ECON 330D2 Chapter Notes - Chapter 12: Real Interest Rate, Aggregate Supply, Aggregate Demand

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coralyak374

19 Apr 2013

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The primary feature that makes a keynesian macroeconomic model different is that some prices and wages aren"t completely flexible- sticky. The new keynesian model is essentially identical to the monetary intertemporal model except that price level is not sufficiently flexible for the goods market to clear in the short run. In contrast to the monetary intertemporal model (mim), the new keynesian model (nk) will have the property that money isn"t neutral. When the monetary authority increases money supply, there will be an increase in aggregate output and employment. Given the failure of the labour market to clear, the nk sticky wage model will have different properties than mim. Keynesian strongly believe that the government should play an active role in the economy, through the monetary and fiscal policy. When the monetary authority increases the money supply, there will be an increase in aggregate output and employment.

Related Questions

Two fundamental problems that often arise in answering a macroeconomic question are: Hidden biathe ADE curve will be perfectly flat. the ADE curve will be perfectly vertical.

ses that keep one from honestly weighing arguments, and problems that restrict access to sufficient data. Confusion over how to sort out conflicting arguments and evidence, and working with flawed models. Hidden biases and a lack of intellectual courage. Hidden biases that keep one from honestly weighing arguments and evidence, and confusion over how to sort out conflicting arguments and evidence.

Question 2 5 pts Intellectual courage in a macroeconomic context is: the willingness to fairly assess material that we havenât previously thought about seriously despite a strong negative reaction to that material. valuable when one has strongly held beliefs about the macroeconomy. being aware of any potential conflicts that might compromise the critical-thinking process and bring those conflicts into that same critical-thinking process. all of the above.

Question 3 5 pts A useful method for sorting through a complex issue when sources conflict is: break the issue into smaller, more manageable subissues. use a matrix to present the conflicts in a clearer manner. both of the above. none of the above.

Question 4 5 pts Which of the following is not a standard for evaluating conflicting claims: Simplicity Relevancy Logicalness Clarity

Question 5 5 pts In terms of the ASR/ADE model, if one believes that the Classical Macroeconomic Model is the best explanation for how the macroeconomy functions: The ASR curve will be perfectly flat. The ASR curve will be perfectly vertical. The ADE curve will be perfectly flat. The ADE curve will be perfectly vertical.

Question 6 5 pts In terms of the ASR/ADE model, if one believes that the Keynesian Model is the best explanation for how the macroeconomy functions: the ASR curve will be perfectly flat. the ASR curve will be perfectly vertical.Question 7 5 pts Which curve in the ASR/ADE model essentially embodies the Phillips Curve? the Fed Reaction Rule the investment curve the ADE curve the ASR curve

Question 8 5 pts Using the ASR/ADE Model, suppose that GDP is below full-employment GDP and inflation is below the targeted inflation rate. In that case, a possible, desirable macroeconomic policy would focus on: generating a positive supply shock. shifting the ADE curve to the right. cutting taxes. All of the above.

Question 9 5 pts Using the ASR/ADE Model, suppose that GDP is above full-employment GDP and inflation is above the targeted inflation rate. In that case, a possible, desirable macroeconomic policy would focus on: generating a positive supply shock. shifting the ADE curve to the right. cutting taxes. All of the above.

Question 10 5 pts Using the ASR/ADE Model, suppose that GDP is below full-employment GDP and inflation is above the targeted inflation rate. In that case, a possible, desirable macroeconomic policy would focus on: raising taxes. shifting the ADE curve to the right. stimulatory monetary policy. None of the above.

Question 11 5 pts Using the ASR/ADE Model, suppose that GDP is above full-employment GDP and inflation is below the targeted inflation rate. In that case, a possible, desirable macroeconomic policy would focus on: generating a positive supply shock. shifting the ADE curve to the right. cutting taxes. None of the above.

Question 12 5 pts Using the ASR/ADE Model, suppose that GDP is below full-employment GDP and inflation is below the targeted inflation rate. In that case, a possible, desirable macroeconomic policy would be to adopt: a stimulatory fiscal policy. a stimulatory monetary policy. either of the above. None of the above.

Question 13 5 pts Using the ASR/ADE Model, suppose that GDP is above full-employment GDP and inflation is above the targeted inflation rate. In that case, a possible, desirable macroeconomic policy would focus on: a stimulatory fiscal policy. a stimulatory monetary policy. either of the above. None of the above.

Question 14 5 pts Using the ASR/ADE Model, what is a potential problem with a positive supply shock? It drives inflation down, possibly below the ideal level. It increases employment and drives the inflation rate up. It makes it harder for businesses to compete. It results in a loss of jobs to foreign countries.

Question 15 5 pts In terms of the ASR/ADE Model, fiscal policy: shifts the ASR curve. shifts the ADE curve. both of the above. none of the above.

Question 16 5 pts In terms of the ASR/ADE Model, monetary policy: shifts the ASR curve. shifts the ADE curve. both of the above. none of the above. Flag this

Question 17 5 pts In terms of the ASR/ADE Model, if the Fed decides that the ideal inflation rate should be higher: it will take actions that will shift the ASR curve vertically up. it will reduce the money supply to drive interest rates up. it will take actions that shift the ADE curve vertically up. none of the above.

Question 18 5 pts In terms of the ASR/ADE Model, if the nation is already at full employment and exports go up: GDP will fall. Inflation will rise. The ASR curve will shift to the right. Inflation will fall.

Question 19 5 pts In terms of the ASR/ADE Model, if business becomes more optimistic (that is, their animal spirits rise): GDP will fall. The ASR curve will shift to the right. Inflation will fall. the ADE curve will shift to the right.*

Question 20 5 pts In terms of the ASR/ADE Model, if there is an economic depression, which of the following would help get the economy back to full employment: a rise in business optimism. an increase in government spending. a rise in the money supply. all of the above.

