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Macro Final Topic Review

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

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  1. Macro Final Topic Review Savings & Leakage Economic Schools of Thought

  2. 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: 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

  3. Market for Dollars 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

  4. GDP Leakage • 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

  5. 3. . . . and 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

  6. Economic Schools of Thought • 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

  7. 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)

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