EC 313 Intermediate Macroeconomics. Lecture 3 Thursday 10/8/2013. Go to the board to explain the multiplier intuitively with the circular flow diagram To the board…
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Go to the board to explain the multiplier intuitively with the circular flow diagram To the board…
S + T = I + G
I = S + (T-G)
I0 = S + (T-G)
Show graphically on the board…
C = 200 + .8(Y-T)
I = 160
G = 300
T = 200
The Demand for Money
Money = currency plus checkable deposits (i.e. M1, will cover M2, etc. later). It can beused for transactions
So we can write Md = PYL(i) , where PY is nominal income (book uses $Y) and L(i) is a function that is negative in the interest rate. That is, when i increases, L(i) (and hence Md) fall.
Figure 4-3 The Effects of an Increase in Nominal Income on the Interest Rate
Figure 4-4 The Effects of an Increase in the Money Supply on the Interest Rate
i = ($100-PB)/PB
PB = $100/(1+i)
Should the Fed choose money or the interest rate? Presently, the Fed targets an interest rate, and lets the money supply adjust as necessary to hit the interest rate target.