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17 Cards in this Set
- Front
- Back
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Increase in reserves...
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reduces interest rates
By decreasing interest rates, Central Bank automatically increases reserves to new level demanded by banks |
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Official Cash Rate (OCR)
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Interest rate on settlement cash held by banks with RBNZ.
=> Banks HOLDING settlement cash are paid the OCR. => Banks BORROWING settlement cash pay the OCR + 0.25% |
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Taylor's Rule
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Monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation.
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Reducing Official Cash Rate
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Hawkish Policy
Dovish Policy |
Tight monetary policy (high OCR)
Loose monetary policy (low OCR) |
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(Neo)Classics:
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- adjustments in prices would automatically make demand tend to the full employment level in the long run.
- self-correcting process. |
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The Keynesian Model
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- Focus on aggregate demand and potential rigidities in prices.
The Keynesian Model’s Crucial Assumption: In the short run, firms meet the demand for their products at pre-set prices. |
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The Components of Planned Aggregate Expenditure (PAE)
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Consumption (C) + Investment (Ip) + Government (G) + Net Exports (NX)
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Autonomous expenditure
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Components of PAE that don’t change when output changes:
- Investment - Govt spending - Exports - Components of consumption and imports that are not influenced by output. |
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Induced expenditure
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Components of PAE that change when output changes:
- Consumption & imports (excluding those that are part of autonomous expenditure). |
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Actual expenditures may not equal PAE
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Assume that for C, G and NX, planned = actual
but, Planned Investment (Ip) may not equal Actual Investment (I) since unsold inventories are included in I. |
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Scarfie Corp. produces $1 million of scarves per year. Expected sales = $800,000 and planned inventory = $200,000, Capital expenditure = $100,000.
Calculate Planned investment (Ip): |
Capital Exp + Planned Inventory
100,000 + 200,000 = 300,000 |
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If actual sales are $800,000
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100,000 + 200,000 = 300,000
I = I* |
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If actual sales are:
$600,000 instead of $800,000 Planned Investment (Ip) = Actual Investment (I) = |
Ip = 300,000
I = 100,000 + 400,000 = 500,000 I > Ip |
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If actual sales are:
$1,000,000 Ip = I = |
Ip = 300,000
I = 100,000 + 0... Ip > I |
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Marginal Propensity to Consume (C)
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People spend a (constant) fraction of their additional income on consumption.
The amount by which consumption rises when disposable income rises by $1. Note: People without income will still have a positive level of consumption ( C). |
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Summary: The Keynesian Model
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In the basic Keynesian model, GDP is determined by planned aggregate expenditure on goods and services.
Prices are fixed. Planned spending is not always equal to actual spending. Consumption typically makes up the largest share of total spending. |
