in the demand curve from d to The new equilibrium is reached at point 2 at the intersection of the 2 d 2 curve with the money supply curve s. As you can see, the equilibrium interest rate rises from to. The liquidity preference framework thus generates the conclusion that when income
5 SUPPLY AND DEAND IN THE ARKET FOR ONEY: THE LIQUIDITY PREFERENCE FRAEWORK W-3 TABLE SUARY Factors That Shift the Demand for and Supply of oney Change in oney Change in Demand [ d ] Change in Variable Variable or Supply [ s ] Interest Rate Income d i s d d 2 Price level d i s d d 2 oney supply s i s s 2 d Note: Only increases ( ) in the variables are shown. The effect of decreases in the variables on the change in demand or supply would be the opposite of those indicated in the remaining columns. is rising during a business cycle expansion (holding other economic variables constant), interest rates will rise. This conclusion is unambiguous when contrasted to the conclusion reached about the effects of a change in income on interest rates using the loanable funds framework. Changes in the Price Level When the price level rises, the value of money in terms of what it can purchase is lower. To restore their purchasing power in real terms to its former level, people will want to hold a greater nominal quantity of money. A d higher price level shifts the demand curve for money to the right from to 2 d (see Figure 3). The equilibrium moves from point to point 2, where the equilibrium interest rate has risen from to, illustrating that when the price level increases, with the supply of money and other economic variables held constant, interest rates will rise.
6 W-32 Appendix 3 to Chapter 4 s 2 d d 2 Quantity of oney, FIGURE 2 Response to a Change in Income d In a business cycle expansion, when income is rising, the demand curve shifts from to 2 d. The supply curve is fixed at s. The equilibrium interest rate rises from to. s 2 d d 2 Quantity of oney, FIGURE 3 Response to a Change in the Price Level An increase in price level shifts the money demand curve from d to 2 d, and the equilibrium interest rate rises from to. Changes in the oney Supply An increase in the money supply due to expansionary monetary policy by the Federal Reserve implies that the supply curve for money shifts to the right. As is shown in Figure 4 by the movement of the supply curve from s to
7 SUPPLY AND DEAND IN THE ARKET FOR ONEY: THE LIQUIDITY PREFERENCE FRAEWORK W-33 s s 2 2 d Case FIGURE 4 Response to a Change in the oney Supply Quantity of oney, When the money supply increases, the supply curve shifts from s to 2 s, and the equilibrium interest rate falls from to. 2 s, the equilibrium moves from point down to point 2, where the 2 s supply curve intersects with the demand curve d and the equilibrium interest rate has fallen from to. When the money supply increases (everything else remaining equal), interest rates will decline. 3 ONEY AND INTEREST RATES The liquidity preference analysis in Figure 4 seems to lead to the conclusion that an increase in the money supply will lower interest rates. This conclusion has important policy implications because it has frequently caused politicians to call for a more rapid growth of the money supply in order to drive down interest rates. But is this conclusion that money and interest rates should be negatively related correct? ight there be other important factors left out of the liquidity preference analysis in Figure 4 that would reverse this conclusion? We will provide answers to these questions by applying the supply and demand analysis we have learned in this chapter to obtain a deeper understanding of the relationship between money and interest rates. An important criticism of the conclusion that a rise in the money supply lowers interest rates has been raised by ilton Friedman, a Nobel laureate in economics. He acknowledges that the liquidity preference analysis oney supply data, which the Federal Reserve reports at 4:30 p.m. every Thursday, are available online at reserve.gov/ releases/h6/ Current 3This same result can be generated using the loanable funds framework. The primary way that a central bank produces an increase in the money supply is by buying bonds and thereby decreasing the supply of bonds to the public. The resulting shift to the left of the supply curve for bonds will lead to a decline in the equilibrium interest rate.
