MGEB06H3 Lecture Notes - Lecture 11: Loanable Funds, Autarky, Supply Shock

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skyswan326

20 Jan 2018

School

UTSC

Department

Economics for Management Studies

Course

MGEB06H3

Professor

Iris Au

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Document Summary

Summary of the various shocks & how they shift curves in the. The is curve plots all the (r,y) points such that the goods market is in equilibrium. So the is curve also plots all the (r,y) points such that investment equals savings. C = c0 + c1 ( y - t ) Substituting all of these assumed terms into the nii yields the following is curve equation: Y = [ 1/(1-c1) ] [ c0 + i0 + g0 - c1 t0 ] - ( i1/(1-c1) ) r. Which has been derived/drawn for given (fixed or exogenous) values of: c0, i0, g0, t0, c1 & i1. If we define the following: = [ 1/(1-c1) ] [ c0 + i0 + g0 - c1 t0 ] then the is curve is: Y = 1 r or, r = ( / 1) (1/ 1) y. The lm curve plots all the (r,y) points such that the money market is in equilibrium.

Related Questions

Suppose that the economy is given by:

C = c0 + c1(Y âT)

I = b0 + b1Y âb2i
with 0 < c1 < 1, 0 < b1 < 1, (c1 + b1) < 1, 0 < b2 < 1, and G, T are exogenous constants.

(a) Derive an expression for equilibrium output.

(b) Derive âY/âi, and invert this expression so that it is now âi/âY (hint: (3/2)â1 = (2/3). This is the IS curve we derived graphically in class. What is itâs sign? What is the eï¬ect on output of a small increase in the interest rate?

(c) What happens to the slope of the IS curve if b2 increases? What happens to the slope of the IS curve if (c1 + b1) increases? What is the economic intuition behind this?

(d) Using the expression for equilibrium output you derived in part b, derive âY/âG and âY/âT. What are the signs of these derivatives? How much does output change (and in what direction) if there is a
small increase in G? How much does output change (and in what direction) if there is a small increase in T? Now suppose equilibrium in the goods market is given by: Y (Y,i,G,T) (+,â,+,â) = C(Y,T +,â ) + I(Y,i +,â ) + G
(e) Derive âY/âi, and invert this expression so that it is now âi/âY (hint: (3/2)â1 = (2/3). This is the IS curve we derived graphically inclass. Whatisthesignofthisexpression? Whatdoesthesteepness of the slope of the IS curve depend on? How do the terms in this expression relate to the parameters b2,b1, and c1 in the IS curve you derived in part b?

(f) Through which channels does the interest rate aï¬ect output (i.e. what is the eï¬ects of changes in the interest rate on C, I, and G )? (Hint: To answer this question, you could take partial derivatives of C, I, and G with respect to i; or simply infer this from your answer to part a. )

In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of

	100
	110
	120
	90
	105

The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

Consider the Following Economy:

Y = (C + I + G + NX) <-Income Identity

C = 300*0.8YD<-Consumption

I = 200-1500r <-investment

NX = 100-0.04Y-500r <-net exports

M^d = (0.5Y-2000r) <-Money Demand

G = 1200

t (tax rate) = 0.2

Money Supply (M^s) = $550

P = $1

a. What is the IS Curve?

b. What is the LM Curve?

c. What are the values of Y (income) and interest rate (r) when the IS-LM model is in equilibrium?

MGEB06H3 Lecture Notes - Lecture 11: Loanable Funds, Autarky, Supply Shock

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