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 Q2 Q

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

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

Effect on P and GDP when $ depreciates

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

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

Sm2 i Sm1 Money Market i2 i1 Dm Q Q2 Q1

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

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

Effect on interest rate when government runs a budget deficit

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

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

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

Effect on P, GDP when $ appreciates

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

Effect on AD of FED’s bond sales during inflation

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

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

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

Effect on AS and SRPC when price of oil increases dramatically

Inflation rate AS2 AS1 SRPC2 AD SRPC1 Unemployment rate P P2 P1 GDP2 P goes up Unemployment rises

Expansionary fiscal policy during a recession

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

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

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

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

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

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

Phillips Curves Inflation on y axis; unemployment on x Short run slopes downward SRPC moves only when AS moves; if AD moves, there is movement along the SRPC If AS shifts left, SRPC shifts right; if AS shifts right, SRPC shifts left LRPC is vertical at the NRU LRPC moves when NRU changes (when LRAS moves) If LRAS shifts left, LRPC shifts right

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