RMIT: Economic Test Notes

Topics: Fiscal policy, Macroeconomics, Monetary policy Pages: 4 (602 words) Published: September 29, 2014
W/J model 2 sector: to the right of Ye : Savings > Planned Investments GDP= total market value of final g&p (not measured in monetary units bla bla bla..) At Ye, if X = M, S + T = I + G ,
Price is exogenous and constant
Investment Expenditure: Total exp on machinery etc and CHANGES in total invent/stock Lower output decreases leakages
Monetary accomodation is used together with fiscal policy. It uses monetary policy to offset crowding out effect

C I G NX shifts IS curve, determined by Multiplier and size of change of autonomous exp ke ↑ / I sensitive to i= IS & AD Flat
ke ↓ / I insensitive to i= IS & AD Steep

Multiplier of LM (k) measures sensitivity of Mt to Y. Large K = Sensitive k ↓ or Ma inelastic= LM Flat
k ↑ or Ma elastic= LM Steep
Any changes to Md or Ms unrelated to i/Y will shift LM
Ms ↑ shifts LM to the right (e.g. RRR decreases, MAS prints money) Md ↑ shifts LM to the left (e.g. Confidence in bonds increase) [Md = Ma + Mt] Mt = k.Y | Ma = -f(i) --> R/i ↑ = Ma ↓ ---> Mt ↑ to restore Ms=Md slope of LM depends on Ma & Mt (but more of Ma)

If Ma = 0, LM = vertical
Slope of Ma determined by substituability of cash/bonds
Slope of Mt determined by size of k
Mt = opposite of slope of LM e.g. Mt=-2, LM=2 (slope)
Slope of LM schedule depends on Mt and r/i responsiveness of Ma

R/i ↑ -> Y ↓
R/i responsiveness of IDC does not affect slope of LM
R/i responsiveness of IDC affects slope of IS
Steep LM = Monetary policy effective
Steep IS = Monetary policy ineffective
Liquidity trap = r/i pushed lower and lower = Monetary policy ineffective ↑G --> shift IS to the right by k.△ G and increase Ye by less than that amt (crowding out) AD curve can be derived from IS-LM by shifting LM as △ P via Interest Rate Effect IS Steep = monetary policy weak

LM steep = monetary policy strong
if I & C are unresponsive to r/i / steep / inelastic --> then IS is steep △ P will not affect position of AD

In deriving...
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