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Macroeconomic Policy and Agriculture Discussion Discussion Topics Topics • Review macro policy options • Monetary • Fiscal • Expand effects to agricultural sector • Commodity prices • Interest rates • Net farm income • Farmland prices This Thistable tablesummarizes summarizesthe theimpacts impactsthat thatexpansionary expansionary and andcontractionary contractionarymonetary monetaryand andfiscal fiscalpolicy policyhave have upon uponkey keyvariables variablesthat thatcan canhave haveaadistinct distincteffect effecton onthe the financial financialhealth healthof offarm farmoperator operatorfamilies. families. 1 Effects Effectsof ofExpansionary ExpansionaryMonetary MonetaryPolicy Policy Interest Interestrates ratesfall fall AI Effects Effectsof ofExpansionary ExpansionaryMonetary MonetaryPolicy Policy Interest Interestrates ratesfall fall AI Investment Investmentgrows grows Effects Effectsof ofExpansionary ExpansionaryMonetary MonetaryPolicy Policy Interest Interestrates ratesfall fall Gap Gapcloses closeswith with some someinflation inflation AI Investment Investmentgrows grows 2 This Thistable tablesummarizes summarizesthe theimpacts impactsthat thatexpansionary expansionary and andcontractionary contractionarymonetary monetaryand andfiscal fiscalpolicy policyhave have upon uponkey keyvariables variablesthat thatcan canhave haveaadistinct distincteffect effecton onthe the financial financialhealth healthof offarm farmoperator operatorfamilies. families. Effects Effectsof ofContractionary ContractionaryMonetary MonetaryPolicy Policy Interest Interestrates ratesrise rise Effects Effectsof ofContractionary ContractionaryMonetary MonetaryPolicy Policy Interest Interestrates ratesrise rise Investment Investmentfalls falls 3 Effects Effectsof ofContractionary ContractionaryMonetary MonetaryPolicy Policy Interest Interestrates ratesrise rise Gap Gapcloses closeswith with less lessinflation inflation Investment Investmentfalls falls This Thistable tablesummarizes summarizesthe theimpacts impactsthat thatexpansionary expansionary and andcontractionary contractionarymonetary monetaryand andfiscal fiscalpolicy policyhave have upon uponkey keyvariables variablesthat thatcan canhave haveaadistinct distincteffect effecton onthe the financial financialhealth healthof offarm farmoperator operatorfamilies. families. Effects Effectsof ofExpansionary ExpansionaryFiscal FiscalPolicy Policy Taxes Taxescut cut Deficit Deficitrises rises 4 Effects Effectsof ofExpansionary ExpansionaryFiscal FiscalPolicy Policy Taxes Taxescut cut Deficit Deficitrises rises Consumption Consumptionrises rises Effects Effectsof ofExpansionary ExpansionaryFiscal FiscalPolicy Policy Taxes Taxescut cut Deficit Deficitrises rises Gap Gapcloses closeswith with more moreinflation inflation Consumption Consumptionrises rises Effects Effectsof ofExpansionary ExpansionaryFiscal FiscalPolicy Policy Spending Spendingraised raised Deficit Deficitrises rises 5 Effects Effectsof ofExpansionary ExpansionaryFiscal FiscalPolicy Policy Spending Spendingraised raised Deficit Deficitrises rises Gap Gapcloses closeswith with more moreinflation inflation This Thistable tablesummarizes summarizesthe theimpacts impactsthat thatexpansionary expansionary and andcontractionary contractionarymonetary monetaryand andfiscal fiscalpolicy policyhave have upon uponkey keyvariables variablesthat thatcan canhave haveaadistinct distincteffect effecton onthe the financial financialhealth healthof offarm farmoperator operatorfamilies. families. Effects Effectsof ofContractionary ContractionaryFiscal FiscalPolicy Policy Taxes Taxesraised raised Deficit Deficitfalls falls 6 Effects Effectsof ofContractionary ContractionaryFiscal FiscalPolicy Policy Taxes Taxesraised raised Deficit Deficitfalls falls Consumption Consumptionfalls falls Effects Effectsof ofContractionary ContractionaryFiscal FiscalPolicy Policy Taxes Taxesraised raised Deficit Deficitfalls falls Gap Gapcloses closeswith with less lessinflation inflation Consumption Consumptionfalls falls Effects Effectsof ofContractionary ContractionaryFiscal FiscalPolicy Policy Spending Spendingcut cut Deficit Deficitfalls falls 7 Effects Effectsof ofContractionary ContractionaryFiscal FiscalPolicy Policy Spending Spendingcut cut Deficit Deficitfalls falls Gap Gapcloses closeswith with less lessinflation inflation Note Noteexpansionary expansionaryand andcontractionary contractionaryfiscal fiscaland and monetary monetarypolicies policiesin ingeneral generalhave havethe thesame sameeffect effectin in terms termsof ofdirection direction(raise (raise//lower), lower),however, however,interest interest rate rateand andexchange exchangerate rateeffects effectsdiffer differfurther further complicating complicatingpolicy