8 W-34 Appendix 3 to Chapter 4 is correct and calls the result that an increase in the money supply (everything else remaining equal) lowers interest rates the liquidity effect. However, he views the liquidity effect as merely part of the story: An increase in the money supply might not leave everything else equal and will have other effects on the economy that may make interest rates rise. If these effects are substantial, it is entirely possible that when the money supply rises, interest rates too may rise. We have already laid the groundwork to discuss these other effects because we have shown how changes in income, the price level, and expected inflation affect the equilibrium interest rate. Study Guide To get further practice with the loanable funds and liquidity preference frameworks, show how the effects discussed here work by drawing the supply and demand diagrams that explain each effect. This exercise will also improve your understanding of the effect of money on interest rates.. Income effect. Because an increasing money supply is an expansionary influence on the economy, it should raise national income and wealth. Both the liquidity preference and loanable funds frameworks indicate that interest rates will then rise (see Figure 2). Thus the income effect of an increase in the money supply is a rise in interest rates in response to the higher level of income. 2. Price-level effect. An increase in the money supply can also cause the overall price level in the economy to rise. The liquidity preference framework predicts that this will lead to a rise in interest rates. So the pricelevel effect from an increase in the money supply is a rise in interest rates in response to the rise in the price level. 3. Expected-inflation effect. The rising price level (the higher inflation rate) that results from an increase in the money supply also affects interest rates by affecting the expected inflation rate. Specifically, an increase in the money supply may lead people to expect a higher price level in the future hence the expected inflation rate will be higher. The loanable funds framework has shown us that this increase in expected inflation will lead to a higher level of interest rates. Therefore, the expected-inflation effect of an increase in the money supply is a rise in interest rates in response to the rise in the expected inflation rate. At first glance it might appear that the price-level effect and the expected-inflation effect are the same thing. They both indicate that increases in the price level induced by an increase in the money supply will raise interest rates. However, there is a subtle difference between the two, and this is why they are discussed as two separate effects. Suppose that there is a onetime increase in the money supply today that leads to a rise in prices to a permanently higher level by next year. As the price level rises over the course of this year, the interest rate will rise via the price-level effect. Only at the end of the year, when the price level has risen to its peak, will the price-level effect be at a maximum. The rising price level will also raise interest rates via the expectedinflation effect because people will expect that inflation will be higher over
9 SUPPLY AND DEAND IN THE ARKET FOR ONEY: THE LIQUIDITY PREFERENCE FRAEWORK W-35 the course of the year. However, when the price level stops rising next year, inflation and the expected inflation rate will fall back down to zero. Any rise in interest rates as a result of the earlier rise in expected inflation will then be reversed. We thus see that in contrast to the price-level effect, which reaches its greatest impact next year, the expected-inflation effect will have its smallest impact (zero impact) next year. The basic difference between the two effects, then, is that the price-level effect remains even after prices have stopped rising, whereas the expected-inflation effect disappears. An important point is that the expected-inflation effect will persist only as long as the price level continues to rise. A onetime increase in the money supply will not produce a continually rising price level; only a higher rate of money supply growth will. Thus a higher rate of money supply growth is needed if the expected-inflation effect is to persist. Does a Higher Rate of Growth of the oney Supply Lower Interest Rates? We can now put together all the effects we have discussed to help us decide whether our analysis supports the politicians who advocate a greater rate of growth of the money supply when they feel that interest rates are too high. Of all the effects, only the liquidity effect indicates that a higher rate of money growth will cause a decline in interest rates. In contrast, the income, price-level, and expected-inflation effects indicate that interest rates will rise when money growth is higher. Which of these effects are largest, and how quickly do they take effect? The answers are critical in determining whether interest rates will rise or fall when money supply growth is increased. Generally, the liquidity effect from the greater money growth takes effect immediately because the rising money supply leads to an immediate decline in the equilibrium interest rate. The income and price-level effects take time to work because the increasing money supply takes time to raise the price level and income, which in turn raise interest rates. The expected-inflation effect, which also raises interest rates, can be slow or fast, depending on whether people adjust their expectations of inflation slowly or quickly when the money growth rate is increased. Three possibilities are outlined in Figure 5; each shows how interest rates respond over time to an increased rate of money supply growth starting at time T. Panel (a) shows a case in which the liquidity effect dominates the other effects so that the interest rate falls from at time T to a final level of. The liquidity effect operates quickly to lower the interest rate, but as time goes by, the other effects start to reverse some of the decline. Because the liquidity effect is larger than the others, however, the interest rate never rises back to its initial level. Panel (b) has a lesser liquidity effect than the other effects, with the expected-inflation effect operating slowly because expectations of inflation are slow to adjust upward. Initially, the liquidity effect drives down the interest rate. Then the income, price-level, and expected-inflation effects begin to raise it. Because these effects are dominant, the interest rate eventually rises above its initial level to. In the short run, lower interest rates result from increased money growth, but eventually they end up climbing above the initial level.
