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Market for Loanable funds
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the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanges
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crowding out
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a decrease in private expenditures as a result of an increase in government purchases
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market for loanable funds graph
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saving
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supply of loanable funds comes from
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borrowers
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demand for loanable funds comes from
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entrepreneurs
governments
individuals/households
governments
individuals/households
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borrowers could be:
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low interest rate
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People borrow so they can make purchases. They prefer a
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high interest rate
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Savers/lenders prefer a
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a curve showing the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government
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Aggregate Demand
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movement along the curve
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A change in price level means:
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- the wealth effect
- the interest rate effect
- international trade effect
- the interest rate effect
- international trade effect
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Aggregate Demand slopes downward due to:
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-when the price level goes down your purchasing power increases so you will look to consume more
- when the price level increases your purchasing power decreases and you will consume less
- when the price level increases your purchasing power decreases and you will consume less
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The Wealth Effect
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when prices fall, you will be saving more on what you are buying, resulting in people buying more that the price is lower
- this also causes a change in the quantity of loanable funds as the savings curve will shift to the right
- this also causes a change in the quantity of loanable funds as the savings curve will shift to the right
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The Interest Rate Effect
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if the price level falls in America, more people from outside will look to buy goods, this increases net exports causing the GDP to increase
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International Trade Effect:
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- Changes in policies
- Changes in expectations
- Changes in foreign variables
- Changes in expectations
- Changes in foreign variables
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Factors Shifting Aggregate Demand
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-interest rates: change in monetary policy
- increase in interest rates tries to lower consumption which makes borrowing more expensive
- government purchases: change in fiscal policy
- increase or decrease spending: when gov purchases increase there is an increase in aggregate demand
- personal income taxes or business taxes: when there is a decrease in taxes our aggregate demand increases because people look to consume and invest more
- increase in interest rates tries to lower consumption which makes borrowing more expensive
- government purchases: change in fiscal policy
- increase or decrease spending: when gov purchases increase there is an increase in aggregate demand
- personal income taxes or business taxes: when there is a decrease in taxes our aggregate demand increases because people look to consume and invest more
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Changes in Policies
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- if you expect the economy is going to be good in the future you may spend more now
- if you expect the economy is going to be bad in the future you may save now
- if you expect the economy is going to be bad in the future you may save now
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Change in Expectations
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- change in income abroad: people in other countries earn more so they would buy more and increase Net Exports in America
- exchange rates : if you sell a lot of goods abroad you want dollars to be weaker so you get more money when people buy (weak dollar)
- exchange rates : if you sell a lot of goods abroad you want dollars to be weaker so you get more money when people buy (weak dollar)
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Changes in Foreign Variables
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A curve that shows the relationship in the long run between the price level and quantity of real GDP supplied
= potential GDP at natural rate of unemployment
= potential GDP at natural rate of unemployment
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Long-Run Aggregate Supply Curve
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No, only changes in labor force, capital, and technology can shift the LRAS
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Do changes in price level have effect on GDP supplied in the long-run?
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nominal variables (prices, money) don't affect real variables in the long run
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money neutrality
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a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied
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Short Run Aggregate Supply (SRAS)
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because contracts make some wages and prices "sticky"
- firms are often too slow to adjust wages
- menu costs make some prices sticky
- firms are often too slow to adjust wages
- menu costs make some prices sticky
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Why does SRAS slope upward?
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Increase; this causes profits to increase so firms will increase production
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If price level increases, the prices of the goods/services that firms produce (increase/decrease) faster than the prices of inputs.
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-increases in labor force and capital stock
- technological changes
- technological changes
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Factors that shift the SRAS and LRAS:
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- expected changes in the future price level
- adjustments of workers and firms to errors in past expectations about price level
- unexpected changes in the price of an important natl. resources (supply shock)
- adjustments of workers and firms to errors in past expectations about price level
- unexpected changes in the price of an important natl. resources (supply shock)
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Factors that shift the SRAS
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- suppliers expect higher future prices
- suppliers expect an increase in inflation
- firms expect a higher cost of production
- also leftward shift if inflation is higher than expected
- suppliers expect an increase in inflation
- firms expect a higher cost of production
- also leftward shift if inflation is higher than expected
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Why would the SRAS curve shift left?
