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# Macro Final Topic Review - PowerPoint PPT Presentation

Macro Final Topic Review. Savings & Leakage Economic Schools of Thought. DEMAND FOR MONEY. MS. You usually do not have to shift MD The Fed. Controls MS and that moves with monetary policy HOWEVER- sometimes they shift MD on the exam For example:

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### Macro Final Topic Review

Savings & Leakage

Economic Schools of Thought

MS

You usually do not have to shift MD

The Fed. Controls MS and that moves

with monetary policy

HOWEVER- sometimes they shift MD on the exam

For example:

1) If the stock market crashes—people hold more

Money (precautionary demand) and MD shifts right

2) If the price level ↑, then MD shifts right

Money Market

Nominal

Interest

Rate

Demand for Money:

Transactions Demand

Precautionary Demand

Speculative Demand

MD

Qty \$

Price Level changes shifts Demand Curve for Money

↑ Px level shifts MD right

↓Px level shifts MD left

Market for Euros

S

S

Euro Price

1

1

S

S

of a dollar

Dollar Price

1

1

of a Euro

.70

--------------

Euro

--------------

1.43 Dollars

--------------

D

D

1

1

--------------

D

D

1

1

Q

1

Qty of Dollars

Q

Qty of Euros

1

• Relative Price Level

• Real Interest Rate

• Booming Foreign Economy

• GDP =Y = C + I + G + (X – M)

• Leakage to GDP: S + T + M

(S = Savings T= taxes M = Imports)

• Injections to GDP: I + G + X

(Investment, Gov’t, Exports)

• In equilibrium: Leakage = Injections

S + T + M = I + G + X

Savings must end up as

Investment

increases the

inflation rate . . .

B

B

6

A

A

2

Phillips curve

4

7

(output is

(output is

8,000)

7,500)

Phillips Curve Short & Long Run

SHORT RUN Phillips Curve

LONG RUN Phillips Curve

Inflation

Rate

Inflation

Long-run Phillips

(percent

Rate

curve

per year)

Unemployment

0

Unemployment

0

Natural rate of

Rate (percent)

Rate

unemployment

You may have to draw a Phillips Curve

Remember—Unemployment on x-axis

• Classical View

• Markets are naturally self regulating (No Gov’t intervention)

• Recessions are temporary, Wages & Prices are flexible

• Keynesian View

• Economy is inherently unstable, Not self regulating

• Wages & prices are sticky (Gov’t intervention needed)

• Monetarist View

• Money matters!----do not regulate economy—control inflation

• Supply Side View

• Incentives matter! Create incentives to increase LRAS

• World Price: when above domestic price we export

World Price: when below domestic price we import

Tariffs & Quotas

Revenue Tariff - designed to raise revenue

Protective Tariff – designed to protect domestic market

Quotas- limit # of goods imported

Price

S

P

-------------

------------

D

US

Market

(Wheat)