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1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory

Answer: Ferguson believes that an increase in the government deficit could produce a crowding-out-effect. First, I will touch base on fiscal policy. Well, what is it? Basically, it adjusts the nationâs spending amount which increases the economyâs deficit to close a recessionary gap, which therefore increases the the demand for loans, meaning people want to borrow money. An increase in demand for loans leads to an increase in interest rates. Higher interest rates lead to a decrease in investment and interest-sensitive consumer spending, so both C and I decrease. Thatâs what the crowding-out-effect is, the decrease in investment due to higher interest rates.

>in Deficit = >in Demand for Loans = >in interest rates =

The government speeds up the economy by deficit spending, they crowd out consumers and investors with high interest rates. So what this means is that the government is attempting to help the economy but it is actually hurting the economy. The reason why I think Ferguson believes this is because of what he says in his debate at the New York Review of Books, that âyou canât be both a monetarist and a Keynesian simultaneouslyâat least I canât see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.â He continues on in the interview to say that the Fed has minted out a fresh $1.75 billion in bonds and that no one is going to buy them. Driving up bonds will increase interest rates which increases mortgage rates which is why he basically doesnât agree with the Keynesian theory.

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Answer: To start I think Krugman believes that the Fiscal policy is effective. It is effective when the Liquidity-Money (LM) curve is horizontal. It creates the crowding in effect. The supply of money is constant so it creates money demanded to be interest inelastic, meaning it doesnât change. So if the government wishes to stimulate the economy, it leaves interest rates at a constant rate, and an increase in investment and saving, therefore helping the economy close the gap on a recession. There is an indifference between money and bonds so this makes fiscal policy effective. So then we get into a monetary expansion, meaning we have an increase in the money supply. Well with the liquidity trap, we get the case that the investment-savings (IS) curve is horizontal. So when the government increases the money supply, investment responds to rapidly changing interest rates, which would decrease the money demanded, making monetary policy effective. But the liquidity trap becomes apparent because interest rates cannot fall below zero percent. This is when monetary policy would become ineffective because interest rates arenât declining meaning investment wouldnât continue. Krugman in his blog basically argues this. He states âMost spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions like the present, in which private demand has fallen so far that the economy remains depressed even at a zero interest rate.â He sums up his argument for the liquidity trap and explains his logic behind the investment-savings, liquidity-money curve, and that is why he disagrees with Ferguson.

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

Answer: One thing I found interesting was George Soroâs point in the debate in the New York review of books. He states âThe other feature is that the financial system collapsed of its own weight. That contradicted the prevailing view about financial markets, namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. Those disturbances were supposed to occur in a random fashion. Markets were seen basically as self-correcting. That paradigm has proven to be false. So we are dealing not only with the collapse of a financial system, but also with the collapse of a worldview.â He continues to mention how Obama has 2 problems he has to face and how people who are viewing this crisis the same as the previous financial crisis, are making a huge mistake. To explain he states this: âBut when you have a collapse of credit thereâs only one source of credit that is still credible, and thatâs the state: the Federal Reserve and the Treasury. Then you have actually to inject a lot more leverage and money into the economy; you have to print money as fast as you can, expand the balance sheet of the Federal Reserve, increase the national debt. And that is, in fact, what has been done, which is the right thing to do. But then once this policy is successful, you have to rein in the money supply as fast as you can.â I think Soro is agreeing with Krugman and the monetary policy of pumping money into the economy. It will raise the money supply which eventually is left for us to capitalize on supply and let our GDP. Now I find this interesting because he is also agreeing with Krugmanâs IS-LM model, and later on, we come to find out that even Ferguson had come to an agreement with Krugmanâs points, with the exception being that the United States was a powerhouse, and therefore the European Union would eventually see its downfall.

Please make comments to the answer of discussion I provided above(at least 300 words total). And you can start with "I agree with you on some points... But I disagree with you on some points".

All the questions from "Output, Exchange Rates, Macroeconomic Policy, and Open-economy IS-LM-FX Model."

Please answer these questions completely. It is important to me.

Thanks!

6. The TB (i.e., EX â IM) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?

A. Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.

B. Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.

C. Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.

D. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.

11. A shift to the left by the IS curve can be achieved by all of the following EXCEPT a(n):

A. decrease in government spending.

B. increase in taxes.

C. increase in the foreign interest rate.

D. decrease in future expected exchange rate Ee.

13. The LM curve will shift to the left, if there is a(n):

A. increase in money supply.

B. increase in interest rate.

C. decrease in money supply.

D. increase in output.

14. If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

A. It will rise.

B. It will stay the same.

C. It will fall.

D. It is uncertain what will happen.

15. Using the IS-LM-FX framework, if we observe that income and interest rate both rise in the Eurozone, this could be the result of

A. contractionary monetary policy pursued by the European Central Bank.

B. expansionary monetary policy pursued by the Federal Reserve System (U.S. central bank).

C. a stock market crash in the Eurozone.

D. increases in government spending in the Eurozone.

18. Whenever U.S. government spending increases,

A. output will not change at all if the U.S. fixes the exchange rate of dollar against major currencies.

B. output will increase by a larger amount when dollar floats than when dollar pegs to other currencies.

C. output will increase by a smaller amount when dollar floats than when dollar pegs to other currencies.

D. output will not change at all since the U.S. adopts a flexible exchange rate.

ECON 330D2 Chapter Notes - Chapter 12: Real Interest Rate, Aggregate Supply, Aggregate Demand

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