- Factors That Shift the Demand Curve 1. Income 2. Wealth 3. Prices of related goods 4. Population 5. Expected price 6. Tastes 7. Other variables
Classical Model
- Factors that Shift the Supply Curve 1. Input prices 2. Price of alternatives 3. Technology 4. Number of firms 5. Expected price 6. Changes in weather or other natural events 7.
Other shift variables
-Change price of a good=change in quantity demanded. -Entire demand curve to shift=change in demand.
The yield of the bond = interest/current price QE3 Definition: It is a monetary policy action taken by the Federal Reserve Bank to lower certain longer-term interest rates Shifting Labor Demand Curve
Shifting the curve -Disposable Income The more income people have the more they want to spend Thus the larger will be the demand for money to purchase things -Wealth The more wealth people have the larger will be their demand for money With an increase in wealth people will hold both more bonds and more money -Many other things (eg. Worries about the safety of other assets, expectations of deflation, technology (ATMs) etc.)
Shifting Supply of Savings
What are the reasons why people hold money? Transactions – we hold money to spend it Precautionary – money saved for emergencies Speculative – money used for potential purchase of assets What are the determinants of money demand? Price level, Interest rate, Real income How does the Federal reserve increase or decrease the money supply? Change in reserve requirements, Change in discount rate, Open-market operations, Buying financial assets a. Issuing stocks/bonds
Shifting the Labor Supply Curve – Size of the population • More people means more labor supplied at the same wage • Thus the labor supply curve shifts out – Tastes for labor and market goods vs. leisure • For example, if people decide they like eating in restaurants more than eating at home they will work more to earn the money to go to restaurants • This would shift the supply curve of labor out since people would want to work more at each wage rate – Taxes on consumption or savings • Either of these would mean that the actual quantity of goods you could buy at the same wage rate would go down so you would supply less labor at the same wage • Thus the supply curve of labor would shift to the left
Shifting the Demand for Savings: – • • – – • • 1.
a. b. c. d.
Anything that makes capital more productive will shift the demand for savings out Technical change or new product that gives some existing projects a higher IRR Cheaper raw material prices could do the same thing Technical change that reduces the cost of capital goods will (probably) shift the demand for investment out Changes in real wages can either increase or decrease the demand for savings depending on whether capital is used to replace workers or to compliment them For example if you are building a road with shovels and the wage goes up you could switch to bulldozers and increase demand for shovels, Or you could hire fewer workers with shovels in which case your demand for shovels would go down).
b. What are the determinants of demand for goods in the short-run model? In the simplest model income moves consumption and that moves demand c. Ad=C(Y)+Id+G+NX (Y is income) Disposable income Wealth Interest rates Expectations (households become more optimistic/pessimistic)
M1 is all the Cash in the hands of the public, Checking account deposits, Travelers checks M2 is M1 plus Savings deposits, Money market deposits ,Money market funds, Certificates of deposit under $100,000 Banks create most money. The largest part of money is deposits at banks. The Federal Reserve determines the level of bank reserves in the economy. During normal times banks will make loans, thus creating deposits, up to the point where the ratio of deposits to reserves is at the maximum allowed by the required reserve ratio. When the Federal Reserve increases available reserves, banks lend out more money creating more money in accounts which is what is counted in M1 and M2
Cause and Effect (Classical Model): Change in the money supply change in price level / change in gov purchases paid for by borrowing crowding out of investment and,or consumption / a limit on interest payments lower than the equilibrium interest rate excess demand for loanable funds / tax on earned interest a reduction in savings and investment / a change in taxes on labor change in employment and labor Federal Open Market Committee: Establishes US Monetary Policy. Open Market purchases: increases money supply and lowers interest rate/Open Market Sales: decreases money supply and raises interest rate AE/AD: C+Ip+G+NX – Equilibrium GDP is the output level when AE intersects the 45line (if AE < GDP = output will decline, if AE > GDP = output will increase) autonomous spending – impulsive. Increases when people are wealthier, optimistic frictional unemployment the only unemployment that exists in the classical model Determinants demand for labor: demand for goods, availability of capital, cost of labor Determinant for demand of goods: income, price buying bonds increases money supply, decrease interest rates selling bonds decreases money supply, increases interest rates Factors affecting level of output from labor supply: productivity, hours avg workers work, fraction of population that isn’t working, size of population. Government interference causes unemployment in classical model bc with policies -> negative externalities. Determinants supply