MIT 14 02 - Multiplier Analysis (7 pages)

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Multiplier Analysis



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Multiplier Analysis

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Lecture Notes


Pages:
7
School:
Massachusetts Institute of Technology
Course:
14 02 - Principles of Macroeconomics
Principles of Macroeconomics Documents

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REVIEW MULTIPLIER ANALYSIS Z C I G Z Y in equilibrium C c c Y T Result 45 degree diagram IMPLICATIONS 1 Spending good saving bad 2 Fiscal policy G or T can be used to stimulate economy But is this right 1 Economy is limited by capacity the supply side matters More on this later in the course 2 Spending depends on more than income Financial markets play a crucial role too 3 There is another lever of policy Monetary policy FINANCIAL ASSETS A PARTIAL LIST 1 Stocks ownership claims on companies entitling owner to a share of profits 2 Bonds entitles owner to a steady flow of interest payments 3 Money Individuals hold a portfolio of different assets reallocate their wealth among assets based on market returns expectations etc Monetary policy involves changing the quantity of money Monetary not fiscal policy is actually the main tool used to fight recessions and rein in booms To understand the role of money and monetary policy we ignore stocks and imagine an economy in which bonds and money are the only two assets BONDS Think of one period bond You buy it for 1 get 1 i one year later Actual bonds are often multi period E g you buy for 1 receive i each year for next 10 years then get your 1 back Typical maturities range from 1 day Fed funds rate to 90 days Treasury bills to 30 years Long term gov t bonds What happens if there is news after a bond is issued changing peoples demands The price of a bond rises or falls in order to make the effective yield match the market Bond price up interest rate down Bond price down interest rate up THE ROLES OF MONEY 1 Money is a medium of exchange sell goods for money use money to buy goods barter direct swapping of goods is rare 2 Money is a unit of account prices are quoted in money terms 3 Money is a store of value it is one way to carry over wealth from present to future So what is money Money and wealth are not the same things You can t give the clerk at 7 11 a share in Yahoo Conventional definition is wealth that can serve as medium



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