week 6 Flashcards
in a closed economy the goods and money market are linked by what?
impact of interest rates on consumption and investment demand
whats the difference between an open market and a closed market when linking the goods and money market
interest rates and exchange rate impact the open market.
when the money market determines the interest rate what does it effect?
consumption, investment and subsequently income
effects income because if more investment firms will increase hiring
what can monetary policy affect?
autonomous consumption through wealth effects
directly - through the effect of interest rates of borrowing
indirectly - through the effect of interest rates on asset prices
what is the relationship between interest rates and investment?
inverse relationship
high interest rates will cause more saving and less investment
when is the money market in equilibrium?
when demand for money is equal to supply for money
what happens when there is excess supply in the money market?
this decreases the interest rates which stimulates investment which then increases income
the increase in income will move the money back to the general equilibrium
what happens when there is excess demand in the goods market?
will result in a decrease in inventories this will increase income which increases the demand for money and then increase the interest rates
what is the is schedule
schedule shows all the different
combinations of income and interest rates at which the goods market is in equilibrium
what does the LM schedule show
shows all the different combinations of income and interest rates at which the money market is in equilibrium
what do movements along the is schedule show
how interest rates affect income
sketch the ISLM model
.
the position of the is schedule depends on ?
▶ Autonomous investment
▶ Autonomous consumption
▶ Government spending
▶ Taxes
the slope of the is schedule depends on?
interest rate elasticity of consumption and investment
the higher the interest rate the elasticity the flatter the is schedule
what do movements along the LM schedule indicate
interest rate changes as income
changes via money demand
what does the position of the lm schedule depend on
money supply
the slope of the LM schedule depends on?
the interest rate and income elasticity of money demand
▶ The higher the interest rate elasticity of money demand the flatter the LM schedule
what are some macro economic targets?
⋆ Living standards
⋆ Business cycles
⋆ Unemployment
⋆ Inflation
what are some macro economic instruments that either the gov or central bank can change?
⋆ Government spending
⋆ Taxes
⋆ Transfer payments
⋆ Interest rates
⋆ Exchange rates
what is fiscal policy?
the government budget to achieve macroeconomic objectives
- The budget consists of three key instruments
▶ Government spending
▶ Taxation
▶ Transfer payments
what is the objective for fiscal policy ? short and long term
▶ Over the short term, to support monetary policy, and, in particular, to allow automatic
stabilisers to help smooth the path of the economy
▶ Over the medium term, to ensure sound public finances and that spending and taxation
impact fairly within and between generations
what is monetary policy?
Central Bank can decide to control the money supply or the interest rate
what could be some of the reasons for altering interest rates?
▶ A monetary growth target
▶ An inflation target
