Full Model L & R

Three types of macroeconomic shocks

1. Financial Shocks

2. Spending Shocks

3. Supply Shocks

Financial Shocks

(shift the MP curve): changes in borrowing conditions/costs

• Monetary policy, risk premium, borrowing conditions, inflation expectations, uncertainty/volatility in the economy

Spending Shocks

(shift the IS curve): changes in autonomous spending at a given real interest rate

• Unrelated to changes in interest rate

• Consumption: Changes in wealth, consumption confidence, taxes

• Investment: Business confidence, corporate taxes, lending standards uncertainty, technological advances

• Govt expenditures: Fiscal policy and automatic stabilizers

• Net exports: Economic growth of trading partners, trade policy

Supply Shocks

(shift the Philips curve)

• Changes in input prices: Affects production costs

• Productivity: Weaker than expected productivity leads production costs to rise more quickly than expected

• Changes in inflation expectations

What does it mean that the model is unidirectional

Only goes one way

R What is BOC rate

Overnight rate at 2.25

• Deposit Rate: 2.2

• Bank Rate: 2.5

R What is economic growth in US driven by

• Consumption

• AI Inflation

US inflation is strong

R How will the economy grow (C) in response to tariffs

• Excepted to grow modestly as it adjust to tariffs and trade uncertainty

• Employment gains in late 2025 have been reversed in 2026 unemployment growth

R Prior to war the global economy was on pace to grow at what rate

3%

R What is the focus of US Fed

Dual Mandate: Stable prices, and maximum sustainable employment

R Why did the fed decide to leave the policy rate unchanged

• See current rate as appropriate to promote max sustainable employment and 2% inflation

• Implications of Middle East uncertain

R Indicators Suggest

• Consumer spending has been resilient

• Fixed investment has continued to expand

• Activity is the housing sector is weak

• Real GDP will rise 2.4% this year and 2.3% next

R Why do job gains remain low

• Decline in the growth of the labour force due to lower immigration and labour force participation

• Labour demand has softened as well

R What is target for federal fund rates

• Maintained at 3.5% - 3.75%

R What are the implications in the middle east, near term

Higher energy prices will push up overall inflation