宏觀經(jīng)濟學(xué)課件

IntermediateMacroeconomicsLecture2TheDataofMacroeconomicsMeasureofeconomicactivity

GrossDomesticProduct(GDP)Totalexpenditureondomestically-producedfinalgoodsandservicesTotalincomeearnedbydomestically-locatedfactorsofproductionTheDataofMacroeconomicsCalculationofGDP

1)

Finalgoods(nointermediategoods;valueadded)

2)

Domesticallyproduced

*GrossNationalProduct(GNP)Totalincomeearnedbythenation’sfactorsofproduction,regardlessofwherelocated3)Usedgoods(notincluded)

4)InventoriessoldGDP;gobad

losevalue

GNPv.s.GDPTheDataofMacroeconomicsNominalv.s.RealGDP

currentyearpriceorbaseyear’spriceNominal=Real=GDPdeflator=nominalGDP/realGDPTheDataofMacroeconomicsMeasureofinflationConsumerPriceIndex(CPI)=

=TheDataofMacroeconomicsExampleP90P04Q90Q04Apple1.02.010002000Pear0.81.520002000Nectarine1.52.520003000Peach11.530005000Banana1.5120008000TheDataofMacroeconomicsCPIvs.GDPDeflatorGDPincludesalltheG&Sproducedintheeconomy;CPIhasabasketofsomeG&SGDPdeflatorincludesonlydomesticproducts;CPIincludesimports.GDPdeflatorhasaweightedbasketofgoods;CPIhasafixedbasket(quantitieswon’tchange)

TheDataofMacroeconomicsTheDataofMacroeconomicsCPImayoverstateinflationConsumersmaysubstituteawayfrommoreexpensivegoods.e.g.1978-1981U.S.pricerose9.1%peryearaccordingtotheGDPdeflator;accordingtoCPI,pricerose11.2%peryear.Why?TheDataofMacroeconomicsMeasureofjoblessPopulation=E+U+NLF=LF+NLFE=theemployedU=theunemployedNLF=notinthelaborforceLF=laborforce=E+U TheDataofMacroeconomicsOkun’sLaw(ArthurOkun,1928-1980,Yale)showstherelationshipbetweenrealGDPandunemploymentrate:

=3%-2*u=growthrateofrealGDP

=

=changeinunemploymentrate=TheDataofMacroeconomicsOkun’sLawimpliestwothings:1)=0→

=3%2)forevery1%↑inu,aroughly2%↓inthegrowthrateofrealGDPStocksv.s.Flows

投資與資本存量儲蓄與財富

預(yù)算赤字與公債存量NationalIncomeNow,welookatthesources&theusesofGDP(supply)(demand)Questionsaddressedinthischapter:DeterminantsofthelevelofoutputHowincomeisdistributedamongfactorsHowoutputisallocatedamongalternativeusesWhatensuresthatthesupplyofanddemandforgoodsareequalCircularFlowMarketsforFactorsofProductionMarketsforGoodsandServicesHouseholdsFirmsFinancialMarketsGovernmentTP.S.G.P.incomeCG.D.IF.P.RWhatDeterminestheTotalProductionofG&S1.

FactorsofProduction

Labor(L)—thetimepeoplespendworkingCapital(K)—thesetoftoolsthatworkersuse.

WhatDeterminestheTotalProductionofG&S2.

TheProductionFunctionb>0constantreturnstoscaleincreasingreturnstoscaledecreasingreturnstoscale

WhatDeterminestheTotalProductionofG&SAssumptions

i.

Fixedamountofinput ,

ii.

Factorsarefullyutilizediii.Notechnologyimprovement→WhatDeterminestheTotalProductionofG&SFactorpriceQoffactorFactorsupplyFirms’Problem MaximizeprofitProfit=Revenue–CostProfit=R-CR=P*Q=P*Y=P*F(K,L)C=LaborCost+CapitalCostC=w*L+r*KProfit=P*F(K,L)–w*L–r*KDemandforFactorsHowmuchlabortohireandhowmuchcapitaltorenttogetmaximumprofit?Themorefactorthefirmemploys,themoreoutputitproduces.However,themorefactorthefirmemploys,theincreaseinoutputforthisadditionalunitoffactordecreases---diminishingmarginalproductDemandforFactorsMPL&MPKOutputLorKF(K,L)DemandforFactorsFactordemandFactorpriceQoffactorDemandforFactorsEquilibriumfactorpriceQoffactorDSDemandforFactorsTomaximizeprofit:Realwage:DemandforFactorsTrytogettherealrentalpriceRealrentalprice:DistributionofNationalIncomeEconomicProfit=F(K,L)-(MPL*L)-(MPK*K)Forcompetitivefirms,economicprofit=0

