PP_Slides_Class_18_Monday_March_24

PP_Slides_Class_18_Monday_March_24 - Good Afternoon! Class...

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Good Afternoon!! Class 18 Monday, March 24
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1. Dynamic scoring is closely related to ___. a. the crowding-in effect b. the crowding-out effect c. both the crowding-out and crowding-in effect d. neither the crowding-out effect nor crowding-in effect
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Remember: classical economics interest rate is determined in the loanable funds market where S = I supply of savings demand for investment
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Loanable Funds Market
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1. According to the John Maynard Keynes’ liquidity trap, at very low rates of interest people tend to a. hold their money b. put their money in the bank c. buy bonds d. lend out their money
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Keynes’ Critique -at low interest rate, investment may not take place: why borrow if you have unused capacity Another way to say this:
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-at low interest rate, people want to hold all money: they don’t want to lend it because they think the interest rate will be higher in the future -monetary policy will be ineffective -increases in the money supply will not lower the interest rate which would increase investment and get the economy to full employment GDP -need to use fiscal policy
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1. The opportunity cost of holding money a. is zero because money is not an economic resource b. varies directly with the interest rate c. varies inversely with the interest rate d. varies inversely with the level of national income
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Money Market
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Fed created by Act of Congress in 1913 Keynes writes the “General Theory. .” in 1936
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1. The ___ demand for money is most sensitive to interest rate changes. a. transactions b. speculative c. precautionary
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Who has a demand for money? Public Why? 3 reasons 1. Precautionary need money for emergencies 1. Transactions need money to buy goods and services 1. Speculative need money to buy interest paying assets
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Three Demands for Money
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interest rate elasticity of money demand %chg Q E = %chg i
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Precautionary Demand for Money -almost perfectly interest rate inelastic -quantity of money demanded is almost unresponsive to the interest rate
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Transactions Demand for Money -interest rate inelastic -quantity of money demanded is not very responsive to interest rates
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PP_Slides_Class_18_Monday_March_24 - Good Afternoon! Class...

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