Intermediate macroeconomics Lecture 8
Intermediate Macroeconomics Lecture 8
The Money market LM Curve OThe theory of liquidity preference M =L(r,Y P L(r) M/P
The Money Market & LM Curve The theory of liquidity preference ( , ) d M L r Y P = s M M P P − − = r M/P M P − − L r( )
The Money market LM Curve ◆ Paul volcker To fight high inflation >Tight money policy (oct.1979) ar Inflation(GDP deflator 78 7.17 79 8.40 80 9.17 9.34 82 6.14 83 3.97 3.7 3.17 2.18
The Money Market & LM Curve Paul Volcker To fight high inflation → Tight money policy (Oct. 1979) Year Inflation (GDP deflator) 78 7.17 79 8.40 80 9.17 81 9.34 82 6.14 83 3.97 84 3.74 85 3.17 86 2.18
The Money market LM Curve How does such a monetary tightening nfluence interest rate It depends LR: Fisher effect: inflation↓→ interest rate↓ SR: Liquidity theory:M↓→ interest rate↑
The Money Market & LM Curve How does such a monetary tightening influence interest rate? It depends… LR: Fisher effect: inflation↓→ interest rate ↓ SR: Liquidity theory: M ↓→ interest rate ↑
The Money market LM Curve iNcome, money demand, Lm curve M -21 LM L(r, Y2) L(r,YD) M/P Y1 Y2 Y
The Money Market & LM Curve Income, money demand, & LM curve r M/P M P − − L r Y ( , 1) r2 r1 L r Y ( , 2) r Y1 Y2 Y LM
The Money market LM Curve An algebraic example of LM curve -=L(r,Y)=a￥+b a>0b≤O 1m a Y b Pb
The Money Market & LM Curve An algebraic example of LM curve ( , ) M L r Y aY br P = = + a 0 b 0 1 M a r Y b P b = −
Short-Run Equilibrium ◆IS- LM Model LM E=Y=C(Y-T)+I+G M L(r, n) IS P Y o The intersection of IS and LM represents simultaneous equilibrium in the market for goods and services and in the market for real money balances at a give price level
Short-Run Equilibrium IS-LM Model The intersection of IS and LM represents simultaneous equilibrium in the market for goods and services and in the market for real money balances at a give price level E Y C Y T I G = = − + + ( ) ( , ) M L r Y P = IS LM r Y
Exercise ◆P2544, Consider the impact of an increase in thriftiness in the Keynesian Cross. Suppose C=C+c(Y-T),where C is a parameter called autonomous consumption and c is the marginal propensity to consumption a. What happens to equilibrium income when the society becomes more thrifty decline in b. What happens to equilibrium savings? C. Why do you suppose this result is called the paradox of thrift?
Exercise P254 4. Consider the impact of an increase in thriftiness in the Keynesian Cross. Suppose , where is a parameter called autonomous consumption and c is the marginal propensity to consumption. a. What happens to equilibrium income when the society becomes more thrifty (decline in )? b. What happens to equilibrium savings? c. Why do you suppose this result is called the paradox of thrift? C C c Y T ( ) − = + − C − C −
Answer a ∠E=C1+c(Y-7)+/+G E=C+C(-)+l+G
Answer a. E − Y Y 1 E C c Y T I G ( ) − − − − = + − + + 2 E C c Y T I G ( ) − − − − = + − + +
Answer b. Equilibrium savings would not be affected Because in Keynesian Cross, S=I because I does not change s would not change
Answer b. Equilibrium savings would not be affected. Because in Keynesian Cross, S=I, because I does not change, S would not change