Economics 1B Lecture 15 S2011

# Economics 1B - Economics 1B UC Davis UC D i Professor Siegler Spring 2011 Announcements Q Quiz#7 posted and due on Sunday by 10 p.m p y y p Exam#2

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5/25/2011 1 Economics 1B UC Davis Professor Siegler Spring 2011 Announcements y Quiz #7 posted and due on Sunday by 10 p.m. y Exam #2 key posted under Modules. y Economic Fluctuations chapter under Modules in SmartSite. y Tonight we will complete the economic fluctuations model. On Thursday and next week, we will use the model to describe important macroeconomic events model to describe important macroeconomic events, including the Great Recession that began in December 2007. y Exam #2 mean was 61 (10 points lower than Exam #1) with a standard deviation of 13. 2

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5/25/2011 2 32 36 Series: EXAM2 Sample 1 325 Ob 313 8 12 16 20 24 28 Observations 313 Mean 60.89776 Median 61.00000 Maximum 92.00000 Minimum 12.00000 Std. Dev. 13.19610 Skewness -0.357431 Kurtosis 3.282099 Jarque-Bera 7 702517 3 0 4 10 20 30 40 50 60 70 80 90 Jarque Bera 7.702517 Probability 0.021253 I. Recap y Recall that the economic fluctuations model consists of three interconnected relationships: y The IS curve , which represents the inverse relationship between the real interest rate and planned aggregate expenditures (and real GDP). The IS curve represents equilibrium in the market for goods and services. y The MP curve , which represents the positive relationship between inflation and the real interest rate. The MP curve represents how the Federal Reserve reacts to inflation. y The SRAS (IA) curve , which represent the positive relationship between inflation and output gaps, with a lag. In the long run, the economy returns to potential output (LRAS). 4
5/25/2011 3 I. Recap y Last class, we derived and summarized the IS curve relationship as: y If the real interest rate change then it’s a movement along the IS curve. If aggregate spending changes at any given real interest rate, then it’s a shift in the IS curve. 5 Income Expenditure (or IS Curve Let’s derive the IS curve, which shows how planned aggregate expenditures and real GDP change as the real interest rate changes. Keynesian Cross) Diagram Planned Spending C(Y T, r 0 )+I(r 0 )+G+X(r 0 ,Y) C(Y 1 )+I(r 1 )+G+X(r 1 ,Y) C(Y 2 )+I(r 2 )+G+X(r 2 ,Y) B C r A B r 0 r 1 As the real interest falls, planned spending and real GDP increase. The IS curve displays these points of spending balance. 6 45 0 Y A Y IS C r 2 Y 0 Y 0 Y 1 Y 1 Y 2 Y 2

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5/25/2011 4 Income Expenditure (or Keynesian Cross) Diagram IS Curve If government spending (G) i th Now, let’s examine a shift in the IS curve, like an increase in government spending Planned Spending C(Y T, r 0 )+I(r 0 )+G 0 +X(r 0 ,Y) A B r A r 0 C(Y 0 )+I(r 0 )+G 1 +X(r 0 ,Y) B increases, then the IS curve shifts right, since spending is higher at any given real interest rate 7 45 0 Y Y IS 0 Y 0 Y 0 Y 1 Y 1 IS 1 II. The MP Curve y The MP or monetary policy curve describes how the Federal Reserve reacts to inflation. y This monetary policy reaction function or monetary oli y ule ay that the Fede al Re e e ie a e the policy rule says that the Federal Reserve increases the real interest rate when inflation increases, and decreases the real interest rate when inflation decreases.
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## This note was uploaded on 02/07/2012 for the course ECON 1b taught by Professor Sheffrin during the Spring '07 term at UC Davis.

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Economics 1B - Economics 1B UC Davis UC D i Professor Siegler Spring 2011 Announcements Q Quiz#7 posted and due on Sunday by 10 p.m p y y p Exam#2

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