lec21 - Effect of Monetary Policy on Y: Fiscal and Monetary...

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3 Fiscal and Monetary Policy Combined Last lecture: Fiscal policy affects aggregate output. Monetary policy affects interest rates. In reality: Policies affect both output and interest rates. Effect is less, due to interactions. 6 Effect of Monetary Policy on Y: M S up r down I and C up Y up C 2 + I 2 + G C 1 + I 1 + G AE Y Y 1 Y 2 9 Effect of Fiscal Policy on Interest Rates: G up or T down Y up M d up r up r M M d 1 M d 2 M S 1 r 2 r 1 11 Expansionary Fiscal Policy: Y r Increase G or decrease T to raise Y. Expansionary Monetary Policy: Y r Increase M S to raise Y. 12 Effect of each policy is LESS than would be expected if “feebacks” were ignored. Output Interest rate YM AE r 13 Expansionary Fiscal Policy: G up Y up Y AE Y 1 Y 2
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14 Expansionary Fiscal Policy: G up Y up r up YM AE r M S M d 2 M d 1 r 2 r 1 Y 1 Y 2 15 Expansionary Fiscal Policy: G up Y up r up Y down AE r M S M d 2 M d 1 r 2 r 1 Y 1 Y 3 Y 2 18 G multiplier < 1 1 - MPC T multiplier < MPC in magnitude.
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at Berkeley.

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lec21 - Effect of Monetary Policy on Y: Fiscal and Monetary...

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