Macroeconomics: Study Guide Tom Porter, 2014. Supply and Demand Start with supply and demand –For macroeconomics the starting point is aggregate supply

Macroeconomics:Study Guide

Tom Porter, 2014

Supply and Demand

• Start with supply and demand– For macroeconomics the starting point is aggregate supply and

aggregate demand– Know the 3 equations for this graph:

• AD = C + I + G + NX• LRAS = the production function, YN = A F(L,K,H,N)

• SRAS = YN + a (P – Pe)

– One or another of these lines will change given a shock (or other change) to one of the variables in these equations.

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FIGURE 14.8: The Long-Run Equilibrium

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Interest Rates

• Interest Rates are determined by supply and demand• There are 2 interest rates:

1. Real interest rates are determined by the supply and demand for loanable funds• Supply for loanable funds are from Savings• Demand for loanable funds are from Investment• The difference between this rate and the world real interest rate determines Net Capital

Outflow.• The Real Exchange Rate, then adjusts to balance Net Capital Outflow with Net Exports.• See Following Slide

2. Nominal interest rates – to be continued after next slide.


FIGURE 13.3: The Real Equilibrium in a Small Open

Economy

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Interest Rates (continued)

• Interest Rates are determined by supply and demand• There are 2 interest rates:

1. Real interest rates – see previous slides

2. Nominal interest rates are determined by the supply and demand for money. The price level also adjusts based on the supply and demand for money. See the next two slides.

– Nominal interest rates are tied to changes in the price level. Percentage changes in the price level is inflation, so the relationship between interest rates and prices is:

R = π + r


FIGURE 11.1: How the Supply and Demand for Money Determine

the Equilibrium Price Level

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FIGURE 15.4:Equilibrium in the Money Market

15-8

Two money equations represent long-run and short-run dynamics.

1. Long-run forces adjust so that:

M x V = P x Y

2. Investment decisions are determined by:

R = π + r

where inflation, π, is expected inflation.


Monetary Policy and Markets

Documents

Macroeconomics: Study Guide Tom Porter, 2014. Supply and Demand Start with supply and demand –For macroeconomics the starting point is aggregate supply