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September 27, 2007
The IS/MP Model
The IS/MP Model combines the IS Curve with a very simple representation of monetary policy.
We can derive an IS Curve from a Simple Keynesian Model.
The derivation we use for the IS/LM Model emphasizes the role of the interest rate by putting it on the vertical axis. The MP Curve depicts a monetary policy that sets the interest rate. Together, these curves are the IS/MP Model.
This exercise illustrates how presentations of economic ideas carefully choose the variables to be on the axes. Changes in additional variables shift the curves.
Changes in government spending (or taxes) shift the IS Curve.
Posted by bparke at 10:30 PM | Comments (0)
September 25, 2007
The IS/MP Model
We began by adding G to our model.
We also added exports, imports, and taxes.
Deriving the IS Curve:
Adding the MP Curve:
Posted by bparke at 09:45 PM | Comments (0)
September 20, 2007
The Simple Keynesian Model
Can an economy be in equilibrium at less than full employment?
Fluctuations in investment could cause business cycles.
Posted by bparke at 09:44 PM | Comments (0)
September 18, 2007
Growth Theory
For one lecture, we relaxed our assumption that the capital stock is fixed and considered growth models.
I did not explain this diagram:
This diagram is not in the book, but it is a standard way of finding the equilibrium growth path. (I added a "k" to clarify a couple of these diagrams.)
Posted by bparke at 09:44 PM | Comments (0)
September 13, 2007
The Laffer Curve
We briefly discussed the idea that cutting tax rates could increase tax revenue.
Posted by bparke at 09:43 PM | Comments (0)
EconModel
We examined the effects of technology shocks, monetary policy, tax cuts, and government spending in the context of the Classical Model. The presentation was via EconModel.
Posted by bparke at 09:38 PM | Comments (0)
September 11, 2007
Loanable Funds
Our goal today is to motivate a diagram showing the supply and demand for loanable funds. Loanable funds is an aggregate of all financial securities except money.
The two goods - two prices diagram explains why people save if the two goods are taken to be present and future consumption.
The trick is understanding how the interest rate is a key element of the budget constraint.
The story behind the demand for loanable funds is that borrowing to finance physical investment depends on the interest rate.
This diagram shows both monetary and fiscal policy.
Lets have a closer look at fiscal policy. Could this have long run effects?
Posted by bparke at 09:37 PM | Comments (0)
September 06, 2007
Aggregate Supply and Demand
Monetary economics is the deepest and most controversial component of macroeconomics. What is money? Why does money have value?
One thing we agreed on is that money does not belong in agents' utility functions so we cannot simply put together another version of two goods - two prices.
What is the price of money?
For the Classical Model, a simple model of transactions will do.
This model of money demand generates the aggregate demand curve. The aggregate supply curve is vertical because output was already determined in the previous lecture.
We now have a more complete picture of business cycles in the Classical Model.
Posted by bparke at 10:49 PM | Comments (0)
September 04, 2007
The Classical Model
The Classical Model emphasizes the role of equilibrium in the supply and demand for labor. The other factor of production, capital, is taken to be fixed in the short run.
The demand for labor follows from profit maximizing behavior and the marginal product of labor.
The Simple Classical Model takes the supply of labor to be fixed. This diagram shows that we can, nonetheless, explain business cycles.
Adding an upward sloping supply of labor allows employment to vary.
We derived the upward sloping labor supply curve from a variation on the two goods - two prices diagram with leisure taking the place of one of the goods. We even speculated about the possibility of a backward-bending labor supply curve at high wage rates.
With the remaining time, we took a side trip to think about taxes and welfare programs.
Posted by bparke at 11:40 PM | Comments (0)