Econ+310+Winter+2010+Topic+6a

# Econ+310+Winter+2010+Topic+6a - Economics310...

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Economics 310 Money and Banking Topic 6(a) Simple Macro  Models

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2 Lecture 1 Readings Mishkin, Chapters 19, 20 and 21 Only the first part of 19 (Quantity Theory) Also, look back at the last half of Chapter 5  (Liquidity Preference Model)
3 Lecture 1 Modeling the macroeconomy Main concern:  determination of the level of  economic activity Y = real GDP Total output (in real terms) Real National Income Real Aggregate spending P = aggregate price level P Y = nominal GDP Dollar value of output/spending/national income

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4 Lecture 1 Y = real output/income/spending P = aggregate price level M d  =  demand  for nominal money balances v = number of times \$1 can be used in a given time period  “Velocity of money” v M  = P Y i.e. M  = P Y       or   M     =  Y . v  P  v Demand for money balances Real money demand is proportionate to real national income (Y) Nominal money demand is proportionate to nominal income (P Y) Quantity Theory
5 Lecture 1 In equilibrium, money demand will equal money supply  M = nominal money supply Equilibrium Condition:      Velocity, v, is assumed constant M is exogenous Changes in M reflected in proportionate changes in P Y is determined independently Changes in Y are either “accommodated” with changes in M, or  result in changes in P Quantity Theory    =       =     Y .    Y .   P           v P           v

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6 Lecture 1 Equilibrium Condition:      If v changes, then %ΔM - %ΔP  = %ΔY - %Δv If v constant, then %ΔM - %ΔP  = %ΔY  Quantity Theory    =       =     Y .    Y .   P           v P           v
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Econ+310+Winter+2010+Topic+6a - Economics310...

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