(5&6) interest rates Flashcards
equilibrium condition CB money
θ$YL(i)
techniques to change money supply
open market operations, reserve requirements, overnight lending at which commercial banks borrow from CB
liquidity trap
interest rates = 0, people become indifferent to holding money or bonds
IS relation
Y=C(Y-T) = I(Y,i)+G
ZZ
demand for goods
ZZ upwards sloping
increase in Y = increase in D for given i (consumption and investment increased)
ZZ below 45deg line
increased in output = less than one-for-one increase in D
why is IS curve downwards sloping
increased i = decreased demand for goods = decreased equm level of output.
change in i on IS curve
movement along IS curve
change in tax on IS curve
shift; increase tax = shift in
change in Y on IS curve
IS curve shift
LM relation
M/P=YL(i); money supply = money demand
for fixed money supply, LM relation when real income increases
real Md increases = increase in i
LM curve assumption
CB chooses money stock, then lets interest rate adjust at its odds
point on downwards sloping IS curve that corresponds to equm on goods market
anywhere on down sloping IS curve
where on LM and IS curve are LM and IS relations satisfied
when they intersect
budget deficit
(G-T) < 0
budget surplus
(G-T) > 0
in budget deficit, fiscal contraction
decrease (G-T), fiscal consolidation (reduce G, raise T)
in budget deficit, fiscal expansion
increase (G-T)
monetary expansion
reduce i -> increase in Ms
monetary contraction
increase i - > decrease in Ms
circular flow of income in closed economy
Y = C + I