of savings or loanable funds: tax rates, time preferences, age of population, wealth, changes in wage, expectations about future Loanable funds: shares, bonds, savings Taxes in classical model: reduce employment, output, investment MV=PY: moneysupply x velocityofmoneycirculation = pricelevel x GDP Y is fixed in labor market on the basis of real wage. V can vary (assumed to be constant) M is adjusted to P. Keynesian Multiplier: (1/(1-MPC) MPC-slope of consumption. The greater the slope, the multiplier effect is more. MPC determines effect on how large multiplier is. Multiplier is based on mpc, (moneyspend/eachdollarearned) high mpcs show faith in economy leading to job creation when savings doesn’t = planned investment, gov borrow money. Crowd out private business. disposable income = (national income – taxes) money is asset accepted as means of payment M1: cash in hands on public, checking acct deposit, travelers checks. M2: M1 plus savings deposits, money market deposit, money market funds, certificates of deposit under 100k. Federal Reserve System: central bank of US. Used to regulate flow of money, implement monetary policy, supervises and regulates banks, “bank for banks” issues paper currency, clears checks, guides macroeconomy, deals wt financial crisis. 7 governors, 1 chairman, 12districts(each has own fed reserve bank) 9 directors(6 elected by private commercial banks,3elected by board of governors) Fed controls things by open market purchases and sales Federal Reserve Open Market Committee: makes monetary policies&decides on interest rates for loans. Discusses, goals, initiatives, jobs, inflation 7governors,5of12presidents of the districts people hold money bc it’s a means of payment. Don’t have to sell assets. Rise in price level/income level->hold on to more money. Higher nominal interest rate ->hold on to less money Determinants of money demand: price level, interest rate, real income fed reserve increase/decrease money supply by: change in reserve requirements, change in discount rate, open market operations, buying financial assets, issuing stocks/bonds federal reserve targets directly federal funds rate slope: change in consumption/ change in disposable income gov spending in classical model -> provide pure public goods & regulate externalities Determinants of supply of labor: population, wage rate, working condition, attitude of workers, cost of education/training, migration, health, geographical non monetary factors, job satisfaction, quality of work Ricardian equivalence: crowding out is worse if people realize gov is borrowing means taxes in future. Reduce consumption now to save money for future. fiat money: money wt virtually no value. Commodity: value Countercyclical fiscal policy: cutting taxes, quicker than gov spending things that shift supply: taxes on consumption, time preferences, age of population, wealth. Demand: cheaper than raw materials, change in cost of capital goods, technical change or new product that gives some existing products a higher internal rate of return (IRR) fiscal: determined by congress, monetary: determined by money supply rise in real income / rise in price level hold more money qualities of money: unit of value, able to spend it Phillips curve: illustrates feds choice between inflation and unemployment in the short run in classical model: savings is always equal to investment Say’s law: total value of spending money in economy will equal total value of output AE: sum of spending by households, business, gov, final goods&services Banks borrow short&lend long EPR: total employment/population PPF: production possibilities frontier MPC has a major effect on how large the multiplier is high MPCs and high multipliers show faith in the economy; willingness to spend barriers to catch up growth: low output per capita, high population growth, poor institutions when gdp at full employment level – natural rate of unemployment rich countries: discovery based growth poor countries: catch up growth cut in net taxes raises consumption, which crowds out planned investment budget deficit = when government purchases are greater than net taxes price level, real income, interest rates determine how much money people hold GDP: C + I + G + NX (expenditure approach) frictional – in between jobs / structural – mismatch causes jobs cause lack of skills factor payments: gdp: adding up all income earned by households in the economy financial intermediary – a business firm that specializes in brokering between savers and borrowers index number: value of measure in current period/value of measure in base period*100 Production function: shows the total output an economy can produce with different quantities of labor Rule of 70: 70/x money multiplier effect: banking system creates most of the money. Fed determines level of bank reserves in the economy. During normal times, banks will make loans 10-20 times the amount of deposits they hold corresponding with a rrr between 10% and 5%. These loans create new deposits in other banks, allowing another institution to loan out more money, up to their maximum allowed by the required reserve ratio. Federal reserve increases or decreases the money supply: change in reserve requirements, change in discount rate, open market operations, buying financial assets, issuing stocks/bonds increase in value of wealth would lead to more desire to consume, thus lowering the supply of loans.
1.
How is the aggregate demand curve derived?