Euler’stheorem

F(K,L)=(MPL*L)+(MPK*K)ExampleCobb-Douglasproductionfunction1.WhatisMPL?2.Whatistherelationshipbetweenlaborincomeandtotalincome?IntermediateMacroeconomics Lecture3TopicsFinishtheassignmentfromlastclassClarificationfor4questionsfromlastclassDemandforgoodsandservicesEquilibriumandtheinterestrateAssignmentCobb-Douglasproductionfunction1.WhatisMPL?2.Whatistherelationshipbetweenlaborincomeandtotalincome?AssignmentWhatistheshapeforMPL?AssignmentLaborincomeshareLaborincome:InventoriesIn2002,firmAproduced1000pc.800soldat$1000each,200becomeinventories.WhathappenedtoGDPin2002?Ifthe200inventoriesweresoldat$1500eachin2003,whathappenedtoGDPin2003?CPIv.s.GDPdeflatorCPImayoverstateinflation(sorry!notalways

)Whenitreallyoverstatesinflation,comparingtotheGDPdeflator,weshouldlookforreasonsfromwhereitdiffersfromtheGDPdeflator,right?CPIv.s.GDPdeflatorCPIv.s.GDPdeflatorInflationorCPIv.s.GDPdeflator3differencesbetweenCPI&GDPdeflatorTherefore,itmightbe1.Baskethasmoreexpensivegoods2.Goodsincludedinthebaskethavehigherweightsthanintherealworld(duetotechnologicalimprovement)3.Importshaveskyrocketingprice☆☆Statisticsbureauschangebasket(typesofgoodsandtheirweights)nowandthenProductionFunction---manytypes/shapesDependson…?LorKQProductionFunctionConstantReturnstoScale(CRS)e.g.Y=L+KIntuition:1person1spade2people2spades……LorKQYMPLorMPKLorKQProductionFunctionDecreasingReturnstoScale(DRS)e.g.Intuition:1office1worker1office2workers……2offices1worker3offices1worker……LorKQYLorKQMPLorMPKProductionFunctionIncreasingReturnstoScale(IRS)e.g.Intuition:knowledgecapital1firm1knowledge2firms1knowledge……

LorKQYLorKQMPLorMPKProductionFunctionInrealworld,productionfunctionfunctionlooksusuallikeLorKQYLorKQMPLorMPKEconomicprofitsv.s.accountingprofitsForcompetitivefirms:+accountingprofits;0economicprofitse.g.CompetitivefirmAhires10workers,$100/worker;uses$100,000capital;itproduces20,000DVDplayerswithp=$100.

Whatistheaccountingprofit?Whatistheeconomicprofit?Whatistheintuitionfortheirdifference?Thanksforyourpatience!PleasecometomeoremailmeyourquestionswheneveryoufeelnecessaryMyofficehoursareMonday10:30-12:00.Doorisopentoeveryone!

