page 52 -77 notes

page 52 -77 notes - 1. 2. change in GDP = change in...

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1. 2. change in GDP = change in investments X multiplier 3. change in GDP = change in investments X 1/ 1-MPC a. works in a recession but not in a booming economy b. if there is an increase in investments or government spending (borrowing), interest rates will go up bc if firms want to spend more, they borrow, if there is more competition for loans, they raise interest rates. 4. Kensian cross a. Find the intersection between aggregate expenditure and the 45 degree line. 5. IS- a locus of points in (r,Y) where the goods market is in equilibrium aka Y+C+I+G, production = demand. a. Must considers C+I+G and the loan market, rates
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b.
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c. a shift in G or I is not caused by a change in interest rate, but they will CAUSE a change in the interest rate. 6. LM- a locus of points (r.Y) where the money market is in equilibrium a. Ie. Where money supply = money demand b. c.
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7. CH 11 8. when the government spends more a. it increases income b. it also increase demand for loanable funds, so interest rates goe up, investments go down and GDP goes down but this crowding out affect is less than the increase in GDP. i. It depends on how steep the LM curve is.
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ii. 1. if the LM curve is vertical, there is full crowding out and fiscal policy (G) is completely ineffective. 2. it becomes less effective if IS is flat
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a. b. if you have an increase in expansionary policy, if gdp doubles and people hold onto even more money, then there is crowding out, the interest rates go up to pay for how much you demand money. c. If holdings remain the same regardless of gdp, interest rates remain the same. d. Crowding out is more defined if LM curve is steep, it offsets the gains. iii. What causes the IS curve to change slope 1. a small drop in r results in a large change in spending 2. if the curve is steep, a drop in r will not affect spending… 9. LM curve is a result of fiscal policy. a. Monetary policy is more effective if IS is flat (aka investors are very sensitive to interest rates. b. Fiscal policy is less effective when the IS curve is flat. i. Bc when IS is flat, investors sensitive to interest rates. c. AS AD IS LM in one pictures will be on the exam. 10. Fiscal Policy a. Effective i. IS is steep and LM is flat b. Ineffective i. IS is flat and LM is steep 11. Monetary policy a. Effective
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i. IS is flat, and LM is steep b. Ineffective i. IS is steep and LM is flat 12. monetary policy a. by the fed i. may or may not accommodate policy ii. based on what they want, GDP or inflation 13. Fiscal policy a. By the president and congress b. Ex. If increased government spending, interest rates would go up, but fed increases money supply, the fed can accommodate by increases money supply to maintain interest rates. c.
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This note was uploaded on 04/11/2009 for the course ECON 101 taught by Professor Miyanishi during the Spring '08 term at UC Davis.

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page 52 -77 notes - 1. 2. change in GDP = change in...

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