Ebook Macroeconomics (11/E): Part 2
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Ebook Macroeconomics (11/E): Part 2
www.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2 effect of fiscal policy is reduced by crowding out: Increased government spending increases interest rates, reducing investment and partially offsetting the initial expansion in aggregate demand.♦As illustrative polar cases: In the case of the liquidity trap the LM curve is horizontal, fiscal polic Ebook Macroeconomics (11/E): Part 2y has its maximum strength, and monetary policy is ineffective. In the classical case the curve is vertical, fiscal policy has no effect on output, anEbook Macroeconomics (11/E): Part 2
d monetary policy has its maximum strength.www.downloadslide.netCHAPTER 11 ‘MONETARY AND FISCAL POLICY249America’s economy crashed in 2008. Figure II-www.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2t Recession. As seen from Figure 11-1. the Federal Reserve drove the federal funds rate as low as the rate could go to stimulate the economy during the downturn. The rate fell from 5 percent in August 2007 to 2 percent in August 2008 to 0.16 percent in August 2009. In addition, the president and Con Ebook Macroeconomics (11/E): Part 2gress enacted tax cuts and major new spending programs in early 2008.In this chapter we use the IS-I.M model developed in Chapter 10 to show how monetEbook Macroeconomics (11/E): Part 2
ary policy and fiscal policy work. These arc the two main macroeconomic policy tools the government can call on to try to keep the economy growing at www.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 29. and Io prevent booms from getting out of hand. Fiscal policy has its initial impact in the goods market, and monetary policy has its initial impact mainly in the assets markets. But because the goods and assets markets are closely interconnected, both monetary and fiscal policies have effects on Ebook Macroeconomics (11/E): Part 2both the level of output and interest rales.Figure 11 -2 will refresh your memory of our basic framework. I he /5 curve represents equilibrium in theEbook Macroeconomics (11/E): Part 2
goods market, rhe LM curve represents equilibrium in the money market. The intersection of the two curves determines output and interest rates in the www.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2. Contractionary monetary policy moves the LMcurve to the left, lowering income and raising interest rales. Expansionary fiscal policy moves the IS curve to the right, raising both income and200520062007200820092010MonthsFIGURE 11-1 THE GREAT RECESSION._______________________________________________ Ebook Macroeconomics (11/E): Part 2_____________The recession began in 2007 and ended in 2009- I err sharp drops in interest rates livre aimed at limiting the depth and length of the reEbook Macroeconomics (11/E): Part 2
cession.(Source: Bureau of Labor Statistics; Federal Reserve Economic Data I FRED III.)www.downloadslide.net250PART 3’FIRST MODELSinterest rates. Contwww.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2e in the quantity of money affects the economy, increasing the level of output by reducing interest rates. In the United States, the federal Reserve System, a quasi-independent part of the government. IS responsible for monetary policy.I he Fed conducts monetary policy mainly through open market ope Ebook Macroeconomics (11/E): Part 2rations, which we study in more detail in Chapter 16. In an open market operation, the Federal Reserve buys bonds (or sometimes other assets) in exchaEbook Macroeconomics (11/E): Part 2
nge for money, thus increasing the stock of money, or it sells bonds in exchange for money paid by the purchasers of the bonds, thus reducing the monewww.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2think of the Fed as "printing” money with which to buy bonds, even though that is not strictly accurate, as we shall see in Chapter 16. When the Fed buys bonds, it reduces the quantity of bonds available in the market and thereby tends to increase their price, or lower their yield— only at a lower i Ebook Macroeconomics (11/E): Part 2nterest rate will the public be prepared to hold a smaller fraction of its wealth in the form of bonds and a larger fraction in the form of money.www.Ebook Macroeconomics (11/E): Part 2
downloadslide.netCHAPTER 11 ‘MONETARY AND FISCAL POLICY251FIGURE 11-3 MONETARY POLICY._________________________________________________An increase in www.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2£ is on the initial LM schedule that corresponds to a real money supply. M/'P. Now consider an open market purchase by the Fed. This increases the nominal quantity of money and. given the price level, the real quantity of money. As a consequence, the Í.M schedule will shift to I.M'. The new equilibr Ebook Macroeconomics (11/E): Part 2ium will be at point £'. with a lower interest rale and a higher level of income. The equilibrium level of income rises because the open market purchaEbook Macroeconomics (11/E): Part 2
se reduces the interest rate and thereby increases investment spending.By experimenting with Figure 11-3. you will be able to show that the steeper thwww.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2 a given change in the money stock can be absorbed in the assets markets with only a small change in the interest rate. The effects of an open market purchase on investment spending would then be small. By contrast, if the demand for money is not very sensitive to the interest rate (corresponding to Ebook Macroeconomics (11/E): Part 2 a relatively steep /..If curve), a given change in the money supply will cause a large change in the interest rate and have a big effect on investmenEbook Macroeconomics (11/E): Part 2
t demand. Similarly, if the demand for money is very sensitive to income, a given increase in the moneystock can be absorbed with a relatively small cwww.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦The Ebook Macroeconomics (11/E): Part 2hap. 10. If you have worked through the optional Sec. 10-5, you should use that equation to confirm (he statements in this paragraph.www.downloadslide.net252 Ebook Macroeconomics (11/E): Part 2www.downloadslide.netChapter 11Monetary and Fiscal PolicyCHAPTER HIGHLIGHTS♦Both fiscal and monetary policy can be used to stabilize the economy.♦TheGọi ngay
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