Lectures in Macroeconomics- Charles W. Upton Equilibrium in Two Markets Practice

Equilibrium in Two Markets- Practice The Y and M Curves P r Y M PoPo roro

Equilibrium in Two Markets- Practice The Y Curve P r Y M PoPo roro

Equilibrium in Two Markets- Practice Definition P r Y M PoPo roro At every point on the Y curve the demand and supply of output are equal.

Equilibrium in Two Markets- Practice Pick a Point P r Y M PoPo roro At every point on the Y curve the demand and supply of output are equal. D Y =S Y

Equilibrium in Two Markets- Practice A change in r P r Y M PoPo roro A little review: D Y =S Y If r , z  so c . Also I  Ergo D Y <S Y.

Equilibrium in Two Markets- Practice A change in r P r Y M PoPo roro A little review: D Y =S Y If r , z  so c . Also I  Ergo D Y <S Y. A little review: D Y =S Y If r , z  so c . Also I  Ergo D Y >S Y.

Equilibrium in Two Markets- Practice Memo to the Auctioneer P r Y M PoPo roro A little review: D Y =S Y If r , z  so c . Also I  Ergo D Y <S Y. A little review: D Y =S Y If r , z  so c . Also I  Ergo D Y >S Y. Memo to the auctioneer: To cut D Y, raise r To raise D Y lower r

Equilibrium in Two Markets- Practice A change in P P r Y M PoPo roro A little review: D Y =S Y If P , z  so c . Ergo D Y <S Y.

Equilibrium in Two Markets- Practice A change in P P r Y M PoPo roro A little review: D Y =S Y If P , z  so c . Ergo D Y <S Y. A little review: D Y =S Y If P , z  so c . Ergo D Y >S Y.

Equilibrium in Two Markets- Practice Memo to the Auctioneer P r Y M PoPo roro A little review: D Y =S Y If P , z  so c . Ergo D Y <S Y. A little review: D Y =S Y If P , z  so c . Ergo D Y >S Y. Memo to the auctioneer: To cut D Y, raise P To raise D Y lower P

Equilibrium in Two Markets- Practice Increased Confidence P r Y M PoPo roro People become more confident about the future.

Equilibrium in Two Markets- Practice The Shifting Y Curve P r Y M PoPo roro Obviously the Y curve has shifted, either up and to the right or down and to the left. But which way?

Equilibrium in Two Markets- Practice Effect of Increased Confidence P r Y M PoPo roro D Y >S Y Wealth and hence consumption are up.

Equilibrium in Two Markets- Practice The New Y Curve P r Y M PoPo roro D Y >S Y Wealth and hence consumption are up. This point is not on the new Y curve

Equilibrium in Two Markets- Practice Moving to the Y Curve P r Y M PoPo roro D Y >S Y The Auctioneer must cut D Y

Equilibrium in Two Markets- Practice What to do P r Y M PoPo roro D Y >S Y The Auctioneer must cut D Y Memo to the auctioneer: To cut D Y, raise r To raise D Y lower r

Equilibrium in Two Markets- Practice What to do P r Y M PoPo roro D Y >S Y The Auctioneer must cut D Y Memo to the auctioneer: To cut D Y, raise P To raise D Y lower P

Equilibrium in Two Markets- Practice The Y Curve P r Y M PoPo roro Now we know

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro Pick any point on the Y curve. D Y =S Y

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro Does the event (e.g. people become more confident about the future mean D Y >S Y or D Y <S Y ? D Y =S Y

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro Suppose D Y >S Y. To get back on the Y curve, the Auctioneer would have to raise r or P. Thus Y curve shifts up and to the right. D Y =S Y

Equilibrium in Two Markets- Practice The M Curve P r Y M PoPo roro

Equilibrium in Two Markets- Practice Definition P r Y M PoPo roro At every point on the M curve the demand and supply of money are equal.

Equilibrium in Two Markets- Practice Pick a Point P r Y M PoPo roro At every point on the M curve the demand and supply of money are equal. D M =S M

Equilibrium in Two Markets- Practice A change in r P r Y M PoPo roro A little review: D M =S M If r , m D . Ergo D M <S M. D M =S M

Equilibrium in Two Markets- Practice A change in r P r Y M PoPo roro A little review: D M =S M If r , m D . Ergo D M <S M. D M =S M A little review: D M =S M If r , m D . Ergo D M >S M.

Equilibrium in Two Markets- Practice Memo to the Auctioneer P r Y M PoPo roro A little review: D M =S M If r , m D . Ergo D M <S M. D M =S M A little review: D M =S M If r , m D . Ergo D M >S M. Memo to the auctioneer: To cut D M, raise r To raise D M lower r

Equilibrium in Two Markets- Practice A change in P e P r Y M PoPo roro A little review: D M =S M If P , m s . True, m d  On balance D M >S M. D M =S M

Equilibrium in Two Markets- Practice A change in P P r Y M PoPo roro A little review: D M =S M If P , m s . True, m d  On balance D M >S M. D M =S M A little review: D M =S M If P , D M <S M.

Equilibrium in Two Markets- Practice Memo to the Auctioneer P r Y M PoPo roro A little review: D M =S M If P , m s . True, m d  On balance D M >S M. D M =S M A little review: D M =S M If P , D M <S M. Memo to the auctioneer: To cut S M, raise P To raise S M lower P

Equilibrium in Two Markets- Practice Increased Confidence P r Y M PoPo roro People become more confident about the future.

Equilibrium in Two Markets- Practice The Shifting M Curve P r Y M PoPo roro Has the M curve shifted up and to the left or down and to the right.

Equilibrium in Two Markets- Practice Effect of Increased Confidence P r Y M PoPo roro D M >S M Wealth and hence consumption and money demand are up.

Equilibrium in Two Markets- Practice The New M Curve P r Y M PoPo roro D M >S M Wealth and hence consumption and money demand are up. This point is not on the new M curve

Equilibrium in Two Markets- Practice Moving to the M Curve P r Y M PoPo roro D M >S M The Auctioneer must cut D M or raise S M

Equilibrium in Two Markets- Practice What to do P r Y M PoPo roro D M >S M The Auctioneer must cut D M or raise S M Memo to the auctioneer: To cut D M, raise r To raise S M, lower P

Equilibrium in Two Markets- Practice What to do P r Y M PoPo roro D M >S M The Auctioneer must cut D M or raise S M Memo to the auctioneer: To cut D M, raise r To raise S M, lower P

Equilibrium in Two Markets- Practice The M Curve P r Y M PoPo roro D M >S M Now we know

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro Pick any point on the M curve. D M =S M

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro Does the event (e.g. people become more confident about the future mean D M >S M or D M <S M ? D M =S M

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro D M =S M Suppose D M >S M. To get back on the M curve, the Auctioneer would have to raise r or lower P. Thus M curve shifts down and to the right.

Equilibrium in Two Markets- Practice Summary P r Y M PoPo roro D M =S M Suppose D M >S M. To get back on the M curve, the Auctioneer would have to raise r or lower P. Thus M curve shifts down and to the right. And, once we know how the Y and M curves shift, the rest is easy.

Equilibrium in Two Markets- Practice End ©2003 Charles W. Upton. All rights reserved