FNCE 101 Lecture Notes - Lecture 20: Marginal Utility, Marginal Product, Consumption Smoothing
Audio 1
Audio recording started: 10:31 AM Monday, April 9, 2018
Slide 4
Bookmark added at 05:45 in Audio 1
○
The nominal exchange rate (E) is # of foreign currencies one
need sto purchase one US Dollar
○
-
Slide 5
Real exchange rate is the # of foreign goods one can purchase
w one US good
○
Bookmark added at 06:15 in Audio 1
○
Foreign goods are cheap to the extent that u can get more
eforeign goods for one us good
Most of the effect is the level of the currency not the
differential of the US rate
§
Law of one price
Sometimes ppl use real exchange rate to mean
baskets of goods
Same concept as law of one price
®
□
§
○
-
Slide 6
Bookmark added at 11:24 in Audio 1
○
You can take local currency price of bigmacs around the
world, convert them to us dollars and then figure out where
you should buy the big mac
○
If you could easily go costlessly you could go to china this
would be optimal where u can exchange big mac for more
○
-
Slide 7
Bookmark added at 12:10 in Audio 1
○
If fed decides to increase FFR
Increase in FFR leads to increase in borrowing costs and
increase in yield of borrowing securties
§
○
In the way that were defining nom exchange rate
Increase in int rate moves in same direction as nominal
exchange rate
§
○
Bc we have sticky prices, a strengthening of us dollar leads to
strengthening of exchange rate
Domestic and foreign price are sticky
§
Nom exchange rate is increasing
§
Leads to increase in numerator and increase in
exchange rate
§
○
In turn NX go down when real exchange rate appreciates
Leads ______
§
When real exchange rtate is greater than one u wanna
buy goods from abroad
Increase in real ex --> decrease x ^M --> decrease
NX
□
§
○
Inc/dec of FFR --> inc/dec nom exc rate -->
○
-
Slide 8
Bookmark added at 14:28 in Audio 1
○
IS/LM model
3 curves
Fe line
No change -- we havent changed the
production function
®
□
LM curve
Nothing changes on asset market because
fed's goals are the same
®
□
Goods market
Instead of only producing for domestic
econ
Output Y=C+I+G+NX
◊
This leads to an equation that says
excess saving in econ has to find its
place in the rest of the wolrd
This excess saving --> NX
}
S-I=NX
}
◊
®
Open econ IS curve is combo of Y and r
Now having it such that Sd-Id+NX
It now has to be price that
clears S-I=NX
}
◊
®
□
§
○
-
Slide 9
Now I have S, I, NX
○
We have to combine S and I into one line and NX is another
line
○
S-I leads to upward sloping curve while NX is a dowanward
sloping curve
○
S-I is upward slopnig bc w output held constant, increase in
real int rate lads to inc in saving and dec in investment
○
Bookmark added at 17:51 in Audio 1
GRAPH
Pu s&I into one curve (S-I)
Low saving - a lot of investment leads to a
little bit of S-I
Could be negatibe
◊
®
High saving - little bit of investment leads
to a lot of S-I
®
□
Downward sloping NX curve
High real int rates means that USD is strong
and when its strong u import a lot export a
little
NX IS SMALL
◊
High exchange rate, low NX
◊
Low real int rate, weak dollar, high
NX
◊
®
□
Equil is where S-I=NX OR where Y-C-G-I=NX
This is the same as Y=C+I+G+NX
®
□
-
Slide 10
Goods market equil is S-I=NX or C+I+G+NX
○
Upward sloping S-I downward sloping NX
○
-
Slide 11
Bookmark added at 24:57 in Audio 1
Real int rate S-I
When u increase current output, current income goes
up
Some goes to inc saving while some goes to inc
consumption
□
Inv stays constant bc investment is linked to
future output
□
Even if u invest more today it doesn’t lead to
output but rather expected future condition not
whats happening today so inv doesn’t react
□
Inv stays constant and S-I curve shifts to the rigt
S-I
®
□
§
When current output goes up, current income goes up
PVLR goes up, consumption goes up □
You go to walmart ocnsume more domestic AND
foreign goods
□
NX goes down □
§
Increase in income leads to decrease in real int rate
§
