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Lecture 5

Lecture 5- Onward to Dunn.pdf

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McGill University
Economics (Arts)
ECON 205
Tom Velk

Dragging on IS and LM IS LM not finishedmust know shape slope and shiftability of bothto shift at all but suppress Ricardian equivalent effect who pays taxesinstead of a net stimulus capacity only a capacity to redistribute move liquidity from the taxpayer owners of the central bank to others the way new money is created is that the central bank buys things from the general populationie your investments your bonds your mortgage as an investormust pay you a capital gain have raised the price at the same time that they have created liquidity whose liquidity is impaired by that actionthe stockowners of the bank the liquidity is being transferred from them to the banks customers so cant shift LM curve eitherif shift these curves by how much look at multiplierconsider intl side of thingseco is open in Canadamonopolization of the various instruments of policy is necessary for the Keynesian must control the population which otherwise runs away from the costs of monetary and fiscal policyintl aspect diminishes the power of the socalled multiplier ie multiplier which causes the IS curve to shift is a matter of the rate of withdrawalleakage each step of stimulus has a bit of savings leakagethe faster the leakage the less expansion we getincome starts to rise with greater income you want to import more French wine instead of Quebec wine etcimports become an extra leakage so the multiplier gets smaller in the case of the effect of imports on rising income income rate and interest becomes very constrictedinterest rate in Keynesian theory can be manipulated to stimulate investment by pushing interest rate downDunn says a single nation cant push interest rate down because you have a world interest rateintl rate is the one that manipulates the marketcreate or withdraw money from this spending cycle as an act of monetary policythe US govt is not big enough to change the real availability of money when you look at the intl availability of moneyanother intl effect operates on the real income side if you are dependent on selling your natural resources or oil Canada SArabia or other dominant economic sectors for your state everything relies on the intl scene thenyou cant control it if someone figures out fracking cold fusion or anything like that this will very profoundly diminish the takings of OPEC no matter what their governments do with taxes and spendingfor both the interest rate and income there are very deep natural market forces that determine what your income is going to be what your capacity is what your interest rate isgovernments in all their arrogance try to but fail to change this cant isolate their economy from the rest of the world Keynesians like to create monopolies and try to isolate their countries Its Dunn Timecountries have a very small base to shift from their primary economic activity especially OPEC countries stimulating the economy wont work just creates inflationKeynesians try to use floating exchange rates and laws of foreign money difficult to enforce such lawsmultiplier gets weaker because of the leakage up because of importscant offset the real problem the Balance of Payment BOP curveequilibrium story but a special kind of equilibriumeco must operate along the graphs line because if it doesnt we will be out of equilibriumwe dont really know how it gets to that curve but it must be on that curve for equilibrium to exist2 areasand 0 is all to the left 0 is all to the rightthe curve is a frontier between the two areasthese areas are trade surplusbalance of payments surplusand balance of payments deficit 0driven mostly by interest rates and income balance of payment is a cause of 4 thingstradeexportsimportsmust always be balanced by the capital accountcapitalppl bringing money in capital flowsif we are importing a lot more than we export as is the case in the US we are leaving all kinds of money abroadin a case where trade was balanced the BMW guy would then turn around and buy something from the USbut now this doesnt happen making exports less and importsgives US an unfavourable balance of trade all the money in the BMW guys pocketeven if he just holds it in his pocket it
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