ECO2004S Summary that will change everything! (1).pdf

# Equilibrium in the goods m bring about equilibrium

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Equilibrium in the goods m bring about equilibrium Equilibrium in the financia money at a given interest r IS LM - Equilibrium requires a poin equilibrium Equilibrium in the goods ma Previously assumed th Now we assume that ‘I’ Investment depends on - Level o - The in Relati the supply and demand for bank reserves es is the federal funds market eral funds rate H = [c + θ (1 - c)]\$YL(i) c + θ (1 - c)] 1 C + θ (1 – c ) H = \$YL(i) l to central bank money multiplied by the m MODEL market: Y=Z, output Y adjusts to the change al markets: The demand for money = the su rate (interest rate changes) Y = C + I(Y ; i) + G ) \$YL(i) = M nt where i (interest rate) and Y (output) ar arket hat ‘I’ was exogenous Ī I’ is endogenous (determined in the model) n two factors: of sales nterest rate I = I(Y,i) ionship (+,-) Supply of Money Demand for money money e in demand to upply for re both in )

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The relationship a increase in inv expansion On the other ha opportunity cos We therefore have: The IS Curve Shows the combination goods market Any point on the IS cur Movement : change in Shift: change in C, G, T p exist because an increase in output/sales vestment co.’s invest in the pursuit of fu and and increase in the interest rate (i) caus st of borrowing to increase relative the pot Y = C(Y -T) + I(Y ,i) + G n of interest and output that result in equil rve results in good market equilibrium the interest rate (movement = on the axis) or non-interest determined I s (Y) results in uture profit ses the tential profits. librium in the )
Equilibrium in the Financial Equilibrium is the relat rate The relationship can Nominal income beco L Real money supply = re The LM Curve Movement: Shift : An increase in m l Markets tionship between the nominal income and M = \$YL(i) be in terms of real money by diving both s ome Real (\$Y Y) LM M P = YL(i) eal money money will shift the curve downward the interest sided by price.

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Putting the IS LM curves tog Government Policies Fiscal contraction = inc Fiscal expansion = incr Monetary contraction = Monetary expansion = Policy mix: use a mixtu opposite direction South Africa’s Response to t Link between global re exports (X) Response was to increa economy 1. Increase 2. Aggressi 3. Tax relie Reasons for response: 1. Industria 2. Employm 3. Social me food relie gether crease in T and decrease in G rease in G and/or decrease in T = decrease in M s increase in M s ure of both policies in the same direction or the crisis ecession and SA’s recession is dues to a dec ase activities aimed at expanding the capac e investment (I) in public infrastructure ive fiscal and monetary policies (increase in ef to low income workers al and trade policy ment measure (increase G) easures (increase G): unemployment equit ef r in the crease in city of the n G and M s ) ty, emergency
US’s response: Bush Collapse of the US hous Decrease in Y (demand Bush: 1. Refused 2. Pumped program Result was ineffective: convince business’ to in Obama’s Response Enacted the American Reinvestment Act (\$75 1.

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• Fall '11
• ENikolaidou

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