10 W-36 Appendix 3 to Chapter 4 T Liquidity Effect Income, Price-Level, and Expected- Inflation Effects Time ( a ) Liquidity effect larger than other effects T Liquidity Effect Income, Price-Level, and Expected- Inflation Effects Time ( b ) Liquidity effect smaller than other effects and slow adjustment of expected inflation T Liquidity and Expected- Inflation Effects Income and Price- Level Effects Time ( c ) Liquidity effect smaller than expected-inflation effect and fast adjustment of expected inflation FIGURE 5 Response over Time to an Increase in oney Supply Growth Panel (c) has the expected-inflation effect dominating as well as operating rapidly because people quickly raise their expectation of inflation when the rate of money growth increases. The expected-inflation effect begins immediately to overpower the liquidity effect, and the interest rate immediately starts to climb. Over time, as the income and price-level effects start
11 SUPPLY AND DEAND IN THE ARKET FOR ONEY: THE LIQUIDITY PREFERENCE FRAEWORK W-37 to take hold, the interest rate rises even higher, and the eventual outcome is an interest rate that is substantially above the initial interest rate. The result shows clearly that increasing money supply growth is not the answer to reducing interest rates but rather that money growth should be reduced in order to lower interest rates! An important issue for economic policymakers is which of these three scenarios is closest to reality. If a decline in interest rates is desired, then an increase in money supply growth is called for when the liquidity effect dominates the other effects, as in panel (a). A decrease in money growth is appropriate if the other effects dominate the liquidity effect and expectations of inflation adjust rapidly, as in panel (c). If the other effects dominate the liquidity effect but expectations of inflation adjust only slowly, as in panel (b), then whether you want to increase or decrease money growth depends on whether you care more about what happens in the short run or the long run. Which scenario is supported by the evidence? The relationship of interest rates and money growth from 950 to 2004 is plotted in Figure 6. When Interest Rate (%) oney Growth Rate (( 2) Interest Rate oney Growth Rate (% annual rate) FIGURE 6 oney Growth (2, Annual Rate) and Interest Rates (Three-onth Treasury Bills), Sources: Federal Reserve Bulletin, various years. Tables. line 6 and
12 W-38 Appendix 3 to Chapter 4 the rate of money supply growth began to climb in the mid-960s, interest rates rose, indicating that the liquidity effect was dominated by the pricelevel, income, and expected-inflation effects. By the 970s, interest rates reached levels unprecedented in the period after World War II, as did the rate of money supply growth. The scenario depicted in panel (a) of Figure 5 seems doubtful, and the case for lowering interest rates by raising the rate of money growth is much weakened. You should not find this too surprising. The rise in the rate of money supply growth in the 960s and 970s is matched by a large rise in expected inflation, which would lead us to predict that the expected-inflation effect would be dominant. It is the most plausible explanation for why interest rates rose in the face of higher money growth. However, Figure 6 does not really tell us which one of the two scenarios, panel (b) or panel (c) of Figure 5, is more accurate. It depends critically on how fast people s expectations about inflation adjust. However, recent research using more sophisticated methods than just looking at a graph like Figure 6 does indicate that increased money growth temporarily lowers short-term interest rates. 4 4See Lawrence J. Christiano and artin Eichenbaum, Identification and the Liquidity Effect of a onetary Policy Shock, in Business Cycles, Growth, and Political Economy, ed. Alex Cukierman, Zvi Hercowitz, and Leonardo Leiderman (Cambridge, ass.: IT Press, 992), pp ; Eric. Leeper and David B. Gordon, In Search of the Liquidity Effect, Journal of onetary Economics 29 (992): ; Steven Strongin, The Identification of onetary Policy Disturbances: Explaining the Liquidity Puzzle, Journal of onetary Economics 35 (995): ; and Adrian Pagan and John C. Robertson, Resolving the Liquidity Effect, Federal Reserve Bank of St. Louis Review 77 (ay June 995):
A Model of Prices and Residential Investment Chapter 9 Appendix In this appendix, we develop a more complete model of the housing market that explains how housing prices are determined and how they interact
Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),
33 Aggregate Demand and Aggregate Supply R I N C I L E S O F ECONOMICS FOURTH EDITION N. GREGOR MANKIW Long run v.s. short run Long run growth: what determines long-run output (and the related employment
Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation
Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth
Chapter 11 International Economics II: International Finance The other major branch of international economics is international monetary economics, also known as international finance. Issues in international
CHAPTER 3 THE LOANABLE FUNDS MODEL The next model in our series is called the Loanable Funds Model. This is a model of interest rate determination. It allows us to explore the causes of rising and falling
Practice Problems Mods 25, 28, 29 Multiple Choice Identify the choice that best completes the statement or answers the question. Scenario 25-1 First National Bank First National Bank has $80 million in
KrugmanMacro_SM_Ch14.qxp 10/27/05 3:25 PM Page 165 Monetary Policy 1. Go to the FOMC page of the Federal Reserve Board s website (http://www. federalreserve.gov/fomc/) to find the statement issued after
4 Macroeconomics LESSON 6 Interest Rates and Monetary Policy in the Short Run and the Long Run Introduction and Description This lesson explores the relationship between the nominal interest rate and the
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.
QUIZ 3 14.02 Principles of Macroeconomics May 19, 2005 I. True/False (30 points) 1. A decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without
The Money Market and the Interest Rate 2003 South-Western/Thomson Learning Individuals Demand for Money An individual s quantity of money demanded is the amount of wealth that the individual chooses to
University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi Chapter 29 Fiscal Policy 1) If revenues exceed outlays, the government's budget balance
Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change
Lecture 11-1 6.1 The open economy, the multiplier, and the IS curve Assume that the economy is either closed (no foreign trade) or open. Assume that the exchange rates are either fixed or flexible. Assume
Chapter 4 Consumption, Saving, and Investment Multiple Choice Questions 1. Desired national saving equals (a) Y C d G. (b) C d + I d + G. (c) I d + G. (d) Y I d G. 2. With no inflation and a nominal interest
Economics 202 Principles Of Macroeconomics Professor Yamin Ahmad The Federal Reserve System The Federal Reserve System, or the Fed, is the central bank of the United States. Supplemental Notes to Monetary
Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian Model The Keynesian Theory of Business
Unit 4 Test Review KEY Savings, Investment and the Financial System 1. What is a financial intermediary? Explain how each of the following fulfills that role: Financial Intermediary: Transforms funds into
Econ 20B- Additional Problem Set 4 I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1. Institutions in the economy that help to match one person's
Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40
Case, Fair and Oster Macroeconomics Chapter 11 Problems Money Demand and the Equilibrium Interest Rate Money demand equation. P Y Md = k * -------- where k = percent of nominal income held as money ( Cambridge
Nominal, Real and PPP GDP It is crucial in economics to distinguish nominal and real values. This is also the case for GDP. While nominal GDP is easier to understand, real GDP is more important and used
Effects on pensioners from leaving the EU Summary 1.1 HM Treasury s short-term document presented two scenarios for the immediate impact of leaving the EU on the UK economy: the shock scenario and severe
Agenda, Business Cycles, and Macroeconomic Policy in the Open Economy, Part 1 How Are Determined A Supply-and-Demand Analysis 19-1 19-2 Nominal exchange rates: The nominal exchange rate indicates how much
1. Solutions to PS 1: 1. a. (iv) b. (ii) [6.75/(1.34) = 10.2] c. (i) Writing a call entails unlimited potential losses as the stock price rises. 7. The bill has a maturity of one-half year, and an annualized
Lecture 8-1 8. Simultaneous Equilibrium in the Commodity and Money Markets We now combine the IS (commodity-market equilibrium) and LM (money-market equilibrium) schedules to establish a general equilibrium
518 Chapter 11 INFLATION AND MONETARY POLICY Thus, the monetary policy that is consistent with a permanent drop in inflation is a sudden upward jump in the money supply, followed by low growth. And, in
Econ 121 Money and Banking Instructor: Chao Wei Answer Key to Midterm Provide a brief and concise answer to each question. Clearly label each answer. There are 50 points on the exam. 1. (10 points, 3 points
University of Colorado at Boulder Department of Economics ECON 4423: INTERNATIONAL FINANCE Final Examination Fall 2005 Name: Answer Key Student ID: Instructions: This test is 1 1/2 hours in length. You
LES S ON 14: INT RODUCTION T O FINANCE Focus Question: How do businesses finance their operations? Objectives Students will be able to: Compare and contrast short-, intermediate-, and long-term financing.
