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ECON 162 Lecture Notes - Lecture 32: Loanable Funds, Aggregate Demand, Money Supply

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mauvebuffalo73
14 Nov 2016
School
Binghamton University
Department
Economics
Course
ECON 162
Professor
Kenny Christianson

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Document Summary

Econ 162 - lecture #32 - classical model: interest rates, fiscal & monetary policy. Role of interest rates in the classical model. Saving (s) - supply of loanable funds. In the classical model, changes in spending have no effect on aggregate demand. I(cid:313) r(cid:313) (cid:314) s(cid:313) (cid:314) c(cid:315) Fiscal policy- changes in the government spending or taxes to influence some macroeconomic variable. If g increases with no change in t, then the deficit increases. To finance the deficit, the federal government issues treasury bonds which increases the demand for loanable funds. In the classical model, changes in the money supply only affect nominal variables, not real variables. Any increase in government spending is exactly offset by declines in consumption and investment spending. John maynard keynes - the general theory (1956) Wages, prices, and interest rates may be sticky so that markets don"t always clear.

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Related Questions

Assume an economy is closed. According to classical economic theory, explain what will be the long-run effects of the increase in government purchases of the late 2000s. You need to present and discuss a formal model in detail for this question and then explain the implications of the model in the context of the question, i.e., explain the effects of expansionary fiscal policy in the model.

You may want to organize your answer around these three parts:

A) Aggregate Supply/Output (includes a discussion of the determinant of the level of output and the effect of fiscal policy on output in the long-run

B.Aggregate Demand/Real expenditures (includes a discussion of components of expenditures, their determinants, and the effect of fiscal policy on expenditures and the composition of expenditures).

C. Loanable Funds Markets (includes a discussion of the determinant of the interest rate in the loanable funds market and the effect of the fiscal policy on the real interest rate in the long run). Please include a graph if possible.

Assume an economy is closed. According to classical economic theory, explain what will be the long-run effects of an increase in taxes. You may want to organize your answer around these three parts:

A) Aggregate Supply/Output (includes a discussion of the determinant of the level of output and the effect of fiscal policy on output in the long-run

B) Aggregate Demand/Real expenditures (includes a discussion of components of expenditures, their determinants, and the effect of fiscal policy on expenditures and the composition of expenditures).

C) Loanable Funds Markets (includes a discussion of the determinant of the interest rate in the loanable funds market and the effect of the fiscal policy on the real interest rate in the long run). Please include a graph if possible.

Using the graph and definitions below of the supply of loanable funds, SLF, and the demand for loanable funds, DLF, discuss the following:

a. What is meant by the equilibrium nominal rate of interest?

b. Illustrate and discuss how an autonomous increase in the expected rate of inflation will change the equilibrium nominal interest rate. Express your discussion in terms of the effect on the supply and demand for loanable funds. Consider an initial real rate of interest of 3 percent and an expected inflation rate of 3 percent. If the expected rate of inflation rises to 4 percent with the real interest rate constant, what would the resulting nominal interest rate become in equilibrium using the Fisher relationship? Assume that investors believe the rise in the expected rate of inflation will remain at the higher level indefinitely.

c. Starting from an equilibrium position as in a, discuss the effects of a tightening monetary policy if the markets believe that a Fed tightening will lower future (next period) inflation. How might a recession occur under this scenario? HINTS: Recall the Fisher relationship where (1+i) = (1+r)(1+pe), where i is the nominal interest rate, r is the required real rate of return before taxes, and pe is the expected rate of inflation.