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Money multiplier = 1 / R
- R = Reserve ratio
- If Bank reserves 10%, the money multiplier should be 10 (10*$100 = $1000)
Velocity of money = (P x Y)/M
- P = Price level (the GDP deflator)
- Y = Quantity of output (the real GDP)
- M = Quantity of money
- ($10.00/per pizza * 1000 pizzas) / $50 = 20 velocities
- V x M = P x Y (Quantity Equation
Real interest rate = Nominal interest rat ? inflation rate
Factors that can influence a country’s X, M and NX
- Tastes
- Prices
- Exchange rates
- Incomes
- Cost of transporting goods
- Policies of the government
Y = C + I + G + NX
S = I + NX
NX = NFI [Net Foreign Investment]
S = I + NFI (Saving = Domestic investment + Net foreign investment)
NFI: the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
IE:
A Canadian Company brought 1000 stock with price $2 in Mexico
A Japanese Company brought 500 stock with price $1.5 in Canada
So NFI = 1000*2 ? 500*1.5 = 1250
Real exchange rate = (e x P)/P*
Real exchange rate = Nominal exchange rate x Domestic Price / Foreign Price
IE:
1 Canadian Dollar = 6 Chinese RMB
1 Bushel Wheat in Canadian worth $120 Canadian Dollar
1 Bushel Wheat in China worth 200 RMB
So Real exchange rate = 6 * 120 / 200 = 3.6
3.6 bushel of Chinese wheat per tone of Canadian Wheat
Under purchasing-power parity, real exchange rate = 1
Which means 1 = (e x P)/ P* => P* = e x P => e = P*/P <= nominal exchange rate relied on price level
Key facts for short run economic fluctuations (business cycle)
1. Economic fluctuations are irregular and unpredictable
2. Most macroeconomic quantities fluctuate together
3. As output falls, unemployment rises
Basic model of economic fluctuation *** (important)
Why Aggregate demand curve slope downward
1. The wealth effect: a lower price level increases real wealth, which encourages spending on consumption. (people buy more when the price is lower than before)
2. The interest rate effect: a lower price level reduces the interest rate, which encourages spending on investment (less money in the bank, more money on the market)
3. The real exchange rate effect: a lower price level causes the real exchange rate to depreciate, which encourages spending on net exports (low exchange rate means foreigner will spend less money on consumption. ? refer back to point 1. => Export more goods and services.
Why might the aggregate demand curve shift
1. Shifts arising from consumption
2. Shifts arising from investment
3. Shifts arising from government purchases (related with quantity of output? maybe)
4. Shifts arising from net exports
(Short run) Quantity of output supplied = Natural level of output + a(Actual price level ? Expected price level)
a is a number that determine how much output responds to unexpected changes in price level.
(Long run) Quantity of output supplied = Natural level of output
More detail in booklet
LRAS, SRAS, AD, MS, AS …………….
In long run aggregate supply curve is vertical.
How AS,AD works *** (important)
Why does the short-run Aggregate-supply curve slope upward
1. The misperception theory: an unexpectedly low price level leads some suppliers to think their relative prices have fallen, which induces a fall in production.
2. The stick-wage theory: an unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services.
3. The stick-price theory: an unexpectedly low price level leaves some firms with higher-than-desired prices, which depresses their sales and leads them to cut back production (think about unemployment raises because output decreases)
Why might the short-run aggregate?supply curve shift
1. Shifts arising from Labour
2. Shifts arising from Capital
3. Shifts arising from Natural Resources (think about the war in Iraq, gas supply decreased)
4. Shifts arising from Technology (advance technology leads to more output ? higher supply)
5. Shifts arising from the Expected Price Level (think about stick-price theory )
Two causes of economic fluctuations
Figure 14-8 (p334) and 14-11(p339)
Money multiplier = 1 / R
- R = Reserve ratio
- If Bank reserves 10%, the money multiplier should be 10 (10*$100 = $1000)
Velocity of money = (P x Y)/M
- P = Price level (the GDP deflator)
- Y = Quantity of output (the real GDP)
- M = Quantity of money
- ($10.00/per pizza * 1000 pizzas) / $50 = 20 velocities
- V x M = P x Y (Quantity Equation
Real interest rate = Nominal interest rat ? inflation rate
Factors that can influence a country’s X, M and NX
- Tastes
- Prices
- Exchange rates
- Incomes
- Cost of transporting goods
- Policies of the government
Y = C + I + G + NX
S = I + NX
NX = NFI [Net Foreign Investment]
S = I + NFI (Saving = Domestic investment + Net foreign investment)
NFI: the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
IE:
A Canadian Company brought 1000 stock with price $2 in Mexico
A Japanese Company brought 500 stock with price $1.5 in Canada
So NFI = 1000*2 ? 500*1.5 = 1250
Real exchange rate = (e x P)/P*
Real exchange rate = Nominal exchange rate x Domestic Price / Foreign Price
IE:
1 Canadian Dollar = 6 Chinese RMB
1 Bushel Wheat in Canadian worth $120 Canadian Dollar
1 Bushel Wheat in China worth 200 RMB
So Real exchange rate = 6 * 120 / 200 = 3.6
3.6 bushel of Chinese wheat per tone of Canadian Wheat
Under purchasing-power parity, real exchange rate = 1
Which means 1 = (e x P)/ P* => P* = e x P => e = P*/P <= nominal exchange rate relied on price level
Key facts for short run economic fluctuations (business cycle)
1. Economic fluctuations are irregular and unpredictable
2. Most macroeconomic quantities fluctuate together
3. As output falls, unemployment rises
Basic model of economic fluctuation *** (important)
Why Aggregate demand curve slope downward
1. The wealth effect: a lower price level increases real wealth, which encourages spending on consumption. (people buy more when the price is lower than before)
2. The interest rate effect: a lower price level reduces the interest rate, which encourages spending on investment (less money in the bank, more money on the market)
3. The real exchange rate effect: a lower price level causes the real exchange rate to depreciate, which encourages spending on net exports (low exchange rate means foreigner will spend less money on consumption. ? refer back to point 1. => Export more goods and services.
Why might the aggregate demand curve shift
1. Shifts arising from consumption
2. Shifts arising from investment
3. Shifts arising from government purchases (related with quantity of output? maybe)
4. Shifts arising from net exports
(Short run) Quantity of output supplied = Natural level of output + a(Actual price level ? Expected price level)
a is a number that determine how much output responds to unexpected changes in price level.
(Long run) Quantity of output supplied = Natural level of output
More detail in booklet
LRAS, SRAS, AD, MS, AS …………….
In long run aggregate supply curve is vertical.
How AS,AD works *** (important)
Why does the short-run Aggregate-supply curve slope upward
1. The misperception theory: an unexpectedly low price level leads some suppliers to think their relative prices have fallen, which induces a fall in production.
2. The stick-wage theory: an unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services.
3. The stick-price theory: an unexpectedly low price level leaves some firms with higher-than-desired prices, which depresses their sales and leads them to cut back production (think about unemployment raises because output decreases)
Why might the short-run aggregate?supply curve shift
1. Shifts arising from Labour
2. Shifts arising from Capital
3. Shifts arising from Natural Resources (think about the war in Iraq, gas supply decreased)
4. Shifts arising from Technology (advance technology leads to more output ? higher supply)
5. Shifts arising from the Expected Price Level (think about stick-price theory )
Two causes of economic fluctuations
Figure 14-8 (p334) and 14-11(p339)