IS curve just as in closed econ version is also downward
sloping
§
○
When current output goes up income goes up
Production goes up, AD goes up, income goes up
§
When increase in current output leads to inc in crrent
income, u have increase in pVLR
Save more bc u want to smooth consumption
over time
□
§
NX is relationship btwn
Real int rate is high, import more, export less, NX
is low
Real int rate is low , real excahgen rate
export more, import more, NX is high,
downward NX curve
Rel between _______ is captured in
the NX curve itself which is why its
dowanward sloping
◊
When u draw IS line its in terms of
current income only
◊
®
□
Higher output is linked with lower real int rate as
in open econ IS curve
□
§
○
-
Slide 12
Bookmark added at 39:37 in Audio 1
To derive IS curve
Need to know what happens to r
§
○
-
Slide 13
Bookmark added at 41:37 in Audio 1
○
All factors that shift IS curve in closed econ also shift it in
open econ
Increase in expected future income makes you
ocnsume more today, decreases saving, increases in IS
curve
§
Firms might only be willing to invest if _____- is
sustained
§
Might be better for them to invest in new maturiteis
and equpiment than to hire more workers
§
First order effect: increase in expected fture income
leads to increase in PVLR, increase in consumption
Decrease in saving, increase in spending, increase
in marginal product of capital also increases IS
curve
□
§
○
Factors that shift a country's NX shift the open econ curve up
Increase in IS curve can shift IS curve up
§
ECB shifting european int rates
Leads u to want to own european assets, supply
dollar to buy euro
Leads to appreaciation of Euro
®
□
§
Leads to increase in our NX and our IS curvestar
represents foreign variables
§
High demand for domestic exports leads to increase in
X and thus NX
§
○
-
Slide 15
Bookmark added at 57:00 in Audio 1
AD curve is now C+I+G+NX
○
___ has impact on constant (a bar) of AD curve
○
-
Slide 16
Increase in FFR
Leads to decrease in consumption
§
Readces investment
§
Increase in AD, so it goes down
§
Increase in nominal int rate leads to net appreciation of
USD
Pushes up imports, diminisming _____□
Now MP affects AD, consumption, NX□
§
○
Firm has to look at marginal benefit of investing vs cost
This is what investment leads u to benefit from when
its fully installed
Cost is user cost of capital which is _______ □
§
Cost is now, beefit is later
§
○
-
Slide 19
Does depreciation f Yen give japan a competitive advante in
the global market
Yes. Low yen means w japanese prices being sticky,
goods are cheap to rest of world while rest of world is
expensive to japanaese ppl
Eleads to increase in jap exports 1)
Decrease in US ____
Comes from fact that local currency prices
are sticky
a)
2)
i.
A.
Impact of depreciation fo Yen on US trade w japan
Low yen, jap goods are cheap for americans, us goods
are expensive
i.
B.
C what are short run impacts on US IS curve and US outputC.
-
Slide 21
From US POV NX went down this means that depreciation of
real int rate that clears economy goods market equil --> shift
down of IS Cruve
○
-
Slide 22
Using AS/AD framework
Following depreciation us ____ goes down implying AS
curve stays the same implying AD curve goes down
implyig output and inflation also goes down
i.
D.
-
Slide
Should fed increase or decrease FFR
Fed should decrease FFR
This has impact on C, I, NX 1)
i.
E.
Wha ttype of OMO
Buy bonds in exchange for cash ---> i.
Fed should buy govt securities
Increases MS and decreases FFR1)
ii.
Decrease in FFR drives down a series of ---iii.
F.
How would a decrease in FFR stimulate output and inflation
Channel for investment --
Investment is also increased1)
Investment increases today to have more capital
tomorrow
2)
Decrease in FFR lowers user vost of capital which
___ inv today
By decreasing ucost of capital its cheaper to
have more capital --- inc current
investment-- current inv is not fixed,
current capital stock is fixed
a)
3)
i.
