Final – Lecture 6 – Chapter 19

Introduction to Macroeconomics (AF4040)

• Week 6: Focus on understanding the relationship between the money and goods markets.

Assessment Details

• Grading: 40% from Multiple Choice Questionnaire (MCQ), 60% from final exam.

• MCQ Details:

  • In-person test with 20 questions in Week 9.

  • Covers all content up to that point.

  • Bring pen, pencil, and calculator.

  • Details on date, location, and time to be confirmed.

• Final Exam Details:

  • Scheduled during exam period in May (exact date TBD).

  • Closed book; allowed materials: stationery (calculator, pen, pencil).

  • 3 questions; answer any 2.

The Relationship Between Money and Goods Markets

• Monetary Changes Impact:

  • Explore how changes in the money supply affect national income.

Money and National Income

• Key Concepts:

  • Effects of money supply changes on prices and income: differing views (Keynesians vs. Monetarists).

  • Quantity Theory of Money: Identity MV = PY where:

    • M = Money Supply

    • V = Velocity of Money

    • P = Price Level

    • Y = National Income

  • Stability of V and Y impacts economic forecasts.

Interest-Rate Transmission Mechanism

• Stages:

  1. Money-Interest Rate Link: Changes in the money supply affect interest rates.

  2. Interest Rate-Investment Link: Fluctuating interest rates influence investment decisions.

  3. Multiplier Effect: Investment changes subsequently affect aggregate demand.

Limitations of Interest Rate Transmission Mechanism

• Challenges:

  • Elastic demand for money may impede the money-interest rate link.

  • Potential liquidity traps where increased money supply does not lead to increased consumption or investment.

Investment and Interest Rates

• Different Demand Responses:

  • Inelastic investment demand means interest rate changes have minimal effect on investment levels.

  • Elastic investment demand indicates more responsive investment changes to interest rate fluctuations.

Exchange-Rate Transmission Mechanism

• Stages:

  • Changes in the money supply impact interest rates, leading to exchange rate variations, which affect imports and exports.

IS/MP Analysis

• Modeling Framework:

  • Integration of goods and money markets.

  • Key tools include IS curve (investment-savings) and MP curve (monetary policy).

  • Discuss equilibrium in goods and money markets with shifts in curves indicating economic changes.

Financial Instability Hypothesis

• Credit Cycles:

  • Examine stages of credit accumulation from tranquility to fragility, ending in financial busts.

  • Impact of the financial accelerator on aggregate expenditure and potential output fluctuations.

Full Effects of Changes in the Markets

• Impact on National Income:

  • Assess how shifts in either the goods or money market, or both, affect equilibrium and national income.

  • Consideration of both injections and money supply increases in overall economic impact.

Conclusion

• Wrap up of the relationship between the money and goods markets emphasizing the ongoing effects of fiscal and monetary policies on national income and economic stability.