ECO102 Lecture 09
ECO102 - Week 08.pdf part 2
- Trade Policy
- Analyse how tariffs will affect the US economy.
- Tariff reduces MPI, creates an Inflationary Gap
- Tariffs make imported goods more expensive, so it drops the MPI to
- Tariffs make the demand curve steeper
is vertical at initial equilibrium output - Only thing that happens after tariffs is that prices and wages rise.
- When we go from
then causing to shift downwards. - Going from
then again, giving us the same point as - So the NX diagram shows:
- NX is unchanged.
- So tariffs just raise wages and prices, but don't change output or NX.
- #tk
- Savings function
- Budget balance
- What are the changes through eq a,b,c,d?
- 6 LRAS Shock
- LRAS Shifts Right
- When LRAS shifts right, we have a recessionary gap.
- They're closed by falling wages and prices.
- #tk flashcards
- No bundle C in this case.
- Shock by
- At bundle B,
but - What causes the Long-Run Aggregate Supply to shift?
- Something permanent
- Changes in
will shift short run. - War
- If people are unable to go to work.
- Society isn't functioning.
- Then prices rise
- 8 Monetary Policy
- Two ways the govt can manipulate exchange rate:
- Direct
- Overnight rates
- Interest rates charged to banks by the central bank
- These rates are passed onto consumers.
- OMO
- Open Market Operations
- Buying and selling government bonds to influence the money supply.
- If central bank sells bonds, price goes down. (supply increase, value down)
- Price goes down, so yield goes up.
- Yield is difference between par (face value) and price you paid.
- You have a bond worth 100, but you bought it for 80, so you get 20 back. Yield is 20.
- Price goes down, so yield goes up.
- Direct
- With this example, the yield makes the
negative. It's the opportunity cost for investments. , then , then - #tk he got:
- A:
- B:
- C:
- Fiscal Policy:
- Affects
- Takes a lot of time to affect govt spend and tax changes.
- Affects
- Monetary Policy:
- Affects
- Implemented in a day.
- Easy to drop and bump.
- However this affects a lot of the canadian economy.
- Higher interest rates affect business borrowing, net present value, return on investment, etc.
- Argument:
- Manipulating economy by
will destabilize the economy, so it's not a good idea to do it too much. - People who are in charge of monetary policy, need to have independence from politicians.
- Is this why Federal Reserve is independent from the US government?
- Manipulating economy by
- #tk flashcards on differences between fiscal and monetary.
- Affects
- We've been studying keynesian macro.
- We can't wait for the long run to happen?
- Classical says keep hands off the economy. No govt policy.
- Hayek says no policy.
- Keynes says we need to intervene in the economy to get out of recessionary gaps and inflationary gaps.
- 7 Balance the budget
- Indirect taxes are initially
- Find
- #tk he got
- Find
so - Adding taxes will make GDP go from 100 to 80, but it will balance the budget.
needs to balance the budget. - We need to tax more than budget deficit because multipliers.
- Since
- Contractionary fiscal policy reduced GDP by
. So direct tax revenues fell by dollars. So we need to increase and then to make up for loss in direct tax revenue. - In long run, policy is too strong.
- We got rid of deficit but now we have a surplus of
- It's a common outcome.
- It's a short-run overreaction.
- We got rid of deficit but now we have a surplus of
- Find
so at if , GDP stays at original level. - 3 questions each worth 5 marks.