Money And Banking - Lesson 3 - Money And The Macroeconomy

Front 1

Define Disposable Income (Equation)

Back 1

Yd=Y - T

Disposable income is the difference between GDP (Y) and taxes (Where T=tY (t=tax rate)

Front 2

What does the IS relationship represent?

Back 2

The IS relationship illustrates combinations of income and interest rates where planned expenditure is equal to actual expenditure.

Each combination of Y and r is consistent with equilibrium in the product market.

Front 3

What is the simplified version of the IS function?

Back 3

r= Ao - δ Y

where

Ao = autonomous expenditure

δ is the slope: δ = (1 - b(1-t) + m)/k

and where

Front 4

As the interest rate increases, what happens to the equilibrium level of GDP?

Back 4

The equilibrium level GDP falls as interest rates increase.

This happens because as interest rates rise, investment expenditure falls and economic activity falls.

Front 5

What will cause the IS curve to shift outward?

Back 5

If the intercept increases, or there is any positive change in Co, Io, or Go.

Front 6

What is the algebraic expression for the LM curve?

Back 6

EQN18: r = (k/f)Y – (1/f)(mmHo)/P

Front 7

What does the LM relationship represent?

Back 7

The LM relationship illustrates combinations of income and interest rates where the demand for money (bonds) is equal to the supply of money (bonds).

IE Every point on the LM curve is consistent with the intersection of a money demand curve and a money supply curve.

Front 8

What will cause a shift in the LM curve?

Back 8

A change in the Money Suppply or Prices (M or P) (assuming the parameters remain constant).

Front 9

What will happen to the LM curve if the Bank of Canada increases the money supply (expansionary policy)?

Back 9

The LM curve will shift down and to the right.

Front 10

What does the IS and LM intersection represent?

Back 10

The intersection of IS and LM occurs when equilibrium is achieved in both the product and asset markets.

Recall that - every point on the IS curve is consistent with the intersection of an expenditure curve and the 45 degree line (ie planned expenditure).

and that

Every point on the LM curve is conssitent with the intersection of a money demand curve and a money supply curve.

Front 11

What does every point on the AD curve represent (in terms of IS and LM curves)? What does this mean in simpler terms?

Back 11

Every point on the AD curve corresponds with an intersection of an IS and LM curve.

In real terms, every point on the AD curve represents a sitution where planned expenditure is equal to actual expenditure and where money demand is equal to the money supply.

Front 12

What are the reasons for why aggregate demand slopes downward?

Back 12

Find answers yourself.

Front 13

What is the natural rate of unemployment?

Back 13

U*, the natural rate of unemployment, is the rate of unemployment that is consistent with potential output (ie the number of individuals who are searching for a job but can't find one either due to skills shortage or employer shortage)

Front 14

What is the phillips curve?

Back 14

The phillips curve shows the relationship between inflation and unemployment.

The relationship, simply stated, is that as unemployment level drops, inflation increases (with some exceptions).

Front 15

What is one of the fundemantal policy concultions of the mainstream paradigm, the natural rate hypothesis?

Back 15

Inflation is caused by output gaps and inflationary expectations.

A good policy towards price stability would involve minimizing output gaps and controlling inflationary expectations.