ECON CH4-5

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yhliuaa
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236696
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ECON CH4-5
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2013-10-17 13:05:45
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ECON CH4
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ECON CH4-5
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  1. variables which affect demand for money
    NOMINAL income $Y, +

    i, (-)
  2. why Interest rate has a negative effect on money demand
    • as interest rate increase,
    • return of bonds increase,
    • people put more wealth on bonds instead of money
  3. equilibrium condition in the financial market(LM relation) and explain
    MS=$Y L(i)
  4. What does M(money supply) depends on
    monetary policy of the central bank
  5. shifting variables of demand for money
    $Y
  6. effect of buying bonds on bond price and interest rate and implications
    • decrease interest rate,
    • increase bond price
  7. effect of changing the RRR
    increase M
  8. a decision of the central bank to lower the interest rate is equivalent to...
    increasing money supply
  9. monetary policy instruments for the central bank to change the money supply
    interest rate(federal funds rate, discount rate)

    required reserve ratio

    open market operations
  10. shifting variables of LM curve
    M
  11. deriving the LM curve
    • increase Y
    • Md curve shifts right
    • eqm interest rate increase
    • (one point of LM)
  12. investment depends on
    level of sales(Y, +)

    interest rate(i, -)
  13. why investment depends on Y
    • as output changes, 
    • demand changes, 
    • firms change investment in order to keep up capacity with demand
  14. why ↓M changes output
    i↑, investment↓, demand↓, output↓
  15. why interest rate has a negative effect on investment
    • high interest rate,
    • cost of borrowing money increase
    • investment decrease
  16. what are the measures of fiscal expansion
    • cut tax
    • increase government spending
  17. why is Z an increasing function of Y?
    • Y increase, 
    • C and I increase,
    • demand for goods increase
  18. why is ZZ flatter than 45deg line?
    • increase in the output will not lead to an one-for-one increase in demand
    • (by a factor of MPC)
  19. shifting variables of IS curve
    ZZ(demand for goods)
  20. Deriving the IS curve
    • increase I
    • ZZ curve shift down(through decrease in investment)
    • eqm output decrease
    • (obtain one point on IS curve)
  21. exogenous variables in the ISLM model
    fiscal policy and monetary policy
  22. how fiscal expansion change ISLM model
    increases the demand in goods market

    shift IS curve to the right
  23. how monetary expansion change ISLM model
    increase the money supply

    shift LM curve to the right
  24. is monetary expansion more investment friendly than fiscal expansion?
    Yes

    fiscal expansion:Y&I increase

    monetary expansion: Y increase and i decrease
  25. changes in autonomous spending has what effect on I
    ambiguous
  26. if investment is independent of interest rate
    • IS curve is a vertical line
    • fixed ouput
  27. Decrease in money demand has equivalent effect as
    Increase in money supply
  28. factors that shift money demand
    Use of atm: left

    Worry about bank failure: right

    decrease in price level: right
  29. Looking at the effect of deficit reduction on investment from investment-saving relationship
    I=S+(T-G)

    T-G↑, I↑

    S=Y-T-C

    Y&C↓, Y↓>C↓(MPC), S↓

    ambiguous
  30. If Y is a variable in C and I
    Z is an increasing function of Y
  31. Let M/P=d1Y-d2i, slope of the LM curve…
    D1/d2
  32. direct effect(of output on demand) of the multiplier
    captured by c1+b1

    horizontal shift of the IS curve
  33. indirect effect of the multiplier
    captured by b2d1/d

  34. what is crowding out and its implication
    increase in output due to shift in IS curve-eqm output

    effect of fiscal policy on interest rate limits the ability of fiscal policy to influence output
  35. larger multiplier mean the sensitivity of consumption and investment to output is
    larger
  36. Effectiveness of fiscal policy depends on
    Multiplier
  37. crowing out(con’t)-why and how the slope of LM curve affect effectiveness of fiscal policy(interest rate)
    • G increase,
    • Y increase
    • money demand increase
    • interest rate increase

    amount of increase in interest rate depends on slope of LM curve

    • d1/d2 is smaller
    • the flatter LM curve
    • the less increase in interest rate
    • less crowding out
  38. Implication of balanced budget change
    follow the direction of G because the effect of G is always greater than that of T
  39. if there is fiscal contraction, what variables must change?
    Y, C&i
  40. if consumer confidence change, what variables must change?
    C, Y, i
  41. if money supply change, what variables must change?
    • i, I, Y, C
    • (no change if investment is independent on interest rate)
  42. definition of real money supply
    stock of money measured in terms of goods
  43. dynamic assumption of ISLM model...
    based on the assumption, changing M will lead to... and changing fiscal policy will lead to...
    • economy always on LM, only moves slowly to IS
    • immediate change in i and no initial change in Y
    • gradual change in i and gradual change in Y
  44. with IS↑ and LM↓, under what condition will I be ambiguous?
    • i must ↑
    • if output ↓, I is lower
    • output↑, I is ambiguous
  45. slope and intercept of the IS curve
    • -(1-c1-b1)/b2; 
    • c0-c1T+b0+G
  46. investment is very sensitive to interest rate
    • a flatter IS slope
    • a less effective fiscal policy(small multiplier)
  47. increasing M in higher MPC countries leads to...
    • since flatter IS
    • larger increase in output and smaller decrease in i
  48. eqm Y ISLM combined: multliplier
    1-c1-b1+b2d1/d2
  49. eqm Y ISLM combined: autonomous spending
    c0-c1T+b0+b2/d2(M/P)+G

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