Let’sgetbetterinMacroeconomicstogether!DforGoods&ServicesY=C+I+G+NXClosedeconomy→NX=0C:consumption I:investmentG:governmentpurchasingNX:netexportDforGoods&Services國民核算(億元)國內(nèi)生產(chǎn)總值95933支出法國內(nèi)生產(chǎn)總值98618居民消費45923政府消費13029固定資本形成36813(存貨增加648)DforGoods&ServicesConsumptionDisposableincome:Y–THowtospenddisposableincome?(C&S)Consumptionfunction:C=C(Y-T)Consumptiondependsdirectlyonthelevelofdisposableincome.Thehigherdisposableincomeis,thegreaterconsumptionis.DforGoods&ServicesTherelationshipbetweendisposableincomeandconsumptionMarginalpropensitytoconsume(MPC):theamountofconsumptionchangeswhendisposableincomeincreasesbyonedollarY-TCU.S.JapanDforGoods&Services2.InvestmentandinterestrateTheinvestmentfunction:I=I(r)r:realinterestrateris1)thecostofborrowing2)theopportunitycostofusingone’sownfundsSo,r↑→I↓DforGoods&ServicesGovernmentPurchasing(G)T–GBudgetsurplus:T–G>0Budgetdeficit:T–G<0Budgetisbalanced:T–G=0DforGoods&ServicesHere,weassumeNotransferpaymentsTotaltaxisfixedTotalgovernmentspendingisfixedSo,governmentpurchasingisalsofixedEquilibriumAggregatesupply:Aggregatedemand:Equilibrium:WhichvariableplaysthekeyroletoensurethedemandforG&Sequalsthesupply?Yes!Realinterestrate!

EquilibriumLoanablefundsmarketDemand?---investmentSupply?---nationalsavingsPrivatesavings:Y–T–CGovernmentsavings:T–GNationalsavings:(Y–T–C)+(T–G)=Y–C–G→I(r)=Y–C–GEquilibriumI(r)rS,IEq’mrEq’mlevelofIEquilibriumThingsthatshiftthesavingscurve1)publicsaving---fiscalpolicy:changesinGorT2)privatesaving---preferences---taxlawsthataffectsavingEquilibriumMilitaryspending↑BuyapartmentinsteadofgettingitfreeIncometaxrate↑rS,ISIEquilibriumThingsthatshifttheinvestmentcurve

1)technologicalinnovations---totakeadvantageoftheinnovation,firmsmustbuynewinvestmentgoods2)taxlawsthataffectinvestmente.g.investmenttaxcreditEquilibriumrS,ISIEquilibriumInrealworld,Sdependsonraswell:r↑S↑WhatifwerelaxtheassumptionthatSisfixed?EquilibriumSisaalsoafunctionofrI(r)S(r)rS,IEquilibriumInrealworld,whenwelookatmacroeconomicdata,weusuallyfailtofindanobviousassociationbetweeninvestmentandinterestrates.e.g.wheninterestratesarelow,investmentisnotalwayshigh.Why?EquilibriumrS,II(r)S(r)Chapter3SummaryNeoclassicmodelofmacroeconomics(assumptions,graphs,intuitions)Theproduction(factors,productionfunction,supply)Distributionofnationalincomeintofactors(factorprices,firm’sdemandforfactors,incomedistributiontofactors)Thedemandforgoodsandservices(C,I,G)Equilibriumandtheinterestrate(SandDfortheeconomy’soutput,loanablefundsmarket)IntermediateMacroeconomicsLecture4Topics4questionsfrombeforeHW#1Unemployment**Naturalrateofunemployment2reasonsforunemploymentFrictionalunemploymentWaitunemploymentPatternsofunemploymentBeforeWeStart…GiveourT.A.’sabigapplause!!!

Joinourforum/forum/area.asp?areaid=133125InventoriesYearProd.SoldPrice2000108100200100200200201300200300broken400YearCI(investmentisnotstock,butflow)GDP2000800200100020010002002300-300020030Inventories–400;Depreciation+4000Realv.s.NominalProfit=p*Y–w*L–r*KY=MPL*L+MPK*KW(r):returntoL(K)intermsofmoney(nominal)MPL(MPK):returntoL(K)intermsofproducts(real)IncreaseincometaxrateWhataretheeffectsontheloanablefundsmarket?t↑T↑Y–T↓privatesavings↓However,T↑T–G↑publicsavings↑Therefore,thefinalresultwillbe…Depends…