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where LRAS, AD, and SRAS all meet
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Long-Run Equilibrium:
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where AD and SRAS meet
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Short Run Equilibrium
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The aggregate demand would shift to the left because consumption, investment, and net exports would decrease
- a new short-run equilibrium would occur
- this would be a recession as it is to the left of LRAS
- actual GDP < potential GDP
- price level falls
- unemployment is higher than natl. rate
The SRAS would shift to the right in response because it will cost less to produce goods
- this is because wages and input prices fall during a recession
- new LR equilibrium is formed at a lower price level than the original
- a new short-run equilibrium would occur
- this would be a recession as it is to the left of LRAS
- actual GDP < potential GDP
- price level falls
- unemployment is higher than natl. rate
The SRAS would shift to the right in response because it will cost less to produce goods
- this is because wages and input prices fall during a recession
- new LR equilibrium is formed at a lower price level than the original
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Suppose people become more pessimistic (or incomes abroad decrease)
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The aggregate demand would shift to the right because net exports would increase
- a new short-run equilibrium would occur
- this would be a boom because it's to the right of the LRAS
- actual GDP > potential GDP
- prices would increase
- unemployment is lower than natl. rate
The SRAS would shift to the left because input prices and wages would increase
- this would cause a new LR equilibrium to be formed at a higher price level than the original
- a new short-run equilibrium would occur
- this would be a boom because it's to the right of the LRAS
- actual GDP > potential GDP
- prices would increase
- unemployment is lower than natl. rate
The SRAS would shift to the left because input prices and wages would increase
- this would cause a new LR equilibrium to be formed at a higher price level than the original
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Suppose income abroad increases:
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- negative supply shock
SRAS would shift to the left
- real GDP would decrease and be less than the potential GDP
- recession because it's too the left
- price level inc.
- unemployment greater than natl. rate
- stagflation occurs
the SRAS returns back to the original spot
SRAS would shift to the left
- real GDP would decrease and be less than the potential GDP
- recession because it's too the left
- price level inc.
- unemployment greater than natl. rate
- stagflation occurs
the SRAS returns back to the original spot
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Suppose Oil Prices increase
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changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
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Fiscal Policy:
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increase in government spending and decrease in taxes
- AD would shift to the right as real GDP increases
- AD would shift to the right as real GDP increases
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expansionary fiscal policy
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a decrease in government spending and an increase in taxes
- AD would shift to the left as real GDP decreases
- AD would shift to the left as real GDP decreases
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contractionary fiscal policy
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President and congress
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Who is responsible for fiscal policy?
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The Fed/Central Bank
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Who is responsible for monetary policy?
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a decline in private expenditures as a result of an increase in government purchases
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crowding-out effect
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The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
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monetary policy
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Federal Reserve Committee is responsible for open managing the money supply and open market operations in the US
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federal open market (FOMC)
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- price stability
- high unemployment
- stability of financial markets and institutions
- economic growth
- high unemployment
- stability of financial markets and institutions
- economic growth
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Monetary Policy Goals:
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- money supply
- interest rates
- interest rates
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Monetary Policy Targets:
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the interest rate banks charge each other for overnight loans
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federal funds rate:
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money supply increases and interest rates decrease
- investment consumption and net exports inc.
- AD curve shifts to the right
- real GDP and price level inc.
- investment consumption and net exports inc.
- AD curve shifts to the right
- real GDP and price level inc.
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Expansionary Monetary Policy:
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money supply decreases and interest rates inc.
- investment consumption and net exports decrease
- AD curve shifts to the right
- real GDP and Price Level Inc.
- investment consumption and net exports decrease
- AD curve shifts to the right
- real GDP and Price Level Inc.
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Contractionary Monetary Policy:
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a theory about the connection between money and prices
- if money supply grows faster than real GDP , there will be inflation
- if money supply grows slower than real GDP, there will be deflation
- if the money supply grows at the same rate, the price level will be stable and there will be neither GDP nor deflation
- if money supply grows faster than real GDP , there will be inflation
- if money supply grows slower than real GDP, there will be deflation
- if the money supply grows at the same rate, the price level will be stable and there will be neither GDP nor deflation
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Quantity Theory of Money
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