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16 Cards in this Set
- Front
- Back
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C1
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Income elasticity demand for MD
change of M/change of Y |
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C2
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Interest elasticity demand for MD
change of M/change of r |
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How interest rate is determined by Keynesian theory
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Interest rate is a monetary factor, determined by supply and demand for money.
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Supply for Money
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change of M=1/required reserves ratio*ER (Excess Reserves)
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Demand for Money
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Wealth=Money+Bonds
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Transactionary MD
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Keep money for transactions
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Precautionary MD
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Keep Money for unexpected purchases
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Speculative Demand
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Uncertainties for change of R and change of bond price
-Interest rate falling: expect interest rate to go up again -Expect bond prices to fall, hold onto money -M2D=F(r)(-) |
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How is the interest rate determined by the Classic approach?
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Supply and Demand for funds is determined by the Loanable funds Theory
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Supply of LF
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SLF=f(MPW,r) (+)
Dis-utility of waiting Real interest rate |
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Demand for LF
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DLF=(MPK, r) (-)
-Return Investment-marginal productivity of capitol -Cost of borrowing: real interest rate |
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What is influenced by the loanable funds theory?
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Crowding out
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What is crowding out?
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Public spending crowding out private spending
G=(-C)+(-I) With an upward movement in supply of LF, savings of households increase, and demand of for LF decrease because businesses responding to and increase in r, government borrows x amount without regards to the increase in r. |
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Explain how the economy is self-adjusted and why a discretionary monetary expansion fails to work based on the New Classical theory
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In the Long Run, policy if ineffective.
Monetary policy makers may not have the knowledge of the impact of the shcocks that the policy and the time lay. Market system is self-adjusted 1)Demand shock -Decrease in P -Decrease in Y/N 2)Anticipate falling price, workers increase NS. |
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Explain why labor market fails to clear according to the New Keynesian Theory
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Rational Expectations: It's costly to collect information and lack of knowledge of economic models.
Markets don't clear; can't assume rigidities. Can't explain prolonged and severe unemployment |
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Explain Price and Wage Rigidities
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1) Price and wage may fail to adjust to clear markets.
2) Price Rigidities -cost of changing prices (menu costs, managerial costs-collect information regarding price changes, printing costs, printing costs) --Risk of loosing customers 3) Wage Rigidities 1. Higher than the market clearing wage 2. Real wage is able to bring our best efforts |
