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Week 7 Notes

by: Kayla Notetaker

Week 7 Notes Econ 253-101

Kayla Notetaker
GPA 4.0
Principles of Macroeconomics
Dr. Yuanyuan (Catherine) Chen

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About this Document

This is a set of notes that talks about Loanable Funds from Dr. Chen's chapter 11 lecture and what we have talked about so far in Chapter 13. This includes illustrations of shifts caused by differ...
Principles of Macroeconomics
Dr. Yuanyuan (Catherine) Chen
Class Notes
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This 4 page Class Notes was uploaded by Kayla Notetaker on Friday October 9, 2015. The Class Notes belongs to Econ 253-101 at Marshall University taught by Dr. Yuanyuan (Catherine) Chen in Fall 2015. Since its upload, it has received 42 views. For similar materials see Principles of Macroeconomics in Economcs at Marshall University.

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Date Created: 10/09/15
Macroeconomics 253 4 Chapter 11 cont Loanable Funds 0 Interaction of borrowers and lenders that determines the market interest rate and quantity of loanable funds exchanged o The demand for loanable funds is determined by the willingness affirms to borrow money to engage in new Investment projects 0 The supply for loanable funs is determined by the wiling ofHHs to save and by the extent of government savingdissolving 0 EX How would a decrease in HH saving effect the equilibrium interest rate and quantity of loanable funds Real Interest SL1 A decrease in HH saving means an Rate increase in spending Increase in E2 spending means using more E1 Loanable Funds This causes a leftward shift in the supply curve causing a rising interest rate and a decrease in the Quantity of Loanable DL Funds Q2 Q1 Quantity of Loanable Funds 0 EX How would a decrease in Government Spending effect the equilibrium interest rate and quantity of loanable funds Real Interest A decrease in Government spending Rate means an increase in saving E2 Increase in government spending E1 means more for Loanable Funds This causes a rightward shift in the supply curve causing a decrease in interest rate and an increase in the Quantity of Loanable Funds Q1 Q2 Quantity of Loanable Funds gtkThe professor claimed this would NOT be on the exam but still sees this as important Macroeconomics 253 4 Chapter 13 Aggregate demand and Aggregate Supply Analysis The Aggregate Demand and Aggregate Supply Model 0 Model that eXplains the short run uctuations in real GDP and price level Short run Price Aggregate Supply Level Aggregate Demand Real GDP 0 The Aggregate Demand Carve AD shows the relationship between the price level and the real GDP demanded by HHs firms and the government 0 Does not involve price change 0 The ShortRan Aggregate Supply Carve SRAS shows the relationship between the price level and the Quantity of real GDP supplied by firms Why do Curves Slope a Certain Way and What Does it Mean 0 Aggregate Demand why the curve slopes down 0 A fall in price level increases the Q of real GDP demanded by HHs firms and government 0 Changes in price level in uence each component of aggregate demand c I and NX Government purchases are usually controlled by policy and law and therefore are unaffected by price level change 0 Change in Consumption The Wealth Effect 0 HH consumption c is determined by income I Income rises consumption rises income falls consumption falls 0 However consumption also depends on wealth the difference between a HH s assets and debts and is NOT the same as income I So when price levels rise consumption decreases and real value of HH wealth also decreases and vice versa if price levels fall consumption and real value will rise 0 This reduces the demand for goods and services demand for goods and services will increase in vice versa case 0 Change in Investment The Interest Rate Effect 0 When prices increase HHs and firms need more money to buy and sell goods and services This causes HHs and firms to try to increase their money by holding more making withdrawals from banks in the form of loans selling assets like bonds 0 When the interest rate increases so does the cost of borrowing funds I Firms will be less likely to eXpand because they will borrow less I HHs will borrow less when buying houses consumption is somewhat affected here too as HHs will also be less likely to buy durable goods such as cars I The reduction in spending decreases the demand for goods and services 0 A higher price level increased interest rates and less investment spending decreased quantity of goods and services demanded Macroeconomics 253 4 o A lower price level decreased interest rates and more investment spending increased quantity of goods and services demanded 0 Change in Net EXports The International Trade Effect 0 Net Exports Spending by Foreign HHs and Firms on US goods and services Exports minus the spending by US HHs and firms on foreign goods and services Imports 0 If the price level in the US rises US eXports become more eXpensive and imports are cheaper If the US sells less eXports and takes in more imports net eXports will decrease 0 All three effects are reasons why the Aggregate Demand curve is downward sloping 0 Overall and Increase in Price Level will lead to a Decrease in Real GDP Demanded 0 These effects cause movements along the AD curve Shifts versus Movements along the AD curve 0 Remember the AD curve eXplains the relationship between price level and Quantity of Real GDP demanded assuming everything else is held constant 0 In other words if other variables besides the price level changes this will cause a shift in the demand curve rather than a movement along it as seen previously 0 Variables that shift AD curve include 0 Changes in government policy I Monetary policy actions that the federal reserve take to manage the money supply and interest rate to pursue a Macroeconomic objective I If the federal reserve makes the interest rate rise Investment and Consumption spending will fall and vice versa The Shift will look like this price An increase in Interest Rate means a decrease in Level Monetary Supply consumption spending and Investment spending because the higher interest AD1 rate raises the price of borrowing HHs and AD Firms will borrow less causing the decrease in Q 2 of AD and a leftward shift in the curve Real GDP I Fiscal Policy changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives 0 Not taken by Federal Reserve 0 The increase or decrease in taX affects disposable income thus affecting consumption I An increase in government purchases shifts the AD curve to the right while a decrease in government purchases shift it to the left The shift would look like this Price Level Macroeconomics 253 4 Because government purchases are a component of AD an increase in government purchases will shirt the AD curve to the right Lower personal AD2 income taxes and lower business taxes also shift the AD curve to the right as this allows HHs more disposable income and firms increased Real GDP profitability However an increase in personal income tax andor business tax will look like this Price An increase in personal or business taxes means a Level decrease in disposable income for HHs and a decrease in profitability for firms shifting the AD1 AD curve to the left AD2 Real GDP 0 Changes in expectations of Households and Firms If HHs are more optimistic about future income they are likely to increase current spending causing an increase in consumption Likewise if firms are more optimistic about future profitability they too are likely to increase in Investment spending Both cause a shift in the AD curve to the right If HHs are more pessimistic about future income they are likely to decrease current spending and save more causing a decrease in consumption Likewise if firms are pessimistic about future profitability they will do less Investment spending and also save Both cause a shift to the left of the AD curve 0 Changes in Foreign Variables If foreign Households and Firms buy fewer domestic US goods and services andor if the domestic country US buys more foreign goods and services Net Exports will fall causing the AD curve to shift to the left If US domestic GDP increases faster than foreign GDP US imports will increase also causing Net Exports to fall and a leftward shift of the AD curve Net Exports also will fall if the exchange rate between the US dollar and foreign currencies rise 0 This is because the foreign currency in the US will rise resulting in fewer exports and the price of foreign products will fall resulting in more imports Any increase in Net Exports however will shift the AD curve to the right 0 NX will increase if US GDP increase more slowly than in other countries or if the value of the US dollar falls in other countries


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