The Liquidity Trap and U.S. Interest Rates in the 1930s SHORT SUMMARY Christopher Hanes Department of Economics School of Business University of Mississippi University, MS 38677 (662) 915-5829 email@example.com
NOTES H IX. How to Read Financial Bond Pages Understanding of the previously discussed interest rate measures will permit you to make sense out of the tables found in the financial sections of newspapers
Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.
DEMB Working Paper Series N. 53 What Drives US Inflation and Unemployment in the Long Run? Antonio Ribba* May 2015 *University of Modena and Reggio Emilia RECent (Center for Economic Research) Address:
Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Key Concepts The Demand for Money Four factors influence the demand for money: The price level An increase in the price level increases the nominal
University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 24 Money Price Inflation 1) Money is A) currency plus coins. B) the same as gold.
What is responsible for the easing of credit standards before the crisis: monetary policy or the savings glut? Adrian Penalver Monetary and Financial Analysis Directorate This letter presents the findings
Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College firstname.lastname@example.org http://www.bc.edu/~irelandp/ec61.html Chapter 6: The Risk and Term Structure
Answers to Text Questions and Problems in Chapter 8 Answers to Review Questions 1. The key assumption is that, in the short run, firms meet demand at pre-set prices. The fact that firms produce to meet
ON THE DEATH OF THE PHILLIPS CURVE William A. Niskanen There is no evidence of a Phillips curve showing a tradeoff between unemployment and inflation. The function for estimating the nonaccelerating inflation
Rauli Susmel Dept. of Finance Univ. of Houston FINA 4360 International Financial Management Chapter 4 Determinants of FX Rates Last Lecture FX is a huge market (the biggest financial market) - Open 24/7-3
Chapter 16 Output and the Exchange Rate in the Short Run Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld Chapter
Remarks by Gordon Thiessen Governor of the Bank of Canada to the Chambre de commerce du Montréal métropolitain Montreal, Quebec 4 December 2000 Why a Floating Exchange Rate Regime Makes Sense for Canada
Survey of Macroeconomics, MBA 641 Fall 2006, Quiz 4 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The central bank for the United States
Chapter 11 1 Final Chapter 11: Extending the Sticky-Price Model: IS- LM, International Side, and AS-AD J. Bradford DeLong Questions What is money-market equilibrium? What is the LM Curve? What determines
FINANCIAL INSTRUMENTS AND RELATED RISKS This description of investment risks is intended for you. The professionals of AB bank Finasta have strived to understandably introduce you the main financial instruments
CHAPTER 8 Current Monetary Balances 395 APPENDIX Interest Concepts of Future and Present Value TIME VALUE OF MONEY In general business terms, interest is defined as the cost of using money over time. Economists
Economics 101 Quiz #1 Fall 2002 1. Assume that there are two goods, A and B. In 1996, Americans produced 20 units of A at a price of $10 and 40 units of B at a price of $50. In 2002, Americans produced
Fiscal Policy chapter: 28 13 ECONOMICS MACROECONOMICS 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to
Web upplement to Chapter 2 UPPLY AN EMAN: TAXE 21 Taxes upply and demand analysis is a very useful tool for analyzing the effects of various taxes In this Web supplement, we consider a constant tax per
Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)
Problem Set 3 Econ 122a: Fall 2013 Prof. Nordhaus and Staff Due: In class, Wednesday, September 25 Problem Set 3 Solutions Sebastian is responsible for this answer sheet. If you have any questions about
Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention Slide 17-1 Chapter 17 Learning Goals How a central bank must manage monetary policy so as to fix its currency's value in the foreign exchange
Chapter 13 Money and Banking Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. The most important function of money is (a) as a store of
1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve
nswers to Problem Set #5 International conomic Relations Prof. Murphy Chapter 5 Krugman and Obstfeld. Relative PPP predicts that inflation differentials are matched by changes in the exchange rate. Under
Mishkin ch.14: The Money Supply Process Objective: Show how the Fed controls stocks of money; focus on M1. - Macro theory simply assumes that the Fed can set M via open market operations. - Point here:
Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* The Demand for Topic: Influences on Holding 1) The quantity of money that people choose to hold depends on which of the following? I. The price
Comments on \Do We Really Know that Oil Caused the Great Stag ation? A Monetary Alternative", by Robert Barsky and Lutz Kilian Olivier Blanchard July 2001 Revisionist history is always fun. But it is not
Agenda The IS LM Model, Part 2 Asset Market Equilibrium The LM Curve 13-1 13-2 The demand for money is the quantity of money people want to hold in their portfolios. The demand for money depends on expected
ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common
Statement by Dean Baker, Co-Director of the Center for Economic and Policy Research (www.cepr.net) Before the U.S.-China Economic and Security Review Commission, hearing on China and the Future of Globalization.
