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Economics 100B - 13 (2-27-07)

Economics 100B - 13 (2-27-07) - Economics 100B Professor...

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Economics 100B Professor Steven Wood 2/27/07 Lecture 13 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, 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. Sharing or copying these notes is illegal and could end note taking for this course ANNOUCEMENTS The midterm statistics are as follows: The maximum score was a 97, the minimum score was 6 (not a typo), there were 398 tests given, the mean for the exam was 71.3, the median was 73, and the standard deviation was 15.6. The mean and median were a little lower than what I usually expect on this exam. The deadline for a re-grade request will be next Tuesday March 6 th . Please type your request and submit it to me before the end of class next Tuesday. LECTURE Today we will be continuing our discussion of short-term fluctuations using the IS-LM Model. This is a step beyond our Keynesian model, which you learned in Econ 1. The IS Curve The IS curve gives us equilibrium in the market for goods and services. This is exactly what the Keynesian Cross model gave us as well. The IS curve is basically all the equilibrium points from the Keynesian Cross. Real Interest Rate Assumption There is only 1 interest rate, R. While this is a simplification of the real- world, it turns out most rates move together. Real (Planned) Spending Assumptions: C depends primarily on YD (+) and a little bit on R (-). C = Co + mpc(1 – t)Y + α R where α < 0. This changes our composition of autonomous consumption. Interest rates are now separate from autonomous consumption. I depends primarily on R (-). I = Io – dR where d > 0. As interest rates rise, businesses borrow less, which means they will invest less. Io, or autonomous investment, can be thought of as: business confidence, expected profits, changes in technology, etc. Basically, how much will businesses invest even if interest rates do not change? New technologies like the internet and wireless communications will be invested in regardless of whether there is a decline in interest rates.
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