Subject 6.


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Point 6 Assembling the Economy: An Audit (For the most part) The Currency (Market 1): Cash Supply Ostensible Cash Supply (M s ) : Affected By the Fed Fed conducts fiscal arrangement to build Cash Supply -Open Business sector Operations -Lessening the store proportion
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Theme 6 Putting the Economy Together: A Review (Mostly)

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The Money (Market 1): Money Supply Nominal Money Supply (M s ) : Affected By the Fed Fed behaviors fiscal arrangement to build Money Supply -Open Market Operations -Decrease the store proportion -Decrease the Discount Rate

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Money Market: Money Demand Our model for the interest for genuine cash equalizations takes the accompanying structure M d/P = L d (Y, r + π e ) where M d = interest for ostensible cash parities (interest for M1) L d = interest for liquidity capacity P = total value level (CPI or GDP deflator) Y = genuine wage (genuine GDP) π e = expected swelling i = ostensible premium rate on non-cash resources

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Money Market Equilibrium Money Market M s r e M d = L d (Y,ï€ e ) M/P

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Interest Rates and Output There are two impacts between premium rates and yield. 1) The IS bend. As premium rates fall, Investment increments and Y increases. r falling reasons Y to build (negative relationship - the IS bend) 2) The exchange thought process in holding cash (the financial input mechanism). As Y builds, interest for cash increments and r increases. Y expanding reasons r to build (positive relationship - the LM bend)

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Market 2 (Goods Market) - IS/LM Y = Output = Aggregate Supply (upgrading firm conduct) Y = Expenditures = C + I + G + NX = Goods Demand IS bend - a snappy review….. How does the interest side of the economy change when interest rates change? As genuine interest rates expand, I falls (client expense of capital ascents), Y falls. The above is the means by which we displayed venture (firms enhance - client cost) C and G (and NX) don\'t change with interest rates (NX likely will, yet we will concede that until further notice). Along these lines, as r changes, aggregate interest in the economy will increment. In {Y, r} space, the interest for yield slants descending - we call this the IS bend.

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IS - Curve IS Curve = Y = C + I + G + NX r Y I = f(r); C and G are not

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Investment/Savings (IS) Remember: S national = I + NX Further S private + (T - G - Tr) = I + NX The IS Curve essentially says that the interest in the economy must equivalent the funds. A fall in r today (all else equivalent), will make I expand, which will make Y increment. An increment in Y today (all else break even with - including holding future Y steady), will make S(private) expand today - making r fall.

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What Shifts the IS bend (survey)? Things that will move the IS bend to the Right Through higher C request: higher A f higher PVLR (counting riches impacts) higher Tr or lower T (holding ts settled) customer certainty Through higher I request: higher A f lower t K business certainty (not premium rate changes, that moves us along the bend) Through higher G request: higher G Through higher NX request: Higher outside Y (in the long run trade rates).

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The LM (Liquidity-Money) Curve LM Curve: (attracted (Y-r) space) - speaks to the relationship of Y and r through the currency market (particularly - Y’s influence on cash request). The LM Curve relates genuine premium rates to genuine changes in yield in the currency market. As Y increments - M d moves upwards - creating genuine premium rates to rise (increment in exchanges interest expands the interest for cash). What shifts the LM bend? Money: Increasing Money Supply builds M/P bringing about the LM bend to one side. Prices: Increasing Prices causes genuine Money Balances to fall moving LM bend to the left. π e : Increasing expected swelling reasons returns on securities (resources other than cash) to build making it less appealing to hold money. Causes LM bend to move right!

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IS-LM Equilibrium Y* = f(N*,K,A) r LM = f(M,P,π e ) r e IS = f(G,PVLR,taxes,A f ) Y* Y

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Understanding the IS-LM Equilibrium: M expanding Suppose M increases…. r LM = f(M 0 ) LM = f(M 1 ) M builds r e 0 1 r 1 IS = f(G) r z Y* Y 1

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Understanding the IS-LM Equilibrium: G expanding Suppose G increases…. Y* = f(N*,K,A) r LM = f(M,P,π e ) G expands 1 r 1 r e z 0 IS = f(G 1 ) IS = f(G 0 ) Y* Y z Y 1

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Understanding the IS-LM Equilibrium: P diminishing Suppose P decreases…. r LM = f(P 0 ) LM = f(P 1 < P 0 ) P diminishes r e 0 1 r 1 IS = f(G) r z Y* Y 1

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The Aggregate Demand Curve You might not have acknowledged it yet,but we simply made a collected interest bend! The AD bend is attracted {Y,P} space. It speaks to how the interest side of the economy reacts to an adjustment in costs. On the past slide, we simply did this! As P abatements (holding everything else settled - including M), M/P will increment. As genuine cash equalizations build, premium rates will fall, Investment will rise and Y will rise. Costs influence the interest side of the economy through premium rates (and hence speculation). Changes in costs don\'t influence (utilization is just influenced by PVLR - or genuine wages - if wages change 1 at 1 with costs (W/P is steady), PVLR won\'t change. The AD bend comes specifically from the IS-LM harmony. In this way, fundamentally, the AD bend is a representation of BOTH the IS bend AND the LM bend.

