Lecture17 - Readings Today Mankiw ch 12 Policy in IS-LM model Next Thursday Mankiw ch 6 Open economy Announcements Midterm#2 Tuesday Nov 13 during

Lecture17 - Readings Today Mankiw ch 12 Policy in IS-LM...

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ReadingsTodayMankiw, ch. 12. Policy in IS-LMmodelNext ThursdayMankiw, ch. 6. Open economy
Announcements: Midterm #2Tuesday Nov 13 during lecture periodCoverageLectures 11-17 (Solow model, IS/LM, AD/AS)Format similar to Midterm #1multiple choice, short answer, long answer
Midterm LocationSectionInstructorExam Location002 Fr 9-10aReidLorch 140003 Thur 3-4pDimitrijeLorch 140004 Fri 1-2pUnikoRoss 1100005 Fri 2-3pUnikoRoss 1100006 Fri 3-4pYunRoss 1100007 Fri 10-11aBartoszLorch 140008 Thur 9-10aProf. WilsonRoss 1100009 Fri 11-12aBartoszLorch 140010 Thur 4-5pDimitrije Lorch 140011 Thur 5-6pYunRoss 1100Students who have previously turned in SSD form for special accomodations, go to Lorch 301 conference room
Midterm #2 review opportunitiesPractice midterm postedSections this week to include IS/LM & AD/AS reviewExtended GSI office hours this weekposted on CTools
The Big PictureKeynesiancrossTheory of liquidity preferenceIScurveLMcurveIS-LMmodelAgg. demandcurveAgg. supplycurveModel of Agg. Demand and Agg. SupplyExplanation of short-run fluctuations
Money supplyThe supply of real money balances is fixed:sM PM PM/Preal money balancesrinterestratesM PM P
Money demandDemand forreal money balances:M/Preal money balancesrinterestratesM PM P,dM PL r Y()L(r ,Y)
EquilibriumThe interest rate adjusts to equate the supply and demand for money:M/Preal money balancesrinterestratesM PM P,M PL r Y()L(r,Y)r1
How the Fed raises the interest rateTo increase r, Fed reduces MM/Preal money balancesrinterestrate1MPL(r,Y)r1r22MPCan think of Fed as controlling Mor controlling r(since effect is the same)
The Big PictureKeynesiancrossTheory of liquidity preferenceIScurveLMcurveIS-LMmodelAgg. demandcurveAgg. supplycurveModel of Agg. Demand and Agg. SupplyExplanation of short-run fluctuations
LMcurveLMcurve is money market equilibrium in (Y,r) space:LM curve slopes up:-Increase in Y increases money demand-rmust increase to keep money demand equal to money supply/( ,)MPL r Y
LMcurve graphicallyM/PrMPL(r,Y1)r1r2rYY1r1L(r,Y2)r2Y2LM(a)The market for real money balances(b)The LMcurve
Shifting LMDecrease money supply Money demand must fall equallyFor given output,Interest rate must rise to maintain money market equilibriumSo decreasing money supply shifts LM up
Shifting LMcurveM/Pr1MPL(r,Y1)r1r2rYY1r1r2LM1(a)The market for real money balances(b)The LMcurve2MPLM2

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