Real GDP = Nominal GDP - Inflation
Real interest rate = Nominal interest rate - Inflation rate
- AD↑ = Y↑ = C + I↑ + G + NX
Discount Rate ↑
Federal Funds ↑
= Sell Government Security
Discount Rate ↓
Federal Funds ↓
= Buy Government Security
- Consumption function
- Increases in MPC will increase the equilibrium level of both income and consumption
- National Income↑ → Spending on goods and services↑ → Demand for money↑
The Keynesian aggregate supply curve is horizontal, indicating that firms will supply whatever amount of goods in demanded at the existing price level
Classical economics (also known as liberal economics) asserts that markets function best with minimal government interference.
Classical economists observe that markets generally regulate themselves, when free of coercion.
Equilibrium output < Potential output: Recessionary gap
Equilibrium output > Potential output: Inflationary gap
Spending Multiplier = 1/(1-MPC)
Tax Multiplier = -MPC/(1-MPC)
- If the public decides to increase its holdings of currency, the interest rate will increase
- An increase in government expenditure will lower the interest rate, causing less investment (Crowding-out effect)
Supply shock: Aggregate Supply Curve shifts to the left
Supply shock will change both relative prices and the general price level
unemployment fell = rGDP increase
inflation fell = Price level fell
- An increase in the labor foece participation rate will make it more diffficult to reduce unemployment, since the number of labors has increased
- British economist John Maynard Keynes spearheaded a revolution in economic thinking that overturned the then-prevailing idea that free markets would automatically provide full employment—that is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands
- The most important determinant of saving and consumption is the level of income
If the interest rate is already low, increasing money supply will not be effective as in the high interest reate.
If the employment is already high, it's hard to improve it further to increase rGDP.
Nothing to improve = no effect on GDP
A lot to improve = greatest effect on GDP
Gold is not part of the money supply
Money in checking accounts
All money in M1 plus "near-moneys"
Certificate of Deposits
Money Market Funds