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what is the paradox of saving
as people attempt to save more, the result is both a decline in output and unchanged saving IN THE SHORT RUN

mechanism behind paradox of savingI=S perspective
 s=c0+MPS(disposable income)
 when consumer wants to save more, c0 ↓
 1)c0 ↑, s ↑
 2)C↓, Z ↓, by eqm, Y↓, S↓

mechanism behind paradox of savingY=Z perspective
 I=S+TG
 consumer's decision to save more cannot affect I, G, T
 S does not change

how to calculate eqm output and demand
 Y, Yd, C, multiplier, autonomous spending
 output: mutliplier
 demand: C+I+G

why is tax called automatic stabilizer when tax depend on Y?
 multiplier=(1c1+c1t1)
 autonomous spending↑, Y↑, T↑, lessen the ↑in Y
 economy responds less to changes in autonomous spending than in the case where T is independent of Y

suppose t depends on Y, if autonomous spending ↓, why is balanced budget requirement destabilizing?
 Y↓ and T↓
 to balance budget, ↓G
 Y further ↓

suppose I=b0+b1Y, if b0 ↑, what is the ↑ in investment?

equilibrium condition in the financial market(LM relation) and explain

shifting variables of demand for money

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


why is ZZ flatter than 45deg line?
 increase in the output will not lead to an oneforone increase in demand
 (by a factor of MPC)

shifting variables of IS curve

is monetary expansion more investment friendly than fiscal expansion?
 Yes
 fiscal expansion:Y&I increase
 monetary expansion: Y increase and i decrease

changes in autonomous spending has what effect on I

if investment is independent of interest rate
 IS curve is a vertical line
 fixed ouput

Decrease in money demand has equivalent effect as

factors that shift money demand
 Use of atm: left
 Worry about bank failure: right
 decrease in price level: right

If Y is a variable in C and I
Z is an increasing function of Y

direct effect(of output on demand) of the multiplier
 captured by c1+b1
 horizontal shift of the IS curve

indirect effect of the multiplier

what is crowding out and its implication
 increase in output due to shift in IS curveeqm output
 effect of fiscal policy on interest rate limits the ability of fiscal policy to influence output

larger multiplier mean the sensitivity of consumption and investment to output is

Implication of balanced budget change
follow the direction of G because the effect of G is always greater than that of T

investment is very sensitive to interest rate
 a flatter IS slope
 a less effective fiscal policy(small multiplier)

increasing M in higher MPC countries leads to...
since flatter IS
larger increase in output and smaller decrease in i