NX --
Decrease in FFR would cause USD ot depreciate
and therefore NX would go up
1)
Decrease in FFR leads to decrease in US nominal
int rates and US skills
Ppl don’t want to dump US assets in
exchange to foreign currencies -->
weakening of USD --> inc us exports, dec in
us imports, dec in us imports
Sterilizes action of japani)
a)
2)
ii.
Shock --- japan decided to push a bunch of yen into
global market, depreciating yen against currenies, led
yen to depreciate vis a vis USD
Fed is going to come in decrease FFR, and sterilize
impact on US econ
1)
iii.
G.
-
Slide 25
Move from point 1 to point 2 --d epreciation of yen against
UDD leads to lower NX lower AD
At point 2 firms demand for product is below potential
§
Firms decrease prices to move bak to potential
§
At point 3 fed says ____
We need to spur econ growth by decreasing ffr□
§
AD goes up thru C, I, NX
you move from point 3 to point 4□
At point 4 firms realize they re operating above
potential
Bring prices up, move back to point 4
®
□
§
○
-
Lecture 20
Monday, April 9, 2018
10:31 AM
Audio 1
Audio recording started: 10:31 AM Monday, April 9, 2018
Slide 4
Bookmark added at 05:45 in Audio 1
○
The nominal exchange rate (E) is # of foreign currencies one
need sto purchase one US Dollar
○
-
Slide 5
Real exchange rate is the # of foreign goods one can purchase
w one US good
○
Bookmark added at 06:15 in Audio 1
○
Foreign goods are cheap to the extent that u can get more
eforeign goods for one us good
Most of the effect is the level of the currency not the
differential of the US rate
§
Law of one price
Sometimes ppl use real exchange rate to mean
baskets of goods
Same concept as law of one price
®
□
§
○
-
Slide 6
Bookmark added at 11:24 in Audio 1
○
You can take local currency price of bigmacs around the
world, convert them to us dollars and then figure out where
you should buy the big mac
○
If you could easily go costlessly you could go to china this
would be optimal where u can exchange big mac for more
○
-
Slide 7
Bookmark added at 12:10 in Audio 1
○
If fed decides to increase FFR
Increase in FFR leads to increase in borrowing costs and
increase in yield of borrowing securties
§
○
In the way that were defining nom exchange rate
Increase in int rate moves in same direction as nominal
exchange rate
§
○
Bc we have sticky prices, a strengthening of us dollar leads to
strengthening of exchange rate
Domestic and foreign price are sticky
§
Nom exchange rate is increasing
§
Leads to increase in numerator and increase in
exchange rate
§
○
In turn NX go down when real exchange rate appreciates
Leads ______
§
When real exchange rtate is greater than one u wanna
buy goods from abroad
Increase in real ex --> decrease x ^M --> decrease
NX
□
§
○
Inc/dec of FFR --> inc/dec nom exc rate -->
○
-
Slide 8
Bookmark added at 14:28 in Audio 1
○
IS/LM model
3 curves
Fe line
No change -- we havent changed the
production function
®
□
LM curve
Nothing changes on asset market because
fed's goals are the same
®
□
Goods market
Instead of only producing for domestic
econ
Output Y=C+I+G+NX
◊
This leads to an equation that says
excess saving in econ has to find its
place in the rest of the wolrd
This excess saving --> NX
}
S-I=NX
}
◊
®
Open econ IS curve is combo of Y and r
Now having it such that Sd-Id+NX
It now has to be price that
clears S-I=NX
}
◊
®
□
§
○
-
Slide 9
Now I have S, I, NX
○
We have to combine S and I into one line and NX is another
line
○
S-I leads to upward sloping curve while NX is a dowanward
sloping curve
○
S-I is upward slopnig bc w output held constant, increase in
real int rate lads to inc in saving and dec in investment
○
Bookmark added at 17:51 in Audio 1
GRAPH
Pu s&I into one curve (S-I)
Low saving - a lot of investment leads to a
little bit of S-I
Could be negatibe
◊
®
High saving - little bit of investment leads