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What Shifts the AD bend? Keep in mind - the AD bend speaks to the interest side of the economy: Y = C+I+G+NX Anything that causes the IS bend to move to one side, will bring about the AD bend to move to one side (both the IS bend and the AD bend speak to the interest side of the economy): Anything that causes the LM bend to move to one side (aside from value changes) will bring about the AD bend to move to one side. Example: Nominal cash (M) expands, r will fall, I will build, AD will move right. With changes in cash: LM moves right Move along the IS bend Interest rates fall I expands AD moves right. An adjustment in costs will bring about the LM bend to move - at the same time, will bring about a development along the AD bend.

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Shifting the AD bend (a case) P G builds P 0 AD 1 AD Y 0 Y 1 Y Suppose costs are held settled (at P 0 ). Assume that G increments and the Fed does not change M. This infers that M/P won\'t change (i.e., the LM bend is settled). An increment in G will move out IS bend. This will make Y increment. An increment in G will prompt an increment in Y, holding P settled. The AD bend will move right!

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Market 3: The Supply Side (an audit) Labor Market Review: N s (PVLR,taxes,value of relaxation, populace) W 0/P 0 N d (A,K) N* What is set in this business sector: N* (and genuine wages).

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Some Definitions In Short Run (N alters, however it require not be at N*, K is settled!) Nominal Wages are ‘Sticky’ (despite the fact that organizations can change costs). W is settled, yet not W/P (on the grounds that organizations can change P) K by definition is altered! Since Wages are sticky in Short Run, the work business sector can be in ‘disequilibrium’ - ie, work interest need not equivalent work supply (repetitive unemployment can happen). In Long Run (N acclimates to N*, K is altered) We will be at N* (work business sector is in harmony), yet capital still does not change. (K is settled!) In Really Long Run (Growth - N changes with N* and K is not altered!) Capital can conform, work business sector is in harmony

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Aggregate Supply Curves over the long haul (LRAS) In the long run, the work business sector clears! (We are at N*) Define: LRAS (full occupation level of yield) gives the level of yield Y* connected with N*: Y* = A F(K, N*, Raw Materials). Note Slight Modification (incorporation of crude materials) LRAS Curve is vertical at Y* - the potential level of GDP. Y* is the level of yield created when the economy produces N*. Additionally know as the FE (full work) line. (w/p) e = the genuine pay in labor market balance N* = hours worked in labor market balance What shifts the Long Run AS Curve: N* or A (by definition K is altered in long run)

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Notes on the Potential Level of GDP (Y*) The Equilibrium level of Y is not so much ideal: Tax mutilations can mean Y* is lower than is financially effective. Balance just means harmony between private expenses and advantages (for this situation to family unit supply of work and firm interest for work). At a harmony, there is no motivator for individuals to change their conduct. The Equilibrium is not steady: Changes to A, K and N* change Y*, and subsequently move the LRAS. Y* slants upward in many nations (on the grounds that An and K and populace develop after some time - moving out N*). Numerous financial specialists trust its development rate is genuinely steady.

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The Long Run AS Curve LRAS P, r Y Y*

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The Aggregate Supply: Short Run 1 The Short Run Aggregate Supply Curve (the relationship in the middle of yield and costs) in the short run is sure. Firms, in the event that they get an interest stun, may decided to create more (at a given altered ostensible pay) to fulfill request. To exploit the higher interest, firms may raise costs (ideally) which drives down W/P. The lower genuine wages reasons firms to ideally procure more work - making yield increment. NOTE : N d has not shifted!!!!!! Firms choose to take care of the increment in demand for their item by contracting more specialists in light of the lower genuine compensation (as costs increment). In short run, firms stay on their work interest bend, while specialists are off their work supply bend incidentally (laborers have small dealing force, choices in the short run). There is disequilibrium in the work market!

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The Short Run AS Curve (SRAS) - The Intuition 1. Work Demand Curve 4. Short Run Aggregate Suppl

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