QuantityDemandedv.s.Demandr↑or↓affects__I____r1r2I2I1ABI(r)QuantityDemandedv.s.Demand___I(r)___↑or↓affectsS,IrSI(r)EE’r*r*’I(r)’NaturalRateofUnemploymentDefinitionsMiseryindex:thesumofinflationandunemploymentratesNaturalrateofunemployment:theaveragerateofunemploymentaroundwhichtheeconomyfluctuatesNaturalRateofUnemploymentIneq’m,naturalrateofunemploymentisaconstantf*U=s*Ef:therateofjobfindings:therateofjobseparationU:unemployedE:employedNaturalRateofUnemploymentUseonlys&ftoexpressU/Le.g.1%oftheemployedlosetheirjobeachmonth,10%oftheunemployedfindajobeachmonth.Then…NaturalRateofUnemployments=1%---everymonth,1%losejobFor1person,afterworkingfor_____months,tendtolosejobF=10%---everymonth,10%getjobFor1person,afterbeingunemployedfor_____months,tendtogetajobFrictionalUnemployment(1streason)Ittakestimetomatchworkersandjobse.g.technologyimprovement

newproductionprocessesornewvarietiesofgoods

differentlocationsandsectors

FrictionalUnemployment(1streason)PublicpolicyimplicationUnemploymentinsurancelesspressuretosearchfornewjobMorelikelytoturndownunattractiveoffersHoweverReduceuncertaintyaboutincomesothateconomicallyandmentally…BettermatchingWaitUnemployment

(2ndreason)Wagerigidity---thefailureofthewagetoadjustuntilL.S.=L.D.

LRealWageSDEW/PMinimum-wagelawsWaitUnemployment

(2ndreason)LRealWageSDEMin.wW/PWaitUnemployment

(2ndreason)UnionsandcollectivebargainingThewagesofworkersintheunionaredeterminednotbytheeq’mofSandDbutbycollectivebargainingbetweenunionleadersandfirmmanagement(wagestendtobehigherthantheeq’mlevel)WaitUnemployment

(2ndreason)Wagesfornon-unionizedworkers

↑duetounioninotherfirmsInsiders&outsiders---outsidersbearpartofthecostofhigherwagesWaitUnemployment

(2ndreason)EfficiencywagesNutritionLaborturnoverrateAveragequalityoftheworkforceMoralhazardproblemPatternsofUnemploymentJustsomeadditionalfactsaboutunemploymentthatwillhelpustoevaluateourtheoriesandassesspublicpoliciesPatternsofUnemploymentVariationindemographicgroupsUnemploymentratebydemographicgroups1997U.S.(%)AgeWhitemaleWhitefemaleBlackmaleBlackfemale16-1914.312.836.528.719+3.63.78.58.8PatternsofUnemploymentTrendinunemploymentChangingcompositionofthelaborforce(age,gender)SectoralshiftsPatternsofUnemploymentTransitionsintoandoutofthelaborforceRecentlyenteredNotactiveinsearchingforjobWithdrawalfromthelaborforceCh.6SummaryUnemploymentiswastedresourceNaturalunemploymentrateReasonsforunemploymentPatternsofunemploymentPoliciesMoneyandInflationMoneyEvolution(types)FunctionsMeasureTheoriesInflationInterestrateTheFishereffectInflationHyperinflationMoneyEvolutionCommoditygold/silvergoldfiatmoneyGresham’slaw:“badmoneychaseoutgoodmoney”MoneyFunctionsMediumofexchangeMeasureofvalueStoreofvalueMeasureofdeferredpayment(premium)MoneyMeasure(China)M0:流通中的現(xiàn)金（通貨）狹義貨幣M1:M0+商業(yè)銀行的活期存款（貨幣）廣義貨幣M2:M1+商業(yè)銀行的定期存款（貨幣和準(zhǔn)貨幣）廣義貨幣M3:M2+其他金融機構(gòu)的存款MoneyMoneyMoneyMoneyMonetarytheoriesTheQuantityTheoryofMoney(1903)

(IrvingFisher,

Yale,

1867-1947)Transactionsandthequantityequation

Money*Velocity=Price*TransactionsM*V=P*TV:#oftimes1$billchangeshandsinagivenperiodoftimeP:generalpriceindexT:#oftransactions(timesinayearthatanytwoindividualsexchangegoodsorservicesformoney)---hardtomeasure∴useY(realoutput)insteadMoneyThemoneyDfn&thequantityequationMoneyDfn:Realmoneydemandisproportionaltoincomek:for1more$income,howmuchpeoplewouldwanttoholdintheirhandsMoneyUseAssumeVisaconstant(orkisaconstant)OutputYisfixed(ch.3)Therefore,%changeinM=%changeinP“anormaleffectofanincreaseinthequantityofmoneyisanexactlyproportionalincreaseinthegenerallevelofprices.”---IrvineFisherMoneyThequantitytheoryofmoneystatesthatthecentralbank,whichcontrolsthemoneysupply,hastheultimatecontrolovertherateofinflation.IncreasingmoneysupplyhasNOeffectonrealoutputlevel.MoneyTheKeynesianChain(1930s)

