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  • Econ110BW11 - Lec4 A - GR - Ol

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    tigerwlin
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    This document discusses nominal and real interest rates in the context of the IS-LM model. It states that the IS curve depends on the real interest rate, while the LM curve depends on the nominal interest rate. It then analyzes the effects of a permanent increase in money growth in both the short-run and medium-run. In the short-run, a money growth increase causes the nominal interest rate and real interest rate to fall and output to rise. In the medium-run, output returns to the natural level while inflation and expected inflation rise, causing the nominal interest rate to increase back to the original level.

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    This document discusses nominal and real interest rates in the context of the IS-LM model. It states that the IS curve depends on the real interest rate, while the LM curve depends on the nominal interest rate. It then analyzes the effects of a permanent increase in money growth in both the short-run and medium-run. In the short-run, a money growth increase causes the nominal interest rate and real interest rate to fall and output to rise. In the medium-run, output returns to the natural level while inflation and expected inflation rise, causing the nominal interest rate to increase back to the original level.

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    Attribution Non-Commercial (BY-NC)
    Baixe no formato PDF, TXT ou leia online no Scribd
    Sinalizar o conteúdo como inadequado
    11 visualizações18 páginas

    Econ110BW11 - Lec4 A - GR - Ol

    Enviado por

    tigerwlin
    This document discusses nominal and real interest rates in the context of the IS-LM model. It states that the IS curve depends on the real interest rate, while the LM curve depends on the nominal interest rate. It then analyzes the effects of a permanent increase in money growth in both the short-run and medium-run. In the short-run, a money growth increase causes the nominal interest rate and real interest rate to fall and output to rise. In the medium-run, output returns to the natural level while inflation and expected inflation rise, causing the nominal interest rate to increase back to the original level.

    Direitos autorais:

    Attribution Non-Commercial (BY-NC)
    Baixe no formato PDF, TXT ou leia online no Scribd
    Sinalizar o conteúdo como inadequado
    de 18

    MacroeconomicsB

    Econ110B Winter2011 Prof.GiacomoRondina Lecture4

    NominalandRealInterestRates,andtheISLMModel
    DoestheISdependonthenominalortherealinterestrate? Does the IS depend on the nominal or the real interest rate? DoesttheLMdependonthenominalortherealinterestrate?

    Expectations:theBasicTools(Ch.14)

    TheISdependsontherealinterestrate
    Y = C (Y T ) + I (Y , r ) + G

    Expectations:theBasicTools(Ch.14)

    TheISdependsontherealinterestrate

    IS : Y = C (Y T ) + I (Y , i e ) + G
    Expectations:theBasicTools(Ch.14) 4

    TheLMdependsonthenominalinterestrate
    M = YL ( i ) P

    Expectations:theBasicTools(Ch.14)

    NominalandRealInterestRates,andtheISLMModel
    i LM

    iA eA rA=iA - eA rA IS(eA) YA Y

    ChangesinExpectedInflation?
    Expectations:theBasicTools(Ch.14) 6

    NominalandRealInterestRates,andtheISLMModel
    i eB > eA LM

    iB iA eB rB=iB - eB rA rB YA YB Y IS(eB) IS(eA)

    ChangesinExpectedInflation
    Expectations:theBasicTools(Ch.14) 7

    NominalandRealInterestRates,andtheISLMModel
    Y = C (Y T ) + I (Y , i e ) + G
    M = YL ( i ) P

    PolicyQuestion: Whataretheeffectsofapermanentincreaseinmoneygrowth? ShortRunvs MediumRun

    Expectations:theBasicTools(Ch.14)

    NominalandRealInterestRates,andtheISLMModel
    Whataretheeffectsofanincreaseinmoneygrowth? Shortrun
    i r Y

    Mediumrun
    i
    r = rn

    Y = Yn

    Whathappensbetweentheshortruntothemediumrun?

    Expectations:theBasicTools(Ch.14)

    MediumRun(510years)
    Equilibrium: Y S = Z = Y

    Supply: Y S = YN

    YN : Natural Rate of Output

    Determinedby Technological Progress

    IS in Medium Run: YN = C (YN T ) + I (YN , rN ) + G


    rN : Natural Interest Rate

    Expectations:theBasicTools(Ch.14)

    10

    Policy:PermanentIncreaseinMoneyGrowth(gm)
    (a) , e : no change in SR
    M M (b) gm > > P SR P LM 0 LM SR (c) ISSR = IS0
    i0 iSR A SR IS0=ISSR YN YSR Y

    LM0 LMSR

    Expectations:theBasicTools(Ch.14)

    11

    AdjustmentinMediumRun(510years)
    Ouput goes back to Natural Rate: Y YN Inflation: Y > YN (from Phillips Curve)

    Expected Inflation: since agents anticipate it and e

    M From Aggregate Demand Y = : gm = in Medium Run (since Y = YN ) P

    Expectations:theBasicTools(Ch.14)

    12

    Policy:PermanentIncreaseinMoneyGrowth(gm)
    (a) e : ISSR ISMR
    (b) , > gm M M < P MR P SR LM SR LM MR
    iMR i0 iSR MR A SR ISMR IS0=ISSR YN YSR Y LMMR LM0 LMSR

    Expectations:theBasicTools(Ch.14)

    13

    Policy:PermanentIncreaseinMoneyGrowth(gm)
    (a) e : ISSR ISMR
    (b) , > gm M M < P MR P SR LM SR LM MR
    iMR i0 iSR MR A SR ISMR IS0=ISSR YN YSR Y LMMR LM0 LMSR

    Short Run i , r , Y

    Expectations:theBasicTools(Ch.14)

    14

    Policy:PermanentIncreaseinMoneyGrowth(gm)
    (a) e : ISSR ISMR
    (b) , > gm M M < P MR P SR LM SR LM MR
    iMR i0 iSR MR A SR ISMR IS0=ISSR YN YSR Y LMMR LM0 LMSR

    Short Run i , r , Y

    Adjustment to MR i , r to rN , Y to YN , to = gm
    Expectations:theBasicTools(Ch.14) 15

    NominalandRealInterestRates,andtheISLMModel
    Effectsofanincreaseinmoneygrowth(gm)

    Expectations:theBasicTools(Ch.14)

    16

    NominalandRealInterestRates,andtheISLMModel
    Effectsofanincreaseinmoneygrowth(gm) FisherEffect Inthemediumrunchangesininflationleadtoonetoone changesinthenominalinterestrate changes in the nominal interest rate
    i = rn +

    Expectations:theBasicTools(Ch.14)

    17

    TheFisherHypothesis:EmpiricalEvidence(TimeSeries) Inthemediumrun,thenominalinterestmovesonetoone withinflation. imedium = rn + medium

    USInflationRateandTbillRate(i) US I fl i R d T bill R (i)


    Expectations:theBasicTools(Ch.14) 18

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