policyissues. issues. Let’s look at policy impacts on the Ag sector 8 Macro Macroto toMicro MicroLinkages Linkagesfor forAgriculture Agriculture Macro CPI AD AS GDP Equilibrium Equilibriuminin the thenational national product productmarket market Macro Macroto toMicro MicroLinkages Linkagesfor forAgriculture Agriculture Macro CPI AD Market AS PCORN D S QCORN GDP Equilibrium Equilibriumininthe the national nationalcorn corn market market Equilibrium Equilibriuminin the thenational national product productmarket market Macro Macroto toMicro MicroLinkages Linkagesfor forAgriculture Agriculture Macro CPI AD Market AS GDP Equilibrium Equilibriuminin the thenational national product productmarket market PCORN Micro D S QCORN Equilibrium Equilibriumininthe the national nationalcorn corn market market $ MC qcorn Output Equilibrium Equilibriumfor for Gary GaryCorngrower Corngrower ininTexas Texas 9 Impact Impactof ofExpansionary ExpansionaryMacro MacroPolicy Policy Macro CPI AD Market AS PCORN Micro D S $ MC GDP Equilibrium Equilibriuminin the thenational national product productmarket market QCORN Equilibrium Equilibriumininthe the national nationalcorn corn market market qcorn Output Equilibrium Equilibriumfor for Gary GaryCorngrower Corngrower ininTexas Texas Expansionary Expansionarymonetary monetarypolicy policyimpacts impacts ••Production Production==Increased Increased ••Ag Agcommodity commodityprices pricesin ingeneral general==Higher Higher ••Interest Interestexpenses expenses==Lower Lower ••Input Inputprices prices==Increased Increased ••Net Netfarm farmincomes incomes==Higher Higher ••Farmland Farmlandprices prices==Higher Higher 10 Impact Impactof ofContractionary ContractionaryMacro MacroPolicy Policy Macro CPI AD Market AS PCORN Micro D S $ MC GDP Equilibrium Equilibriuminin the thenational national product productmarket market QCORN Equilibrium Equilibriumininthe the national nationalcorn corn market market qcorn Output Equilibrium Equilibriumfor for Gary GaryCorngrower Corngrower ininTexas Texas Contractionary Contractionarymonetary monetarypolicy policyimpacts impacts ••Production Production==Decreased Decreased ••Ag Agcommodity commodityprices pricesin ingeneral general==Lower Lower ••Interest Interestexpenses expenses==Higher Higher ••Input Inputprices prices==Decreased Decreased ••Net Netfarm farmincomes incomes==Lower Lower ••Farmland Farmlandprices prices==Lower Lower 11 Impact Impactof ofExpansionary ExpansionaryMacro MacroPolicy Policy Macro CPI AD Market AS PCORN Micro D S $ MC GDP Equilibrium Equilibriuminin the thenational national product productmarket market QCORN Equilibrium Equilibriumininthe the national nationalcorn corn market market qcorn Output Equilibrium Equilibriumfor for Gary GaryCorngrower Corngrower ininTexas Texas Expansionary Expansionary fiscal fiscalpolicy policyimpacts impacts ••Production Production==Increased Increased ••Ag Agcommodity commodityprices pricesin ingeneral general==Higher Higher ••Interest Interestexpenses expenses==Higher Higher ••Input Inputprices prices==Higher Higher ••Net Netfarm farmincomes incomes==Lower Lower ••Farmland Farmlandprices prices==Lower Lower 12 Impact Impactof ofContractionary ContractionaryMacro MacroPolicy Policy Macro CPI AD Market AS PCORN Micro D S $ MC GDP Equilibrium Equilibriuminin the thenational national product productmarket market QCORN Equilibrium Equilibriumininthe the national nationalcorn corn market market qcorn Output Equilibrium Equilibriumfor for Gary GaryCorngrower Corngrower ininTexas Texas Contractionary Contractionaryfiscal fiscalpolicy policyimpacts impacts ••Production Production==Decreased Decreased ••Ag Agcommodity commodityprices pricesin ingeneral general==Lower Lower ••Interest Interestexpenses expenses==Lower Lower ••Input Inputprices prices==Lower Lower ••Net Netfarm farmincomes incomes==Higher Higher ••Farmland Farmlandprices prices==Higher Higher 13 Again Againwe wesee seeexpansionary expansionaryand andcontractionary contractionaryfiscal fiscal and andmonetary monetarypolicies, policies,in ingeneral, general,have havesimilar similareffects effects in interms termsof ofdirection direction(raise (raise//lower) lower)except exceptinterest interestrate rate which whichin inturn turnhelps helpscause causediffering differingimpacts impactson onincome income and andfarmland farmlandprices. prices. Summary Know the direction of affects that expansionary and contractionary monetary and fiscal policy have on key macro variables, including interest rates, inflation and unemployment. Know the affects that expansionary and contractionary monetary and fiscal policy have on key Ag sector variables, including farm product prices, farmland values and farm input sales. 14
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