(JohnKeynes,Cambridge,1883-1946)

Ms↑i↓(r↓)I↓Y↑Therefore,moneysupplyDOESaffecttherealoutputlevelMoneyRevisedquantitytheoryofmoney:theMonetarism(1930s)

(Univ.ofChicago&MiltonFriedman,Stanford,1912-)1940s–1960s,mostglamorousLate1960sand1970s,stagflationMoney“Allinflationsalwaysandeverywhereareamonetaryphenomenon.”“Quantitytheoryequation,ifcorrectlyinterpreted,isnotabadequationafterall.”MoneyIfVisstableinthelongrun,thenanyincreaseinMcaneitherincreasethegeneralpricelevel(P)orraisenationalincome(Y)RelaxedtheassumptionthatYisfixedfromtheclassicmodelinCh.3MoneyTherefore,Iftheeconomyisfarawayfromfullemployment,…Iftheeconomyisclosetofullemployment,…IntermediateMacroeconomicsLecture5InflationDefinitionInflation:TheoverallincreaseinpricesHyperinflation:extraordinaryhighinflationRealv.s.NominalInterest

RateTheFisherequationr:realinterestratei:nominalinterestrate:inflationrateNominalinterestratecanchangebecauseofthechangeintherealinterestrateor/andtheinflationrateNominalInterestRateThequantitytheory+theFisherequationAnincreaseintherateofmoneygrowthof1%causesa1%increaseintherateofinflation;thena1%increaseintherateofinflationinturncausesa1%increaseinthenominalinterestrateThisone-for-onerelationbetweentheinflationrateandthenominalinterestrateiscalledtheFishereffect.(one-for-onerefersto%,notitsvalue)ExAntev.s.ExPostIfthereisarumorthattheoilpricewillgoupfurtherduetopossibleOPEClimitationofproduction,whatwillhappen?

DemandforMoneyThecostofholdingmoneyDonotearninterestPaythecostforpossibleinflationSo,thecostofholdingmoneyisTheDemandforMoneyHowToStopaHyperinflationIfthequantitytheorywerecompletelytruewhereididnotaffectmoneydemandstabilizemoneysupple=stabilizePHowToStopaHyperinflationHowever,iftheFishereffectholdsisthecostforholdingmoneystabilizemoneysupplymakesincreasessinceMisstable,mustbethatp↓deflation↓HowToStopaHyperinflationWhatisthepathtogettotheendofhyperinflationwithoutcausingdeflation?

PiM/PM0rTimeEndofinflationTheSocialCostsofInflationExpectedinflationShoeleathercostMenucostPossiblelowerrelativepriceTaxliabilityConfusioninvaluemeasuringTheSocialCostsofInflationUnexpectedinflationRedistributewealthamongindividualHurtsindividualonfixedpensionsMoreuncertainty(mostpeoplearerisk-averse)IntermediateMacroeconomicsLecture6EconomicGrowthGoalDeveloptheSolowGrowthModel---Howmuchoftheeconomy’soutputshouldbeconsumedtodayandhowmuchshouldbesavedforthefuture?Staticanalysis(Ch.3)DynamicTheAccumulationofCapitalThesupplyforgoodsProductionfunction:Characteristics:CRSPerCapita---TheAccumulationofCapitalTheproductionfunctionyky=f(k)TheAccumulationofCapitalThedemandforgoods---Solowmodelassumesthatthedemandforgoodscomesfromconsumptionandinvestmentonly:

TheAccumulationofCapitalThesteady-statelevelofcapitalyky=f(k)i=sf(k)yciTheAccumulationofCapitalChangeincapitalstocky=f(k)yki=sf(k)k*TheAccumulationofCapitalSteady-state