to a lot of S-I
®
□
Downward sloping NX curve
High real int rates means that USD is strong
and when its strong u import a lot export a
little
NX IS SMALL
◊
High exchange rate, low NX
◊
Low real int rate, weak dollar, high
NX
◊
®
□
Equil is where S-I=NX OR where Y-C-G-I=NX
This is the same as Y=C+I+G+NX
®
□
-
Slide 10
Goods market equil is S-I=NX or C+I+G+NX
○
Upward sloping S-I downward sloping NX
○
-
Slide 11
Bookmark added at 24:57 in Audio 1
Real int rate S-I
When u increase current output, current income goes
up
Some goes to inc saving while some goes to inc
consumption
□
Inv stays constant bc investment is linked to
future output
□
Even if u invest more today it doesn’t lead to
output but rather expected future condition not
whats happening today so inv doesn’t react
□
Inv stays constant and S-I curve shifts to the rigt
S-I
®
□
§
When current output goes up, current income goes up
PVLR goes up, consumption goes up □
You go to walmart ocnsume more domestic AND
foreign goods
□
NX goes down □
§
Increase in income leads to decrease in real int rate
§
IS curve just as in closed econ version is also downward
sloping
§
○
When current output goes up income goes up
Production goes up, AD goes up, income goes up
§
When increase in current output leads to inc in crrent
income, u have increase in pVLR
Save more bc u want to smooth consumption
over time
□
§
NX is relationship btwn
Real int rate is high, import more, export less, NX
is low
Real int rate is low , real excahgen rate
export more, import more, NX is high,
downward NX curve
Rel between _______ is captured in
the NX curve itself which is why its
dowanward sloping
◊
When u draw IS line its in terms of
current income only
◊
®
□
Higher output is linked with lower real int rate as
in open econ IS curve
□
§
○
-
Slide 12
Bookmark added at 39:37 in Audio 1
To derive IS curve
Need to know what happens to r
§
○
-
Slide 13
Bookmark added at 41:37 in Audio 1
○
All factors that shift IS curve in closed econ also shift it in
open econ
Increase in expected future income makes you
ocnsume more today, decreases saving, increases in IS
curve
§
Firms might only be willing to invest if _____- is
sustained
§
Might be better for them to invest in new maturiteis
and equpiment than to hire more workers
§
First order effect: increase in expected fture income
leads to increase in PVLR, increase in consumption
Decrease in saving, increase in spending, increase
in marginal product of capital also increases IS
curve
□
§
○
Factors that shift a country's NX shift the open econ curve up
Increase in IS curve can shift IS curve up
§
ECB shifting european int rates
Leads u to want to own european assets, supply
dollar to buy euro
Leads to appreaciation of Euro
®
□
§
Leads to increase in our NX and our IS curvestar
represents foreign variables
§
High demand for domestic exports leads to increase in
X and thus NX
§
○
-
Slide 15
Bookmark added at 57:00 in Audio 1
AD curve is now C+I+G+NX
○
___ has impact on constant (a bar) of AD curve
○
-
Slide 16
Increase in FFR
Leads to decrease in consumption
§
Readces investment
§
Increase in AD, so it goes down
§
Increase in nominal int rate leads to net appreciation of
USD
Pushes up imports, diminisming _____□
Now MP affects AD, consumption, NX□
§
○
Firm has to look at marginal benefit of investing vs cost
This is what investment leads u to benefit from when
its fully installed
Cost is user cost of capital which is _______ □
§
Cost is now, beefit is later
§
○
-
Slide 19
Does depreciation f Yen give japan a competitive advante in
the global market
Yes. Low yen means w japanese prices being sticky,
goods are cheap to rest of world while rest of world is
expensive to japanaese ppl
Eleads to increase in jap exports 1)
Decrease in US ____
Comes from fact that local currency prices
are sticky
a)
2)
i.
A.
