Summary Intermediate Macroeconomics: Dynamic Models & Policy

INTERMEDIATE
MACROECONOMICS:
SUMMARY


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,Intermediate Macroeconomics summary
Lecture 1
Keynesian Cross Model
Output (Y): income determined by the demand side of the economy
Aggregate expenditures: planned expenditures, AE =C + I + G + EX – IM
→ Both C and IM depend positively on Y!

If Y > AE → unplanned investments (add to inventory) → output down → employment down (bust)
If Y < AE → unplanned disinvestments (get from inventory) → output up → employment up (boom)
Equilibrium if Y = AE (it’s short run, so P are sticky)

Example: Higher G

Multiplier of G, C, I = 1/(1-C)
Multiplier of T = -C/(1-C)




Money market and Interest Rates
Real money demand: L(i,Y) Real money supply: M/P
→ Y is positive related and i is negative related → influenced by the CB

Money Demand Money Supply




 LM-curve

The higher Y, the higher the interest rate




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,Interest rate Targeting: The CB usually sets the target interest rate (horizontal line)



Mbar = target money supply
ibar = target interest rate

If a = 0, M is fixed
if a → infinite, interest rate is fixed




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, Aggregate expenditure and the goods market
Y = C + I + G + EX – IM
assume for simplicity
- C = c*Y
- I = I – b*i
- EX = x1*Yw + x2*R (Yw = foreign income, R = real exchange rate =
- IM = m1*Y – m2*R → higher R means foreign products become more expensive and
our products become cheaper. E = nominal exchange rate.
Number of domestic currency per unit of foreign currency.
e.g. E=0.7 euros/$, rise in E = depreciation, fall in E = appreciation)
See lecture 1.3, 7:00 for example with exchange rates.




IS curve
Negatively sloped!
→ negative relation between Y and i




LM = equilibrium in money market
IS = equilibrium in the goods market
ISLM = general equilibrium, both markets



For now: IS-LM is a closed economy
model

See exercise for useful derivations




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