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Macro Midterm 1

Macro Midterm 1 - DRAW IT OUT(MS shifts MOVEMENT along MD...

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READ THE QUESTION changing of interest rates - first ask, WHAT DOES IT DO TO GDP (what does that do to I , C , savings, etc., etc.) When there is an excess supply of money, people have more money than they need. Therefore, they put that money into non-monetary interest bearing financial assets to get the most out of it. When there is an excess demand of money, people have less money than they need. Therefore, as they are already trying to get more money, there is an excess supply of non-monetary interest bearing financial assets. MS goes up. .. What does that mean for INTEREST RATES? (What does that do to investment, savings?) Joe withdraws X dollars, money supply will fall by (-X/rr + X), as will deposits/loans. Change in MS = amount of bonds purchased * 1/rr
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Unformatted text preview: DRAW IT OUT (MS shifts, MOVEMENT along MD) At equilibrium (money market), in recession, no monetary policy occurs. What happens? Aggregate spending decreases, shifting MD down, driving rates down. This increases investment and brings AD up to close the recessionary gap. Budget shouldn't be balanced. It should be averaged (allow deficit in recession to be countered by surplus in good years). A balanced budget rule undermines automatic stabilizers. When entering a recession, the govt. wouldn't be able to cut taxes and increase transfers to limit the size of the recession. Instead, they'd be using contractionary fiscal policies that would deepen the recession....
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