Impact of depreciation fo Yen on US trade w japan
Low yen, jap goods are cheap for americans, us goods
are expensive
i.
B.
C what are short run impacts on US IS curve and US outputC.
-
Slide 21
From US POV NX went down this means that depreciation of
real int rate that clears economy goods market equil --> shift
down of IS Cruve
○
-
Slide 22
Using AS/AD framework
Following depreciation us ____ goes down implying AS
curve stays the same implying AD curve goes down
implyig output and inflation also goes down
i.
D.
-
Slide
Should fed increase or decrease FFR
Fed should decrease FFR
This has impact on C, I, NX 1)
i.
E.
Wha ttype of OMO
Buy bonds in exchange for cash ---> i.
Fed should buy govt securities
Increases MS and decreases FFR1)
ii.
Decrease in FFR drives down a series of ---iii.
F.
How would a decrease in FFR stimulate output and inflation
Channel for investment --
Investment is also increased1)
Investment increases today to have more capital
tomorrow
2)
Decrease in FFR lowers user vost of capital which
___ inv today
By decreasing ucost of capital its cheaper to
have more capital --- inc current
investment-- current inv is not fixed,
current capital stock is fixed
a)
3)
i.
NX --
Decrease in FFR would cause USD ot depreciate
and therefore NX would go up
1)
Decrease in FFR leads to decrease in US nominal
int rates and US skills
Ppl don’t want to dump US assets in
exchange to foreign currencies -->
weakening of USD --> inc us exports, dec in
us imports, dec in us imports
Sterilizes action of japani)
a)
2)
ii.
Shock --- japan decided to push a bunch of yen into
global market, depreciating yen against currenies, led
yen to depreciate vis a vis USD
Fed is going to come in decrease FFR, and sterilize
impact on US econ
1)
iii.
G.
-
Slide 25
Move from point 1 to point 2 --d epreciation of yen against
UDD leads to lower NX lower AD
At point 2 firms demand for product is below potential
§
Firms decrease prices to move bak to potential
§
At point 3 fed says ____
We need to spur econ growth by decreasing ffr□
§
AD goes up thru C, I, NX
you move from point 3 to point 4□
At point 4 firms realize they re operating above
potential
Bring prices up, move back to point 4
®
□
§
○
-
Lecture 20
Monday, April 9, 2018 10:31 AM
Audio 1
Audio recording started: 10:31 AM Monday, April 9, 2018
Slide 4
Bookmark added at 05:45 in Audio 1
○
The nominal exchange rate (E) is # of foreign currencies one
need sto purchase one US Dollar
○
-
Slide 5
Real exchange rate is the # of foreign goods one can purchase
w one US good
○
Bookmark added at 06:15 in Audio 1
○
Foreign goods are cheap to the extent that u can get more
eforeign goods for one us good
Most of the effect is the level of the currency not the
differential of the US rate
§
Law of one price
Sometimes ppl use real exchange rate to mean
baskets of goods
Same concept as law of one price
®
□
§
○
-
Slide 6
Bookmark added at 11:24 in Audio 1
○
You can take local currency price of bigmacs around the
world, convert them to us dollars and then figure out where
you should buy the big mac
○
If you could easily go costlessly you could go to china this
would be optimal where u can exchange big mac for more
○
-
Slide 7
Bookmark added at 12:10 in Audio 1
○
If fed decides to increase FFR
Increase in FFR leads to increase in borrowing costs and
increase in yield of borrowing securties
§
○
In the way that were defining nom exchange rate
Increase in int rate moves in same direction as nominal
exchange rate
§
○
Bc we have sticky prices, a strengthening of us dollar leads to
strengthening of exchange rate
Domestic and foreign price are sticky
§
Nom exchange rate is increasing
§
Leads to increase in numerator and increase in
exchange rate
§
○
In turn NX go down when real exchange rate appreciates
Leads ______
§
When real exchange rtate is greater than one u wanna
buy goods from abroad
Increase in real ex --> decrease x ^M --> decrease
NX
□
§
○
Inc/dec of FFR --> inc/dec nom exc rate -->
○
-
Slide 8
Bookmark added at 14:28 in Audio 1
○
IS/LM model
3 curves
Fe line
No change -- we havent changed the
production function
®
□
LM curve
Nothing changes on asset market because
fed's goals are the same
®
□
Goods market
Instead of only producing for domestic
econ
Output Y=C+I+G+NX
◊
This leads to an equation that says
excess saving in econ has to find its
place in the rest of the wolrd
This excess saving --> NX
}
S-I=NX
}
◊
®
Open econ IS curve is combo of Y and r
Now having it such that Sd-Id+NX
It now has to be price that
clears S-I=NX
}
