Demanded for money has an inverse relationship between nominal interest rates and the quantity of money demanded.
Quantity demanded rate: increases of money. Quantity demanded: decrease
QD decreases interest rates
QD increases cash
Demanded for money
Money demanded shift
Change in price level
Change in income
Change in taxation that affects investment
Nominal interest rate (IR) on y-axis
Quantity of money on x-axis
The money demanded curve slopes down and to the right because all else being equal, higher interest rates increase the opportunity cost of holding money, they're leading public to reduce quantity of money it demanded.
Bonds are loans
Stocks are owns
Bonds are loans, or IOU's, that represent debt that the government or corporation must repay to an investor. The bond holder has NO OWNERSHIP of the company.
Bonds
First: if a corporation issues and then sells a bond
If that corporation issues a 10K bond with a 10yr term and a 5% interest
Interest rate: Decreases
Bonds: Increases
Interest Rates: Increases
Bond: Decreases
Nominal interest rate: 5%
Stock owners can earn a profit in 2 ways
Dividends, which are portions of a corporations profits are paid to stockholders
A capital gain is earned when a stockholder sells stock for more than he or she paid for it.
A stock holder that sells stock at a lower price than the purchase price suffers a capital loss.
Progressive tax - takes a larger % of income from high income groups
Proportional taxes - takes the same % of income from all income groups
Regressive taxes - takes a larger % from low income groups.
Contractionary Fiscal Policy
Decrease govt. spending
tax increases
Combinations of the two
Expansionary Fiscal Policy
Increase govt. spending
decrease taxes on consumers
Combinations of the two
Automatic or Built in stabilizers
Anything that increases the govt. budget deficit during a recession and increase it's budget surplus during inflation without requiring explicit action by policy makers
Non-discretionary fiscal policy
Corporate dividends
social security
veterans benefit
Transfer payments
welfare checks
food stamps
unemployment checks
Expansionary is reduced with DI but recession reduce drops
An initial change in spending causing a larger change in aggregate spending, or agggregate demand (AD)
Multiplier = Change in AD/Chnage in spending = AD/ C, I, G, Xn
Why? expenditures and income flow continuously which sets off a spending ^ in the economy.
Calculating spending multiplier
1/1-MPC pr 1/MPS
Multiplier is + when increase in spending but - when decrease in spending
Calculating tax multiplier
When the government texes, the multiplier work in reverse.
Money leaving circular flow
Tax mulitplier = MPC/ 1- MPC or -MPC/MPS
If there is a taxcut, then the multiplier is +, more money in circular flow
Why prices tend to be sticky
Menu cost
Fear of price wars
Wage contracts
Minimum wage
Moral effort and productivity
Output level low, unemployment increase, GDP decrease and there is a recession.
Upward sloping, output expands as total increase
Firms cant respond in increase in demand by increase output.
Input prices - made or sold in U.S. Wages, cost of capital, raw materials. Strung $ = lower foreign weaker $ = higher foreign. Market Power - monopolies and cartels that control resources control the price of those resources. Increase in resources price = SRAS <- decrease in resources price = SRAS ->
Productivity = output/inputs. More productivity = lower unit production cost = SRAS -> Lower = higher production cost = SRAS <-
legal institutional environment - taxes and subsides is taxes on business increase per unit cost = SRAS <- subsides to business reduce per unit production cost = SRAS -> Govt regulation creates a cost of compliance = SRAS <- Deregulation reduces compliance costs = SRAS ->
Ad is demanded by consumers, businesses, government, and foreign countries.
Talks about total. Determinants will be different.
Changes in price level cause they move along the curve not a shift of the curve.
Aggregate Demand (AD)
Relationship between the price level and the level of real GDP is inverse.
3 reasons why AD is going down
Higher prices reduce purchasing power of $. This decreases the quantity of expenditure. Wealth Effect.
As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment. Interest - Rate effect.
When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods. Exports fall and imports rise causing real GDP demanded to fall. Foreign Trade effect.
Shifts in Aggregate Demand (AD)
Two parts to a shift in AD
A change in C, Ig, G, and Xn
A multiplier effect that produces a greater change than the original change in the 4 components.
Increase in AD=AD ->
Decrease in AD=AD<-
Determinants of AD
Consumption
Gross Private Investment
Government Spending
Net Exports
Change in consumer spending
Consumer wealth
Consumer expectations
Households indebtedness
Taxes
Change in investment spending
Real interest rates
Future business expectations
Productivity and Technology
Business Taxes
Change in government spending
War
Health care
Defense
Change in Net Exports
Exchange rates
National income compared to abroad
AD = GDP =C+Ig+G+Xn
"if the US get a cold, Canada gets pneumonia"
Government Spending
More govt. spending (AD ->)
Less govt. spending (AD<-)
Disposable Income (DI)
Income after taxes or net
2 Choices
Consume or save
With disposable income, households can consume or save.
Consumption
Household spending
The ability to consume is constrained by amount of disposable income or the propensity to save
APC=C/DI=%DI that is spent
Household consume if DI=0
Dissaving or Autonomous consumption
Saving
Household not spending
Ability to save is constrained by amount of disposable income and propensity to consume