University of Essex Term Paper Financial Instruments and Capital Markets 2010/2011 Konstantin Vasilev Financial Economics Bsc Explain the role of futures contracts and options on futures as instruments
Practice Problems on the Capital Market 1- Define marginal product of capital (i.e., MPK). How can the MPK be shown graphically? The marginal product of capital (MPK) is the output produced per unit of
Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual
Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services
Risk, Return and Market Efficiency For 9.220, Term 1, 2002/03 02_Lecture16.ppt Student Version Outline 1. Introduction 2. Types of Efficiency 3. Informational Efficiency 4. Forms of Informational Efficiency
A HOW-TO GUIDE: UNDERSTANDING AND MEASURING INFLATION By Jim Stanford Canadian Centre for Policy Alternatives, 2008 Non-commercial use and reproduction, with appropriate citation, is authorized. This guide
Lesson 8 Save and Invest: The Rise and Fall of Risk and Return Lesson Description This lesson begins with a brainstorming session in which students identify the risks involved in playing sports or driving
Carnegie Mellon University Research Showcase @ CMU Tepper School of Business 3-1967 Memorandum: Regulation of Interest Rates on Time and Savings Accounts Allan H. Meltzer Carnegie Mellon University, email@example.com
2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible
Slide 1 Exchange Rate Policy in the Policy Analysis Matrix Scott Pearson Stanford University Lecture Program Scott Pearson is Professor of Agricultural Economics at the Food Research Institute, Stanford
Chapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter first introduces the analysis of business cycles, and introduces you to the
Wealth Management Education Series Cultivate an Understanding of Bonds Wealth Management Education Series Cultivate an Understanding of Bonds Managing your wealth well is like tending a beautiful formal
Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model. Carlos Llano (P) & Nuria Gallego (TA) References: these slides have been developed based on the ones provided by Beatriz
abcdefg News conference Berne, 15 December 2011 Introductory remarks by Jean-Pierre Danthine I would like to address three main issues today. These are the acute market volatility experienced this summer,
LEVEL ECONOMICS ECON2/Unit 2 The National Economy Mark scheme June 2014 Version 1.0/Final Mark schemes are prepared by the Lead Assessment Writer and considered, together with the relevant questions, by
Chapter Two Determinants of Interest Rates Interest Rate Fundamentals Nominal interest rates - the interest rate actually observed in financial markets directly affect the value (price) of most securities
PRACTICE- Unit 6 AP Economics Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The term liquid asset means: A. that the asset is used in a barter exchange.
Name: Solutions Cosumnes River College Principles of Macroeconomics Problem Set 11 Will Not Be Collected Fall 2015 Prof. Dowell Instructions: This problem set will not be collected. You should still work
CHAPTER 5 HISTORY OF INTEREST RATES AND RISK PREMIUMS HISTORY OF INTEREST RATES AND RISK PREMIUMS Determinants of the Level of Interest Rates Risk and Risk Premium The Historical Record Real Versus Nominal
03-Mentzer (Sales).qxd 11/2/2004 11:33 AM Page 73 3 Time Series Forecasting Techniques Back in the 1970s, we were working with a company in the major home appliance industry. In an interview, the person
Your consent to our cookies if you continue to use this website.