◊
®
□
§
○
-
Slide 9
Now I have S, I, NX
○
We have to combine S and I into one line and NX is another
line
○
S-I leads to upward sloping curve while NX is a dowanward
sloping curve
○
S-I is upward slopnig bc w output held constant, increase in
real int rate lads to inc in saving and dec in investment
○
Bookmark added at 17:51 in Audio 1
GRAPH
Pu s&I into one curve (S-I)
Low saving - a lot of investment leads to a
little bit of S-I
Could be negatibe
◊
®
High saving - little bit of investment leads
to a lot of S-I
®
□
Downward sloping NX curve
High real int rates means that USD is strong
and when its strong u import a lot export a
little
NX IS SMALL
◊
High exchange rate, low NX
◊
Low real int rate, weak dollar, high
NX
◊
®
□
Equil is where S-I=NX OR where Y-C-G-I=NX
This is the same as Y=C+I+G+NX
®
□
-
Slide 10
Goods market equil is S-I=NX or C+I+G+NX
○
Upward sloping S-I downward sloping NX
○
-
Slide 11
Bookmark added at 24:57 in Audio 1
Real int rate S-I
When u increase current output, current income goes
up
Some goes to inc saving while some goes to inc
consumption
□
Inv stays constant bc investment is linked to
future output
□
Even if u invest more today it doesn’t lead to
output but rather expected future condition not
whats happening today so inv doesn’t react
□
Inv stays constant and S-I curve shifts to the rigt
S-I
®
□
§
When current output goes up, current income goes up
PVLR goes up, consumption goes up □
You go to walmart ocnsume more domestic AND
foreign goods
□
NX goes down □
§
Increase in income leads to decrease in real int rate
§
IS curve just as in closed econ version is also downward
sloping
§
○
When current output goes up income goes up
Production goes up, AD goes up, income goes up
§
When increase in current output leads to inc in crrent
income, u have increase in pVLR
Save more bc u want to smooth consumption
over time
□
§
NX is relationship btwn
Real int rate is high, import more, export less, NX
is low
Real int rate is low , real excahgen rate
export more, import more, NX is high,
downward NX curve
Rel between _______ is captured in
the NX curve itself which is why its
dowanward sloping
◊
When u draw IS line its in terms of
current income only
◊
®
□
Higher output is linked with lower real int rate as
in open econ IS curve
□
§
○
-
Slide 12
Bookmark added at 39:37 in Audio 1
To derive IS curve
Need to know what happens to r
§
○
-
Slide 13
Bookmark added at 41:37 in Audio 1
○
All factors that shift IS curve in closed econ also shift it in
open econ
Increase in expected future income makes you
ocnsume more today, decreases saving, increases in IS
curve
§
Firms might only be willing to invest if _____- is
sustained
§
Might be better for them to invest in new maturiteis
and equpiment than to hire more workers
§
First order effect: increase in expected fture income
leads to increase in PVLR, increase in consumption
Decrease in saving, increase in spending, increase
in marginal product of capital also increases IS
curve
□
§
○
Factors that shift a country's NX shift the open econ curve up
Increase in IS curve can shift IS curve up
§
ECB shifting european int rates
Leads u to want to own european assets, supply
dollar to buy euro
Leads to appreaciation of Euro
®
□
§
Leads to increase in our NX and our IS curvestar
represents foreign variables
§
High demand for domestic exports leads to increase in
X and thus NX
§
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Slide 15
Bookmark added at 57:00 in Audio 1
AD curve is now C+I+G+NX
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___ has impact on constant (a bar) of AD curve
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Slide 16
Increase in FFR
Leads to decrease in consumption
§
Readces investment
§
Increase in AD, so it goes down
§
Increase in nominal int rate leads to net appreciation of
USD
Pushes up imports, diminisming _____□
Now MP affects AD, consumption, NX□
§
○
Firm has to look at marginal benefit of investing vs cost
This is what investment leads u to benefit from when
its fully installed
Cost is user cost of capital which is _______ □
§
Cost is now, beefit is later
§
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Slide 19
Does depreciation f Yen give japan a competitive advante in
the global market
Yes. Low yen means w japanese prices being sticky,
goods are cheap to rest of world while rest of world is
expensive to japanaese ppl
Eleads to increase in jap exports 1)
Decrease in US ____
Comes from fact that local currency prices
are sticky
a)
2)
i.
