econ_100B-15 - ECONOMICS 100B Professor Steven Wood...

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ECONOMICS 100B Professor Steven Wood 10/16/08 Lecture 15 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. *Note: Reference to Professor Wood’s Power Point Slides today will be noted as (15-1), for “Power Point #15: The IS-LM Model Part 4, Slide #1.” LECTURE This afternoon, we want to continue our discussion on IS-LM model. This model is the main workhorse model that macroeconomists use for short-term economic events. Today we want to think about some policy-related issues that can be looked at with IS-LM. So we will spend most of the time today talking about policy analysis. Now of course there are two types of policies: monetary and fiscal. Monetary policy is nothing more than changes in the nominal money supply. Fiscal policy is changes in government purchases (spending side) or changes in taxes (revenue side). Notice that when we talk about monetary policy, we’re talking about the Federal Reserve. In the current time, Federal Reserve is implying that they will change the interest rate directly rather than the money supply. We’ll see in a few minutes that it is indeed possible to do this, but that they’ll actually have to get this change implemented by changing the money supply. We can also make a distinction between what are referred to as expansionary policies or contractionary policies. We want to be careful about what we mean by each of these. Expansionary policies lead to an increase in current economic output. When we see expansionary, we’re trying to expand aggregate economy, or real GDP. Contractionary policy, of course, would be just the opposite. So if we’re trying to increase the economic output, we want increase in the nominal money supply (which would shift the LM curve), increases in government purchase, or decrease in taxes. Just the opposite would apply for contractionary policies. So let’s take a few minutes talking about an expansionary monetary policy in the context of our model. This is fairly straightforward because this is what we did exactly last time. When the Federal Reserve increases the money supply, the LM curve will shift to the right and we need to think about what the adjustment mechanism is. This increase in nominal money supply leads to increase in real money supply (since we’re holding prices constant). So now the real money supply is greater than our
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econ_100B-15 - ECONOMICS 100B Professor Steven Wood...

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