{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture 19 -- Money Market graph

Lecture 19 -- Money Market graph - ECO 320L Fall 2010...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ECO 320L, Fall 2010, Professor Beatrix Paal updated 10/8/2010 10:19 AM Lecture 19: More on the LM curve, Money market graph 1 Lecture 19 More on the LM curve, Money market graph Last time • (review rational expectations) • aggregation in the asset market – Walras’ Law ( Chapter 7.4 ) • start the LM curve ( Chapter 9.3 ) Today • continue the classical version of the LM curve ( Chapter 9.3 ) • the Keynesian interpretation of the LM curve • money market equilibrium graph ( Chapter 9.3 ) • general equilibrium Next time • business cycle measurement and facts ( Chapter 8.1, 8.2, and 8.3 ) Money market equilibrium – Numerical example Problem • g = G¡¡¡ , ¢ g = £u , ¤ = U¥¡¡ , ¦ = §u , ¨ = Gu • The money demand curve is • Calculate the equilibrium price level. Solution • the money demand curve implies that © g = G . • therefore, expected inflation can be calculated as ª « = ¬ − ­ ® ¯ ® = °u . • ± = ² + ³ ´ = 4u . • then we can substitute µ and ¶ into the money demand curve to figure out real money demand: • the last step is solving for · from ¸ = ¹ º » ¼ = 800 10 ¼ = ¥¡ 2 500 D Y L i = 1000 10 500 500 0.04 D Y L i = = = PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com ECO 320L, Fall 2010, Professor Beatrix Paal updated 10/8/2010 10:19 AM Lecture 19: More on the LM curve, Money market graph 2 The LM curve – classical How do we represent the equilibrium price level in the general equilibrium graph? • for a fixed level of g and G ¡ • each point in the general equilibrium graph (i.e. each combination of ¢ and £ ) corresponds to a certain price level • there are multiple combinations of ¢ and £ that give the same price level • an LM curve graphs combinations of ¢ and £ for which the price level is the same – b to derive the slope of the LM curve, we ask the following question: In response to a change in ¢ , how does £ have to change to keep the equilibrium price level unchanged? • there is a different LM curve corresponding to every possible price level – ¤ is a shifter of the LM curve – b we will look at how a change in P shifts the LM curve – notation: ¥¦(§) or ¥¦(§ = ⋯ ) • changes in g , G ¡ and other determinants of money demand are also shifters of the LM curve – b in particular, monetary policy 3 4 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com ECO 320L, Fall 2010, Professor Beatrix Paal updated 10/8/2010 10:19 AM Lecture 19: More on the LM curve, Money market graph 3 The LM curve – numerical example continued problem • Continue to assume that g G = ¡u , ¢ = U£¤¤ and ¥ = ¦u . The money demand curve is • We saw that this implies that expected inflation is § ¨ = ©u ....
View Full Document

{[ snackBarMessage ]}

Page1 / 10

Lecture 19 -- Money Market graph - ECO 320L Fall 2010...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon bookmark
Ask a homework question - tutors are online