Econ110BW11 - Lec8 A - GR_ol

Econ110BW11 - Lec8 A - GR_ol - Macroeconomics B Econ 110B...

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Macroeconomics B Econ 110B–Winter 2011 Prof. Giacomo Rondina Lecture 8
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Plan for Lecture 8 Stock Market and Economic Activity Modern Theories of Consumption 2 Financial Markets and Expectations (Ch. 15)
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Stock Market and the IS LM Stock Price () ( ) 12 3 1 11 1 1 1 2 1 1 $$ $ $ $ .... ... 1 1 1 1 1 1 1 ...... 1 ee e e tt t t n t e e t t t t n DD D D Q i ii i i i ++ + + + + =+ + + + + + + + + Relationship with IS LM ± Interest Rates (current and future) ± Output (future) ) output sales profits dividends D 3 Financial Markets and Expectations (Ch. 15) ( ) ( , Y output sales ⇒⇒
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Stock Market and the IS LM Example 1: Stock Market and Monetary Policy The economy is in mild recession, monetary authority decides to increase money supply from t for the next few periods. What happens to stock prices from t 1tot ? ± stock prices increase ± timing: depends on when the change in monetary policy is announced 4 Financial Markets and Expectations (Ch. 15)
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Stock Market and the IS LM ample 2: Stock Market and Consumer Confidence Example 2: Stock Market and Consumer Confidence There is an unexpected upward shift in consumers’ confidence at t .Wha t happens to stock prices from t 1 to t ? i LM i and Y ambiguous effect on Q t i 1 IS IS 1 i 0 Y 0 Y 0 Y 1 5 Financial Markets and Expectations (Ch. 15)
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Stock Market and the IS LM ample 2: Stock Market and Consumer Confidence Example 2: Stock Market and Consumer Confidence There is an unexpected upward shift in consumers’ confidence at t .Wha t happens to stock prices from t 1 to t ? i igh interest rate elasticity of Money Demand LM FLAT i 0 i 1 High interest rate elasticity of Money Demand Y Y 0 Y 1 6 Financial Markets and Expectations (Ch. 15)
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Stock Market and the IS LM ample 2: Stock Market and Consumer Confidence Example 2: Stock Market and Consumer Confidence There is an unexpected upward shift in consumers’ confidence at t .Wha t happens to stock prices from t 1 to t ?
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Econ110BW11 - Lec8 A - GR_ol - Macroeconomics B Econ 110B...

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