1. Slide Show #7 AGEC 430 Macroeconomics of Agriculture Spring 2010

2. Handout #10

3. QM This is the money market in the Keynesian model.

4. Transmission of Monetary Policy Two essential forms of monetary policy actions: 1.Change the fractional reserve requirement ratio (rr m ) 2.Change the level of total reserves (TR) in banking system The level of total reserves is affected by: 1.Fed buying or selling of government bonds 2.Fed changing the discount rate on loans from Fed to banks

5. Transmission of Monetary Policy Expansionary policy actions: 1.Lowering discount rate 2.Buying government bonds 3.Lowering required reserve ratio Contractionary policy actions: 1.Raising discount rate 2.Selling government bonds 3.Raising required reserve ratio iEiE QM i E1 iEiE QM i E1

6. Handout #11

7. Assume government spending set by budget and fixed in the short run. Assume government spending set by budget and fixed in the short run.

8. Found by substituting C, I, G and T equations into 1 st equation. Found by substituting C, I, G and T equations into 1 st equation.

9. The increase in government spending in 2009 already exceeds the fiscal stimulus employed in the last two major recessions, and much of the approved spending has yet to be implemented.

10. Size of the civilian labor force. Size of the civilian labor force. Simplified labor supply curve. Simplified labor supply curve.

11. Is there cost push inflation from the labor market here? Why? More on this shortly. Is there cost push inflation from the labor market here? Why? More on this shortly.

12. The tax base (h) would include property taxes taxes. Taxes paid this year based on last year’s income. Y t-1 T h tx

13. Federal government receipts are down from their peak of $2.75 trillion in 2007. Why?

14. Deficit determined by the extent to which government spending exceeds its revenue. Deficit determined by the extent to which government spending exceeds its revenue. Y t-1 T h tx

15. An increase in domestic income increases imports and reduces exports as domestic consumption increases. A stronger dollar reduces exports and increases imports. Both cause X N to fall. An increase in domestic income increases imports and reduces exports as domestic consumption increases. A stronger dollar reduces exports and increases imports. Both cause X N to fall.

16. An increase in domestic interest rates relative to interest rates in the rest of the world increases the value of the dollar.

17. Handout #12

24. Aggregate Production Function So an increase in AD requires more production of goods to meet this demand. This increases the demand for labor and increases capacity utilization rates. So an increase in AD requires more production of goods to meet this demand. This increases the demand for labor and increases capacity utilization rates.

25. Two Types of Inflation

26. Ypot AS AD General price level Example of Demand Pull Inflation Y 1 Y 2 P2P1P2P1 Inflation = sustained percent increase in general price level

27. Ypot AS AD General price level Example of Demand Pull Inflation Y 1 Y 2 P2P1P2P1 Inflation = sustained percent increase in general price level Y1/Ypot < Y2/Ypot so the ratio is greater as the gap is closing Y1/Ypot < Y2/Ypot so the ratio is greater as the gap is closing

28. Ypot AS AD General price level Example of Cost Push Inflation Y 2 Y 1 P2P1P2P1 Inflation = sustained percent increase in general price level As wage rates for example increase, we see cost push inflation.

30. Lower US interest rates weakens the value of the dollar relative to foreign currencies.

31. This makes it cheaper for other countries to buy our exports (i.e., takes fewer yen to buy wheat than before). Lower US interest rates weakens the value of the dollar relative to foreign currencies. This makes it cheaper for other countries to buy our exports (i.e., takes fewer yen to buy wheat than before).

32. Lower US interest rates weakens the value of the dollar relative to foreign currencies. This makes it cheaper for other countries to buy our exports (i.e., takes fewer yen to buy wheat than before). This also makes imports more expensive (i.e., takes more dollars to buy imported goods). Lower US interest rates weakens the value of the dollar relative to foreign currencies. This makes it cheaper for other countries to buy our exports (i.e., takes fewer yen to buy wheat than before). This also makes imports more expensive (i.e., takes more dollars to buy imported goods).

33. The increase in net exports, including ag products, increases prices, net income, land values and net worth.

34. Lower interest rates reduces farm interest expenses, which increases net income, land values and net worth.

35. Price Quantity D S Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products P2P1P2P1 Q1Q2Q1Q2 Let’s Step Through This Graphically

36. Price Quantity D S Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 2: Farm revenue = price times quantity. Revenue increases as both price and quantity increase (i.e., P 2 Q 2 > P 1 Q 1 ) Step 2: Farm revenue = price times quantity. Revenue increases as both price and quantity increase (i.e., P 2 Q 2 > P 1 Q 1 ) P2P1P2P1 Q1Q2Q1Q2 Let’s Step Through This Graphically

37. Price Quantity D S Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 2: Farm revenue = price times quantity. Revenue increases as both price and quantity increase (i.e., P 2 Q 2 > P 1 Q 1 ) Step 2: Farm revenue = price times quantity. Revenue increases as both price and quantity increase (i.e., P 2 Q 2 > P 1 Q 1 ) Step 3: Farm interest expenses decline as interest rates fall. Step 3: Farm interest expenses decline as interest rates fall. P2P1P2P1 Q1Q2Q1Q2 Let’s Step Through This Graphically

38. Price Quantity D S Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 1: Increase in export demand as value of dollar declines. This increases prices for agricultural products Step 2: Farm revenue = price times quantity. Revenue increases as both price and quantity increase (i.e., P 2 Q 2 > P 1 Q 1 ) Step 2: Farm revenue = price times quantity. Revenue increases as both price and quantity increase (i.e., P 2 Q 2 > P 1 Q 1 ) Step 3: Farm interest expenses decline as interest rates fall. Step 3: Farm interest expenses decline as interest rates fall. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. P2P1P2P1 Q1Q2Q1Q2 Let’s Step Through This Graphically

39. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Let’s Step Through This Graphically

40. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Step 5: The capitalized value of farm land can be approximated by dividing net farm income by a capitalization rate such as the rate of interest, or: LV = Net farm income / interest rate. If net farm income is rising and interest rates are falling, then farm land values should increase. Step 5: The capitalized value of farm land can be approximated by dividing net farm income by a capitalization rate such as the rate of interest, or: LV = Net farm income / interest rate. If net farm income is rising and interest rates are falling, then farm land values should increase. Let’s Step Through This Graphically

41. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Step 4: Net farm income = farm revenue minus farm expenses. Net farm income rises as a result of steps 2 and 3. Step 5: The capitalized value of farm land can be approximated by dividing net farm income by a capitalization rate such as the rate of interest, or: LV = Net farm income / interest rate. If net farm income is rising and interest rates are falling, then farm land values should increase. Step 5: The capitalized value of farm land can be approximated by dividing net farm income by a capitalization rate such as the rate of interest, or: LV = Net farm income / interest rate. If net farm income is rising and interest rates are falling, then farm land values should increase. Step 6: Net worth = total assets minus total debt. If farm land values are rising and net farm income is rising, then total assets will increase, thereby increasing net worth. Step 6: Net worth = total assets minus total debt. If farm land values are rising and net farm income is rising, then total assets will increase, thereby increasing net worth. Let’s Step Through This Graphically