A.
Impact of depreciation fo Yen on US trade w japan
Low yen, jap goods are cheap for americans, us goods
are expensive
i.
B.
C what are short run impacts on US IS curve and US outputC.
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Slide 21
From US POV NX went down this means that depreciation of
real int rate that clears economy goods market equil --> shift
down of IS Cruve
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Slide 22
Using AS/AD framework
Following depreciation us ____ goes down implying AS
curve stays the same implying AD curve goes down
implyig output and inflation also goes down
i.
D.
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Slide
Should fed increase or decrease FFR
Fed should decrease FFR
This has impact on C, I, NX 1)
i.
E.
Wha ttype of OMO
Buy bonds in exchange for cash ---> i.
Fed should buy govt securities
Increases MS and decreases FFR1)
ii.
Decrease in FFR drives down a series of ---iii.
F.
How would a decrease in FFR stimulate output and inflation
Channel for investment --
Investment is also increased1)
Investment increases today to have more capital
tomorrow
2)
Decrease in FFR lowers user vost of capital which
___ inv today
By decreasing ucost of capital its cheaper to
have more capital --- inc current
investment-- current inv is not fixed,
current capital stock is fixed
a)
3)
i.
NX --
Decrease in FFR would cause USD ot depreciate
and therefore NX would go up
1)
Decrease in FFR leads to decrease in US nominal
int rates and US skills
Ppl don’t want to dump US assets in
exchange to foreign currencies -->
weakening of USD --> inc us exports, dec in
us imports, dec in us imports
Sterilizes action of japani)
a)
2)
ii.
Shock --- japan decided to push a bunch of yen into
global market, depreciating yen against currenies, led
yen to depreciate vis a vis USD
Fed is going to come in decrease FFR, and sterilize
impact on US econ
1)
iii.
G.
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Slide 25
Move from point 1 to point 2 --d epreciation of yen against
UDD leads to lower NX lower AD
At point 2 firms demand for product is below potential
§
Firms decrease prices to move bak to potential
§
At point 3 fed says ____
We need to spur econ growth by decreasing ffr□
§
AD goes up thru C, I, NX
you move from point 3 to point 4□
At point 4 firms realize they re operating above
potential
Bring prices up, move back to point 4
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□
§
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Lecture 20
Monday, April 9, 2018 10:31 AM
Document Summary
Audio recording started: 10:31 am monday, april 9, 2018. The nominal exchange rate (e) is # of foreign currencies one need sto purchase one us dollar. Real exchange rate is the # of foreign goods one can purchase w one us good. Foreign goods are cheap to the extent that u can get more eforeign goods for one us good. Most of the effect is the level of the currency not the differential of the us rate. Sometimes ppl use real exchange rate to mean baskets of goods. You can take local currency price of bigmacs around the world, convert them to us dollars and then figure out where you should buy the big mac. If you could easily go costlessly you could go to china this would be optimal where u can exchange big mac for more. Increase in ffr leads to increase in borrowing costs and increase in yield of borrowing securties.
