Macroeconomic Model - Supply of Money Increases

Macroeconomic Model - Supply of Money Increases -...

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LECTURE 3 MONEY SUPPLY INCREASES
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THE MACRO ECONOMIC MODEL Introduction to Economics Class Notes Fall 2000 Charles R. Plott California Institute of Technology
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Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P UNKNOWNS .Y income .C consumption .I investment .i interest rate .P price level .L employment .MD money demand .MD T transaction demand for money .MD S speculative demand for money .w nominal wages level GIVENS G Government spending X net exports M nominal money supply b marginal propensity to consume EQUATIONS .Y=C+I+G+X .C=a(i)+bY .I=I(i) .M/P = MD .MD=MD T +MD S .MD T = MD T (Y) .MD S = MD S (i) .DL(w/P)-SL(w/P)=0 .L=SL(w/P)
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EXERCISE #3 THERE IS A SHIFT IN THE MONEY SUPPLY. MONEY SUPPLY INCREASES. A MONETARY INDUCED INFLATION
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Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P
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Aggregate demand exceeds aggregate supply causing price increases. The price increase lowers real wages. The lag in
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Unformatted text preview: expectations of price increases in the labor market expands the system beyond full employment and GDP is above potential GDP. Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P Increasing prices cause a decrease in the real money supply. Less real money puts upward pressure on interest rates, choking off investment. The decrease in spending is a fall in aggregate demand, bringing it into line with aggregate supply. In the labor market wages adjust to prices so real wage returns to the full employment level and GDP moves back to potential GDP. Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P...
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Macroeconomic Model - Supply of Money Increases -...

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