MACROECONOMIC THEORY ECO 7206
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This 1 page Class Notes was uploaded by Tomasa Blick on Friday September 18, 2015. The Class Notes belongs to ECO 7206 at University of Florida taught by William Bomberger in Fall. Since its upload, it has received 32 views. For similar materials see /class/206678/eco-7206-university-of-florida in Economcs at University of Florida.
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Date Created: 09/18/15
l The differential equations are dCC dY d1 I di dYdCdldGdNX dMP7MP2dPLYdY dY FNdN FNNdN WP2dP dNX Xede Xde de e di de dEP 7 EPZdP a The shortrun multipliers are dYdG 0 didG 1Xee I gt 0 dYdM 1PLyMFNNWFN gt 0 b When L 0 the LM curve is vertical Changes in G have bigger effect on i and a smaller zero effect on Y than it does if L lt 0 Changes in M on the other hand have a larger effect on Y than usual c The longrun multipliers are dYdG 0 didG 1Xee I gt 0 dYdM 0 These are the same as the ones in class because the slope of the LM curve doesn t affect these longrun results 2 a Any expansionary fiscal policy G rises or T falls will shift the IS curve to the right and raise interest rates Higher interest rates will produce a capital in ow and cause the currency to appreciate worsening the trade deficit Expansionary monetary policy M rises shifts the LM curve to the right and lowers interest rates Lower interest rates produce a capital out ow and cause the currency to depreciate reducing the trade deficit b Expansionary monetary policy or any other expansionary policy will lead to an increase in consumption since income rises Therefore it must be combined with an increase in taxes sufficient to keep after tax income at the original level This will shift the LM curve to the right combined with a smaller leftward shift in the IS curve c If consumers behavior is consistent with Ricardian equivalence they will not reduce their consumption as T rises with G unchanged Hence the leftward shift in the IS curve will not materialize and the policy will be more expansionary than policy makers thought 3 a If interest rates rise the incentive to save increases That is future consumption is cheaper in the sense that it takes a smaller reduction in current consumption to finance an extra unit of future consumption This substitution effect applies to all households A saving household can use the extra interest on their savings to increase current consumption without reducing future consumption This income effect might be greater than the substitution effect and current consumption may increase Households with negative savings experience a negative income effect they must reduce current consumption if they are to maintain future consumption while paying a higher interest rate on their borrowing hence they are less likely than saving households to increase consumption b The fact that aggregate saving rates don t rise over time is consistent with the notion that permanent consumption is proportional to permanent income If so the comparison of high and low income households at a given time may be misleading Households grouped together because they are currently at the upper end of the income distribution are likely to contain few households with negative transitory income Hence the average transitory income of the group is likely to be positive and the permanent income of the group is likely to be less than its current income If consumption depends on permanent income the group will exhibit above average saving rates A reverse pattern will be exhibited in the low end of the income distribution 4 a The tax cut stimulates consumption shifting the IS curve to the right In the longrun prices rise shifting the LM curve to the left and raising i while restoring the original level of Y Higher interest rates reduce I and NX b The reduction in lY represents a reduction the saving rate in the Solow model leading to future values of KN and YN which are less than they would have been Thus future values of Y are reduced c The decrease inl would be larger in a closed economy because NX will absorb part of the crowding out hence the effect on future Y is larger d As n increases the n5k curve becomes steeper leading to lower but stable future values of KN and YN Thus Y will grow faster due to faster growing N but the standard of living YN will be lower