ECON 1113 1st Edition Lecture 22 Outline of Last Lecture I The Interest Elasticity of Investment II The Monetary Sector and Investment III A More Complete Keynesian Model Outline of Current Lecture I Monetary Policies to Combat Unemployment II Monetary Policies to Combat Inflation III The Government Budget Deficit Current Lecture I Monetary Policies to Combat Unemployment A Monetary Policy changes to combat unemployment 1 Monetary Transmission Method a Money supply increases causing interest rates to decrease b Investment spending increases causing total expenditure and nominal GDP increases B Diagrams 1 Bond Market a Horizontal axis quantity of bonds time b Vertical axis price of bonds in dollars bond c Demand curve and supply curve present d Equilibrium of the two curves gives original bond price which also implies an interest rate e To combat employment the Fed must buy bonds shifting the demand curve to the right and raising the equilibrium bond price and altering its equivalent interest rate 2 Money Market a Horizontal axis quantity of money time b Vertical axis interest rate in percent c Money demand curve and vertical money supply curve present d Equilibrium of the two curves gives original interest rate which also implies a bond price These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II e When the Fed buys bonds the seek to increase money supply and shift the curve to the right lowering equilibrium interest rate and altering its equivalent bond price 3 Investment Market a Horizontal axis investment spending in dollars b Vertical axis interest rate in percent c Marginal efficiency of investment curve present as dependent upon the interest rate equilibrium of the money market diagram d As interest rates decrease the equilibrium investment spending moves right on the MEI curve equating to the change in investment spending 4 Domestic Product of Income a Horizontal axis nominal GDP in dollars b Vertical axis planned total expenditure in dollars c Keynesian aggregate supply 45 degree curve from origin and total expenditure curve present d Equilibrium of the two curves gives the equilibrium of nominal GDP e In this instance of unemployment the target nominal GDP would occur to the right of the equilibrium forming a GDP gap f To increase the PTE to the necessary amount the difference would equal the change in investment spending from the above diagrams C Now consider 1 Investment Market Diagram a The MEI is a steep curve so much so that increasing investment spending through interest rates still does not shift the point on the line far enough to the desired amount of investment spending b This is an occurrence of interest inelastic investment demand E I 1 which is the case of the US economy today Monetary Policies to Combat Inflation A Monetary Policy changes to combat unemployment 1 Monetary Transmission Method a Money supply decreases causing interest rates to increase b Investment spending decreases causing total expenditure and nominal GDP decrease B Diagrams 1 Bond Market a To combat inflation the Fed must sell bonds shifting the supply curve to the right and lowering the equilibrium bond price and altering its equivalent interest rate III 2 Money Market a When the Fed sells bonds the seek to decrease money supply and shift the curve to the left raising equilibrium interest rate and altering its equivalent bond price 3 Investment Market a As interest rates increase the equilibrium investment spending moves left on the MEI curve equating to the negative change in investment spending 4 Domestic Product of Income a In this instance of inflation the target nominal GDP would occur to the left of the equilibrium forming a GDP gap b To decrease the PTE to the necessary amount the difference would equal the negative change in investment spending from the above diagrams The Government Budget Deficit A Federal budget defined as G T budget balance 1 G T balanced budget 2 G T budget surplus 3 G T budget deficit B Current deficit 1 trillion year 1 The deficit is financed by the Treasury not the Fed which is an executive branch department of the Federal Government collects taxes and finances government spending by selling US Treasury Bonds in the Open Market