ECON 100 Tutorial 18

1. ECON 100Tutorial 18 Rob Pryce www.robpryce.co.uk/teaching

2. This Tutorial • We will run through the IS-LM stuff • We will look at combining the IS and LM curves • We will look at what happens to the IS-LM when we change stuff around (eg. Gov’t spending) • We will talk about crowding out • We will look at some past exam questions • We will not really go through the set questions • But I’m happy to discuss if needed

3. IS “curve” Z 45o line If we increase the interest rate, investment will fall. Since Y = C + I + G, Y will also fall. The slope of the IS curve will depend on 2 things: How sensitive investment is to the interest rate How much investment makes up of Y Y = C + I + G Y i IS curve Y

4. LM “curve” i i Money supply LM curve Money demand L = αi + βY Qm Y δL/δi < 0 δL/δY > 0

5. Combining the IS and LM i LM curve i IS curve Y Y

6. Combining the IS and LM i LM IS Y

7. Playing with the IS-LM i LM What happens if government spending increases? IS Y

8. Playing with the IS-LM i LM What happens if the money supply decreases? IS Y

9. Crowding Out i LM IS’ IS Y

10. Solving IS-LM: Finding the IS Y = C + I + G C = 75 + 0.8 (Y – T) I = 125 – 0.25r G = 250

11. Solving IS-LM: Finding the LM Ms = 450 Md = 50 + 0.75Y – 50r

12. Solving IS-LM: Putting Together IS: Y = 1250 – 0.69r LM: Y = 533.3 + 66.6r FINDING EQUILIBRIUM r FINDING EQUILIBRIUM Y (2 ways) 1250 – 0.69r = 533.3 + 66.6r 67.29r = 716.7 r = 716/67.3 r = 10.63 Y = 533 + 66.7r r = 10.6 Y = 533 + 707 Y = 1240 Y = 1250 – 0.69r r = 10.6 Y = 1250 – 7.3 Y = 1242.7

13. Which of the following is not a function of money • a) A medium of exchange • b) A unit of account • c) A shelter against inflation • d) A store of value 2011 Exam Q23

14. Other things constant, the major determinant of the economy’s demand for money is: • a) The stock of gold in the economy • b) The amount of currency in circulation • c) The stock of wealth held by the average household in the economy • d) The amount of pounds spent on transactions in the economy during a given time period 2011 Exam Q24

15. ‘Crowding out’ occurs if new public expenditure: • a) is insufficient to maintain social services • b) creates excess demand and over-full employment • c) attracts an influx of economic migrants • d) diverts expenditure from existing productive activities 2011 Exam Q26

16. According to Friedman’s re-interpretation of the Phillips Curve, if inflationary expectations rise, the Phillips curve: • shifts down • shifts up • becomes flatter • becomes steeper 2011 Exam Q32

17. Keynes’s analysis of the demand to hold money (i.e., ‘liquidity preference) assumes that asset holders speculate regarding: • the exchange rate • bond prices • prices of consumption goods • prices of capital goods 2010 Exam Q25

18. In the Keynesian ISLM model, when government spending falls: • the LM curve shifts to the right • the LM curve shifts to the left • the IS curve shifts to the right • the IS curve shifts to the left 2010 Exam Q27

19. The Phillips curve is an empirical association between: • wages and prices • wages increases and the rate of unemployment • wage levels and the rate of unemployment • prices and economic growth 2010 Exam Q31

20. Class Test 3 25 questions, 18 from Geraint and 7 from Gerry You should know where you are for the class test (I am in minor hall) Go through: tutorial worksheets and slides past exams (be careful!) lecture slides reading (?) Bring with you: Library Card Pen, Pencil, Eraser Calculator Brain!

21. Any Questions? Email: r.pryce@lancaster.ac.uk Web: www.robpryce.co.uk/teaching OfficeHour: Wednesday, 9:45 – 10:45 Charles Carter C Floor or by appointment (email me)

22. Good Luck! 好运 buenasuerte VielGlück! In bocca al lupo!!