20-ad as - Aggregate Demand & Aggregate Supply Lecture...

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macroS2010 Lec20-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Aggregate Demand Lecture 20-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. April 7, 2010
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macroS2010 Lec20-page 2 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Problem Solving given A MODEL. So, let: C = consumption G = govern. spending M D = money demand I d = investment spending T = taxes M S = money supply Y = national income/output r = interest rate Y d =disposable income Assume all the following: C = 600 + 0.75Y d ; I d = 1000 – 1500r ; G=100; T=100; EX=0; IM=0 Money demand is: M D = 900 – 1000r; and the required reserve ratio for banks in this economy is 10%. No bank holds excess reserves, and everybody keeps all their money in the banking system. The total reserves in the banking system is $80. With all that, answer the following: 1. What is the total money supply? $800 2. What is the equilibrium interest rate? 10% 3. What is the equilibrium level of national income? $5,900 NOW Suppose: The government wants Y*/national income to be $5,600. It decides to pressure the central bank. The central bank agrees this is an appropriate goal, and accordingly engages in open market operations. 4. Should the central bank buy or sell bonds to achieve this goal? How much in bonds (give a dollar figure) should the central bank buy or sell? Sell $5 worth to the public.
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macroS2010 Lec20-page 4 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Try MORE! Same set up, but now assume Y FE =$6,500 Add an import function. .. and do the problem over. Make the tax function more interesting. ..and do the problem over. How about FISCAL policy instead of monetary. .. and do the problem over.
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M s ? PANEL 1 Federal Reserve Commercial Banks Jane Q. Public Assets Liabilities Assets Liabilities Assets Liabilities Securities $100 $20 Reserves Reserves $20 $100 Deposits Deposits $5 $0 Debts $80 Currency Loans $80 Securities $5 $10 Net Worth $80 Currency PANEL 2 Federal Reserve Commercial Banks Jane Q. Public Assets Liabilities Assets Liabilities
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20-ad as - Aggregate Demand & Aggregate Supply Lecture...

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