Download Macro Final Topic Review

Macro Final Topic Review
Savings & Leakage
Economic Schools of Thought
DEMAND FOR MONEY
You usually do not have to shift MD
The Fed. Controls MS and that moves
with monetary policy
Money Market
Nominal
Interest
Rate
HOWEVER- sometimes they shift MD on the exam
For example:
1) If the stock market crashes—people hold more
Money (precautionary demand) and MD shifts right
2) If the price level ↑, then MD shifts right
MS
Demand for Money:
MD
Qty $
Transactions Demand
Precautionary Demand
Speculative Demand
Price Level changes shifts Demand Curve for Money
↑ Px level shifts MD right
↓Px level shifts MD left
Injections & Leakages
• Injections - income of firms which does not normally arise from the
expenditure of households
– changes in investment, government spending or exports.
• Leakages - Income not passed on by consumers in the circular flow
– savings, taxation or imports
GDP Leakage
• GDP = Y = C + I + G + (X – M)
• Leakage to GDP:
S+T+M
(S = Savings T= taxes M = Imports)
• Injections to GDP:
I+G+X
(Investment, Gov’t, Exports)
• In equilibrium: Leakage = Injections
S+T+M=I+G+X
Savings must end up as
Investment
Leakage
Injections
Tariffs & Quotas
Revenue Tariff - designed to raise revenue
Protective Tariff – designed to protect domestic market
Quotas- limit # of goods imported
Price
World Price: when above domestic price we export
-------------
------------
P
S
World Price: when below domestic price we import
D
US
Market
(Wheat)
Tariffs & Quotas:
•
•
will always produce deadweight loss and lower consumer surplus
lead to higher prices & protect inefficient producers
Price
-------------
------------
P
Sdomestic
STariff
SWorld
D
World Qty
(Wheat
Phillips Curve Short & Long Run
(b) The Phillips Curve
The Phillips Curve
Inflation
Rate
(percent
per year)
6
Inflation
Rate
Long-run Phillips
curve
3. . . . and
increases the
inflation rate . . .
B
B
A
A
2
Phillips curve
0
4
(output is
8,000)
Unemployment
7
(output is Rate (percent)
7,500)
0
Natural rate of
unemployment
You may have to draw a Phillips Curve
Remember—Unemployment on x-axis
Unemployment
Rate
House of
Money
Market for Dollars
Market for Euros
S1
Euro Price
of a dollar
S1
Dollar Price
of a Euro
Q1
1.43 Dollars
--------------
D1
Qty of Dollars
--------------
--------------
.70 Euro --------------
Q1
D1
Qty of Euros
1) If real interest rates rise in the USA, then the dollar appreciates
a) Europeans supply Euros and demand dollars
2) If the price level rises in the USA, then the dollar depreciates
a) European goods look “cheap” => supply dollars demand Euros
Economic Schools of Thought
•
Classical View
•
•
•
Keynesian View
•
•
•
Economy is inherently unstable, Not self regulating
Wages & prices are sticky (Gov’t intervention needed)
Monetarist View
•
•
Markets are naturally self regulating (No Gov’t intervention)
Recessions are temporary, Wages & Prices are flexible
Money matters!----do not regulate economy—control inflation
Supply Side View
•
Incentives matter! Create incentives to increase LRAS