ECON102 Lecture Notes - Lecture 19: Monetary Policy, Output Gap, Aggregate Demand

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cerisegiraffe538

17 Apr 2018

School

University of Alberta

Department

Economics

Course

ECON102

Professor

Andrew Wong

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ECON102 Full Course Notes

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If there is an increase in the money supply: If we shift the money supply to the right (increase in the money supply) causes quantity to increase. If we shift the money supply to the left (decrease in the money supply) causes quantity to decrease. Interest rate affects consumption, investments, and net exports. If there is an increase in the money demand: Interest rate increases when right shifted money demand. Interest rate decreases when left shifted money supply. Interest rate payed by commercial banks when they borrow from central bank. At the same time, the price level increases: It is less costly to borrow from central bank: commercial banks will keep less reserves and give more loans, money supply increases, when there is an increase in the price level, md is shifted right. Md is greater than ms: ms shifts right and the money demand also shifts right.

Related Questions

In a third world country, the central bank wants to reduce the inflation rate by 5%. The current money supply is $2.0 trillion and the goal is to have equilibrium in the money market (M_s=M_d). What should be the new target interest rate to reduce the inflation rate by 5% and to keep the money market in equilibrium? Use the quantity theory of money model (M*V=P*Y, or M*V=P*Q) and assume that V and Y (or Q) are constant. The estimated money demand function is given as:

M_d = 10-0.7i.

rubymallard238

Assume the following model of the economy, with the price level fixed at 1.0:

C = 0.8(Y-T), Ms = 1200, Md/P = 0.4Y-40r,

I = 800-20r, T = 1000, G = 1000,

where Ms and Md are the nominal supply of money and nominal demand for money.

(a) Write a formula for the IS curve, showing Y as a function of r alone.

(b) Write a formula for the LM curve, showing Y as a function of r alone.

(d) Assume G increases by 200. By how much will Y increase in short-run equilibrium? What is the government purchases multiplier?

(e) Assume that G is back at its original level, but Ms increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for the money supply?

crimsonplatypus15

Assume the money sector (LM-curve) can be described by the following two equations:

md=(1/4)Y-10i and ms=400.

In the expenditure sector only investment spending (l) is affected by the interest rate (i) and the equation of the IS-curve is Y=2,000-40i.

a.) Assume the size of the expenditure multiplier is ^(triangle)G=2. What is the effect of an increase in government purchases by ^(triangle)G=200 on income and interest rates?

b.) By how much will private investment be crowded out as a result of this increase in government purchases?

c.) If the money demand equation were changed to md=(1/4)Y (note the interest rate does not enter the demand function for money) how would your answers in questions "a" and "b" change?

ECON102 Lecture Notes - Lecture 19: Monetary Policy, Output Gap, Aggregate Demand

ECON102 Full Course Notes

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