TheAccumulationofCapitalExample:Cobb-DouglasfunctionSteadystate:TheAccumulationofCapitals=0.15,=0.05,k=1k*=9TheAccumulationofCapitals=0.15,=0.05,k=16k*=9TheAccumulationofCapitalSteady-statelevelofcapitalhasnothingtodowiththestartinglevelofcapital.Thingsthatmatterare:---thesavingsrate(s)---thedepreciationrate---thetechnology(productionfunctionf)TheAccumulationofCapitalExplainwhyJapanhasahigherstandardofliving(outputlevelpercapita)comparingtosimilarcountries?TrytoexplainhighgrowthperiodsafterWorldWarIIinJapanandGermany,aswellasafter1978inChina.Ifthereisnochangeins,or,orf,newsteadystatelevelofyandkarethesameasbeforeTheAccumulationofCapitalIncreaseinthesavingsrate(s)yki=sf(k)y=f(k)TheAccumulationofCapitalIncreaseindepreciationrate()yki=sf(k)y=f(k)TheGoldenRuleLevelofCapitalHighershigherkhigheryHowever,individualsdoNOTcareaboutkorybuttheamountofgoods/servicestheycanconsume.Thesteadystatewiththehighestconsumptioniscalled“thegoldenrulelevelofcapitalaccumulation.”TheGoldenRuleLevelofCapitalFromtheSolowmodel

Atthesteadystate:Choosek*tomaximizec*TheGoldenRuleLevelofCapitalWhatifk*<k**?yki=sf(k)y=f(k)k**k*Policymakersincreasesinordertoincreasek*TheGoldenRuleLevelofCapitalThetransitionpathciyIncreasesTheGoldenRuleLevelofCapitalWhatifk*>k**?yki=sf(k)y=f(k)k**Policymakersincreasesinordertoincreasek*k*TheGoldenRuleLevelofCapitalThetransitionpathciyDecreasesSummarySolowgrowthmodelSupplyforgoodsandproductionfn.Demandforgoodsandconsumptionfn.Thesteady-statelevelofkTheGoldenRulelevelofkTransitionpathfromonesteadystatetotheGoldenRulesteadystateIntermediateMacroeconomicsLecture7HowtheSRandLRDifferIntheLR,pricesareflexibleandcanrespondtochangesinSorD.IntheSR,manypricesarestuckatsomepredeterminedlevel.IntheSR,monetarypolicydoeshaveapotenteffectonoutputandemployment!AggregateDemandShiftsintheADcurve---changeinmoneysupplyPYAD110017025085AD’(M)AggregateSupplyLRv.s.SRPYPYLRASSRASShockstoADIntroductionofATMPYLRASSRASABCShockstoASOnlyonSRAS(changethecostofproduction)HowtodealwithadversesupplyshockPYLRASSRASADASRAS’BCShockstoASWhentheeconomysuffersfromadversesupplyshock,policymakershave2choicesDonothingstagflationbacktonormalIncreaseADtoaccommodatetheshock

inflationShockstoASChangeinoilpriceShockstoASEnergyuse(kgofoilequivalentpercapita)TheIS-LMModelClassicalmodelcannotexplaintheGreatDepressionLRv.s.SRIS---“investment”and“savings”LM---“l(fā)iquidity”and“money”TakesthepricelevelasexogenousandshowswhatdeterminesnationalincomeTheIS-LMModelThegoodsmarketandtheIScurveTheKeynesianCrossPlannedexpenditure:

TheIS-LMModelEY45UnplannedinventoryaccumulationUnplanneddropininventoryTheIS-LMModelHowdoestheeconomygettotheequilibrium?e.g.Yishigherthanequilibriumlevel

