AAA-ch 15-PhillipsCurve-FA2010

AAA-ch 15-PhillipsCurve-FA2010 - 12:30 class: Final exam is...

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Unformatted text preview: 12:30 class: Final exam is in this room. in Ch. 15 Ch. …only pp. 332 – end (The Phillips Curve) Thurs., Dec. 9, 3 - 5 p.m. Same format Bring 2 PENCILS and FSU ID Your final will cover chapters 1-3, 7-17 NO OFFICE HOURS FINALS WEEK: How to figure your average: 12:30 class: Grade on one Midterm Grade on other Midterm Average on Bb Quizzes* Grade on Final Exam Grade Percentage Weight ____________ X .2 = ____________ X .2 = ____________ X .2 = ____________ X .4 = Total those up for your final average If you missed any midterm, take that line out of the above and increase your final exam percentage by the weight of the missed exam. For example, if you only took one midterm, delete one of those lines and add 20% to your final exam weight. So now your final exam would count as 60% instead of 40%. If you didn’t take ANY midterms, your final counts 80% and Bb quizzes count 20%. BRING PRINTOUT OF YOUR GRADES IF YOU COME TO MY OFFICE TO ASK ABOUT GRADES… Quantity Theory of Money comes from Equation of Exchange • Next comes the LR & SR Phillips curve LR • Show what impact that a change in the GR of the Nominal money supply has on both real and nominal variables… variables… • SR: real variables can change, temporarily from a change in monetary policy • LR: no net change in reals, but nominals reals, are all affected. *Drop 4 of your Bb quizzes. Failed policies of the 1970s Malaise Speech: • Carter up for re-election in 1980. re• Appointed Paul Volker to be chairman of the BOG for the FED (to replace Wm. Miller) • Tight money policy – resulted in stagflation • Malaise Speech: Jimmy Carter, July 15, 1979 Almost a year later, the economy was in shambles. High inflation High unemployment High interest rates Low productivity (annual growth rate of Real GDP = 1%) Distinguish between Distinguish anticipated and unanticipated changes in monetary policy & the differing effect on the Phillips Curve, both LR & SR. (PMA) Expansionary money policy causes: 1. Decrease in unemployment in the short run 2. Decrease in inflation in the short run 3. Increase in inflation in the short run 4. Increase in inflation in the long run 5. A permanent reduction in unemployment in the long run. (PMA) In terms of the economy, restrictive (contractionary) money (contractionary) policy causes: 1. Short run pain; long run gain 2. Short run gain; long run pain If the FED pursues UNANTICIPATED restrictive MP, what happens? • Just the opposite… opposite… • MS shifts to the LEFT (sells bonds) • That increases R • That decreases AD • That lowers Y and employment in the SR (PMA) Restrictive (contractionary) (contractionary) money policy causes: 1. Increases in unemployment in the short run 2. Decrease in inflation in the short run 3. Increase in inflation in the short run 4. Decrease in inflation in the long run 5. A permanent reduction in unemployment in the long run. (PMA) The Monetarist’s theory of Monetarist’ inflation is based on: 1. The equation of exchange 2. The quantity theory of money 3. Keynesian fiscal policy The Monetarist’s theory of inflation is: The Monetarist’ 1. There is a direct and proportional relationship between the growth rate of government spending and the growth rate of taxes. 2. There is a direct and proportional relationship End of Ch. 15 between the growth rate of the money supply and the growth rate of the average price level. 3. There is an indirect relationship between the growth rate of tax rates and the growth rate of the average price level. Bonus Slides How does an increase in the money supply affect the G&S Market? • The decrease in R will increase borrowing • People borrow to SPEND or INVEST (business spending) • Thus, an M leads to a IR, which leads to an in AD APL SRAS APL2 APL1 AD1 Y1 So can the FED increase the money supply and NOT cause inflation? • Yes, if they match INCREASES in the MS to INCREASES in Real GDP AD2 Real GDP Y2 So can the FED increase the money supply and NOT cause inflation? • Yes, if they match INCREASES in the MS to INCREASES in Real GDP Thus, increases in the MS matched to increases in Real GDP leads to economic growth and little or no inflation. APL APL SRAS 1 SRAS 2 APL2 APL1 SRAS 1 SRAS 2 APL2 APL1 AD1 Y1 Y2 AD2 Real GDP AD1 Y1 Y2 AD2 Real GDP Bond prices and interest rates Bond • Say that GE offers a $1,000 bond at 8% and sells all of them in the primary market. • Later, GE wants to sell more bonds (still with a • • • face value of $1,000) to get more capital. However, by now, the market R has declined to 6% If you are in the market for a bond, which would you rather have--a new bond paying 6% or a have--a bond in the secondary market paying 8%? Since we’d all rather have the 8% bond, the we’ demand for those bonds will increase and the price will rise. Thus, a decrease in R causes an increase in price of bonds. If you miss the final, you can just show up on Friday in our classroom and take the make-up. makeFalse, I need to let Dr. Holcombe know ahead of time. Because if I know don’t let her know ahead of time don’ and if I am the ONLY person who and needs the makeup exam, she won’t needs won’ know and won’t be there. PLUS, the know won’ makeup exam is not in this makeup classroom. classroom. To discuss my grade with Dr. Holcombe, I need to have a PRINTOUT of my grade when I come to her office. TRUE ...
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