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Money Market

FED buys bonds from the public Draw graph showing effect on interest rate. What happens to value of $ in foreign exchange market?. Sm2. Sm1. i. Money Market. i1. i2. Dm. Q1. Q. Q2.

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Money Market

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  1. FED buys bonds from the publicDraw graph showing effect on interest rate. What happens to value of $ in foreign exchange market?

  2. Sm2 Sm1 i Money Market i1 i2 Dm Q1 Q Q2

  3. Draw graph showing effect on the interest rate from increased saving in the U.S. What happens to nation’s capital stock?

  4. Loanable Funds Market i SLF1 SLF2 i1 i2 DLF Q1 Q Q2

  5. Effect on P and GDP when $ depreciates

  6. ASLR AS P AD/AS P2 P1 AD2 AD1 GDP Qf Q2

  7. FED sells bonds. Draw graph showing effect on interest rate. What happens to the value of the $ in the foreign exchange market?

  8. Sm2 i Sm1 Money Market i2 i1 Dm Q Q2 Q1

  9. Government & FED do nothing in response to short-run recession

  10. ASSR1 ASLR P AD/AS ASSR2 P1 P2 AD GDP Q1 Qf

  11. Effect on interest rate when government runs a budget deficit

  12. Loanable Funds Market SLF i i2 i1 DLF2 DLF1 Q1 Q Q2

  13. Value of U.S. $ and Japanese yen when U.S. interest rates increase. What happens to American imports and exports?

  14. Foreign Exchange Market P ($) P (Yen) SYen1 S$ SYen2 P2 P1 P1 D$2 P2 DYen D$1 Q1 Q2 Q Q1 Q Q2 Yen Dollars

  15. Effect on P, GDP when $ appreciates

  16. ASLR AS P AD/AS P1 P2 AD1 AD2 GDP Qf Q2

  17. Effect on AD of FED’s bond sales during inflation

  18. ASLR AS P AD/AS P1 AD1 P2 AD2 GDP Qf Q1

  19. Government and FED do nothing in response to short-run inflation

  20. ASSR2 ASSR1 ASLR P AD/AS P2 P1 AD GDP Qf Q1

  21. Effect on AS and SRPC when price of oil increases dramatically

  22. Inflation rate P AS2 AS1 P2 P1 SRPC2 AD SRPC1 GDP2 GDP1 GDP Unemployment rate P goes up Unemployment rises

  23. Expansionary fiscal policy during a recession

  24. ASLR AS P AD/AS P2 P1 AD2 AD1 GDP Q1 Qf

  25. Effect on ASLR and LRPC when U.S. capital stock increases

  26. Effect on AS P Inflation ASLR1 LRPC1 LRPC2 ASLR2 NRU2 Unem. Qf1 Qf2 NRU1 GDP

  27. The FED and Monetary policy • Always affects the money market • Money market has vertical supply curve • Increase in money supply lowers interest rates – increases investment and consumption and AD • Lower interest rates cause $ to depreciate – exports increase, imports decrease • Decrease in money supply has opposite effect

  28. Loanable funds market • S affected by savings; D affected by increased budget deficit (increasing G or decreasing taxes) • Upward sloping S curve • Increase in budget deficit raises interest rates (decreases I and C – crowding out) • Increase in savings lowers interest rates • Changes in income affect BOTH savings and consumption in the same direction

  29. Short run vs. long run • If unemployment rises in the short run, wages fall • Falling wages increases AS (shifts to right) • If unemployment falls in the short run, wages rise • Rising wages decreases AS (shifts to left) • Long run equilibrium is at the NRU

  30. Capital Flows • Money coming into a country increases D for that currency and increases S of other currency • Increasing D for a currency causes it to appreciate; increasing S for a currency causes it to depreciate • Higher interest rates in a country increases D for its currency b/c it increases the D for that country’s financial assets • A higher P in a country decreases D for its currency b/c people will buy another country’s goods instead

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