Midterm 2 Study

Midterm 2 Study - Goods Market Equilibrium Condition...

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Goods Market Equilibrium Condition Y = C + I + G Y= quantity of goods supplied by firms Right side = is the aggregate demand for goods C = sum of desire consumption by households I = desired investment by firms G = government purchases Different way to write GME condition that emphasizes the relationship between desired saving and desired investment Subtract C + G from both sides Y – C – G = I S = I Saving-Investment Diagram: Real interest rate on vertical axis National saving + investment on horizontal axis S, saving curve, shows the relationship between national saving and the real interest rate Upward slope of S reflects empirical finding that a higher interest rate raises desired saving I, investment curve, shows the relationship between desired investment and the interest rate Slopes downward because a higher interest rate increases the user cost of capital and thus reduces the desire investment Increase in real interest rate eliminates the excess of the demand for goods over the supply of good by reducing both consumption and investment demand Shifts in the Saving Curve For any real interest rate, a change in the economy that RAISES desired national saving, shifts the SAVING curve, S, to the RIGHT A change that REDUCES desired national saving shifts the DEMAND curve to the LEFT. Shifts in the Investment Curve For any real interest rate, a change in the economy that RAISES desired investment shifts the investment curve, I, to the RIGHT. Open-Market Purchases – INCREASE money supply
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Open-Market Sales – REDUCE money supply Risk Premium (yr1 + yr2)/2 = % % + % = %% The Money Demand Function The effects of the price level, real income, and interest rates on money demand M = P x L (Y, i), Md = aggregate demand for money (nominal terms) P = price level Y = real income or output I = nominal interest rate earned by alternative, non=monetary assets
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Midterm 2 Study - Goods Market Equilibrium Condition...

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