Econ 185 -- Spring 2005

Aggregate Supply and Demand

Midterm 2 Answers

Shift the IS/LM Curves

The IS/LM Model

There was considerable evidence during the 1930's that the labor market might not be in full employment equilibrium.

The Classical Model

MT 2 Prep

These are the answers to the usual questions.

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Money Supply

The fractional reserve banking system links the money supply M1 to open market operations.

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The Demand for Money

HW 3

The point is to derive a budget constaint in a diagram of risk vs. expected return.

Monetary Economics

The two goods - two prices model actually has an extra price. In an exchange model with n goods, only n-1 prices are necessary. The extra price allow one good (gold, for example) to be the money.

This are a little more complicated in a world of fiat money.

Your textbook is an excellent source of information on this subject.

Puts and Calls

Forward and Futures Markets

Today we discussed forward and futures markets as well as puts and calls.

Risk vs. Expected Return

We can assess the value of a risk in terms of the curvature of an agent's utility function.

This leads to indifference curves for combinations of expected return and risk as measured by statistical standard deviation.

We can also derive a budget constraint.

Put these two elements together, and you have a diagram that explains how people determine the optimal portfolio when they can hold either a risk-free asset or a risky asset.

Different people have different optimal portfolios.

to do

Mean-Variance Analysis - I

Consider three assets and the means, variances, and standard deviationa of their returns.

While the variance is a measure of risk, we can also compute the utility-based value of the risk.

The Central Limit Theorem is a fundamental tool in mean-variance analysis.

Rules for linear combinations of assets are also important.

For example, we can analyze a portfolio of two stocks.

Question, what kind of covariance is best for reducing risk?