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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 ( ) ( ) ( ) ( )( ) ( ) ( ) 1 2 3 1 1 1 1 1 1 1 1 2 1 1 $ $ $ $ $ .... ... 1 1 1 1 1 1 1 ...... 1 e e e e t t t t n t e e e e t t t t t t t t n D D D D Q i i i i i i i i + + + + + + + + = + + + + + + + + + + + + + Relationship with IS LM Interest Rates (current and future) Output (future) ( ) ( ) Y output sales profits dividends D 3 Financial Markets and Expectations (Ch. 15) ,
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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 1 to t ? 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 Example 2: Stock Market and Consumer Confidence There is an unexpected upward shift in consumers’ confidence at t . What happens to stock prices from t 1 to t ? i LM i and Y ambiguous effect on Q t i 1 IS 0 IS 1 i 0 Y 0 Y Y 1 5 Financial Markets and Expectations (Ch. 15)
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Stock Market and the IS LM Example 2: Stock Market and Consumer Confidence There is an unexpected upward shift in consumers’ confidence at t . What happens to stock prices from t 1 to t ? i i 1 High interest rate elasticity of Money Demand LM FLAT i 0 Y Y 0 Y 1 6 Financial Markets and Expectations (Ch. 15)
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Stock Market and the IS LM Example 2: Stock Market and Consumer Confidence There is an unexpected upward shift in consumers’ confidence at t . What happens to stock prices from t 1 to t ? i LM STEEP Low interest rate elasticity of Money Demand High interest rate elasticity of Money Demand LM FLAT i 1 i 0 Y Y 0 Y 1 7 Financial Markets and Expectations (Ch. 15)
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