YbiggerthanplannedEmoreinventories

layoffworkers&reduceproductionYgetssmallerTheIS-LMModelGovernment-purchasemultiplier$100IncreaseinGDirectlyincreasesEby$100Yincreasesby$100Cincreasesby$100*MPCYincreasesby$100*MPCCincreasesby$100*MPC*MPCYincreasesby$100*MPC*MPC……TheIS-LMModelGovernment-purchasesmultiplierEYY’TheIS-LMModelTaxmultiplier$100decreaseinTDirectlyincreasesEby$100*MPCYincreasesby$100*MPCCincreasesby$100*MPC*MPCYincreasesby$100*MPC*MPC……TheIS-LMModelTaxmultiplierEYY’TheIS-LMModelr,IandtheIScurverIrYEYr1r2I(r1)I(r2)E--I(r1)E--I(r2)Y1AY2BISTheIS-LMModelIncreaseinGrYEYE–G2E–G1Y1Y2TheIS-LMModelAloanable-fundsinterpretationoftheIScurve

rIrYr1r2S(Y2)S(Y1)Y1AY2BISIntermediateMacroeconomicsLecture8TheMoneyMarket&LMCurveThetheoryofliquiditypreferencerM/PTheMoneyMarket&LMCurvePaulVolckerTofighthighinflationTightmoneypolicy(Oct.1979)TheMoneyMarket&LMCurveHowdoessuchamonetarytighteninginfluenceinterestrate?Itdepends…LR:Fishereffect:inflation↓interestrate↓SR:Liquiditytheory:M↓interestrate↑TheMoneyMarket&LMCurveIncome,moneydemand,&LMcurverM/Pr2r1rYY1Y2LMTheMoneyMarket&LMCurveAnalgebraicexampleofLMcurveShort-RunEquilibriumIS-LMModelTheintersectionofISandLMrepresentssimultaneousequilibriuminthemarketforgoodsandservicesandinthemarketforrealmoneybalancesatagivepricelevelISLMrYExerciseP2544.ConsidertheimpactofanincreaseinthriftinessintheKeynesianCross.Suppose,whereisaparametercalledautonomousconsumptionandcisthemarginalpropensitytoconsumption.Whathappenstoequilibriumincomewhenthesocietybecomesmorethrifty(declinein)?Whathappenstoequilibriumsavings?Whydoyousupposethisresultiscalledtheparadoxofthrift?Answera.EYAnswerb.Equilibriumsavingswouldnotbeaffected.BecauseinKeynesianCross,S=I,becauseIdoesnotchange,Swouldnotchange.Answer c.Inthiscase,thebehaviorofthriftinessdoesdecreasestheconsumption.However,itdoesnotincreasethesavingsaswhatwewouldexpect.Thatiswhyitiscalledtheparadoxofthrift.ThishappensbecausethriftinessonlyleadstoadecreaseinincomeY.Therefore,althoughCdecreases,withalowerY,Sdoesnotchange.Toindividuals,thriftinessisusuallyconsideredasavirtue,especiallyintheEasternWorld.FromtheperspectiveofKeynesianCross,thriftinessisnogoodatall.AggregateDemandIIPotentialcausesoffluctuations(monetary&fiscalpolicies)TheGreatDepressionMonetary&FiscalPoliciesFiscalPolicyLMISArYBCMonetary&FiscalPoliciesTheincreaseinYinresponsetoafiacalexpansionissmallerintheIS-LMmodelthanintheKeynesianCross.Afiscalexpansionraisestheinterestrateand“crowdsout”investmentMonetary&FiscalPoliciesMonetaryPolicyChangeinMshiftsLMcurveLMISArYMonetary&FiscalPoliciesIncreaseinmoneysupplyLowerstheinterestrateStimulatesinvestmentExpandstheDforgoodsandservicesThisiscalledthemonetarytransmissionmechanism.Monetary&FiscalPoliciesTheinteractionbetween2kindsofpoliciese.g.thecongressraisesTtofightbudgetdeficitWhateffectswouldithaveontheeconomy?Itdepends…DependsonhowtheFed.responds.Monetary&FiscalPoliciesFed.holdsthemoneysupplyconstantLMISArYMonetary&FiscalPoliciesFed.wantstoholdrconstantLMISArYMonetary&FiscalPoliciesFed.wantstopreventtherecessionLMISArYMonetary&FiscalPoliciesTheimpactofthechangeinfiscalpolicydependsonthemonetarypolicyShockstoIS-LMModelInvestor’sanimalspiritsConsumerconfidenceDemandformoney(confidenceofthebankingsystem)TheGreatDepressionPleasereadthebook！