1. Domanda Aggregata, Prodotto, e Tasso di Interesse
Capitolo 10
Domanda Aggregata, Prodotto, e Tasso di Interesse

2. Cyclical fluctuations
Figure 10.01
Cyclical fluctuations
Figure 10.1

3. Figure 10.1 Changes we see , and how we decompose them. Real GDP Time
Long-term growth trend
(+) cyclical deviation
Actual real GDP
Real GDP
(-) cyclical deviation
Time
Figure 10.1

4. Table 10.01
Openness and size (%)
Table 10.1

5. General macroeconomic equilibrium in the open economy
Figure 10.02
General macroeconomic equilibrium in the open economy
Figure 10.2

6. Figure 10.2 Goods Market Money Market
Interaction of markets in the closed economy
Income influences demand for money
Goods Market
Money Market
Interest rates affect aggregate demand
Figure 10.2

7. Figure 10.2 Goods Market Money Market Foreign Exchange Market
Now we open the economy…
Income influences demand for money
Goods Market
Money Market
Interest rates affect aggregate demand
Interest rates influence the exchange rate
Real exchange rates affect aggregate demand
Foreign Exchange Market
Figure 10.2

8. Identità contabile fondamentale (equazione delle risorse-impieghi)
Y = C + I + G + XZ
C = C(, Y-T), con  e T dati o esogeni (* e T*)
I = I(i, q), q esogeno (animal spirits), q*
G esogena G*
SPPC =X-Z=SPPC(Y, Y*, ), Y* reddito estero

9. Parità dei tassi di interesse: i* = i
ius=ie
(1+ius)=(1/St)(1+ie)St+1=(1+ie) St+1/St
St+1=(1+s) St
(1+ius)=(1+ie)(1+s) se prendo i log  (approssim.)
ius=ie+s dove s è la variazione del tasso di cambio nominale
se ius>ie per garantire lo stesso rendimento delle attività nei due paesi s>0 (apprezzamento dell’euro), ma ciò implica anche che all’inizio (quando si verifica ius>ie) l’euro si deve svalutare

10. Figure 10.03
The 45° diagram
Figure 10.3

11. Figure 10.3 Desired demand Output Ceteris paribus varies varies
Desired demand
Output
Figure 10.3

12. Equilibrium condition
Figure 10.03
Equilibrium condition
Desired demand Y Y´
Output
Figure 10.3

13. Figure 10.3 The 45° Diagram, a.k.a. “The Keynesian Cross”
Desired demand A
Output
Figure 10.3

14. Figure 10.04
The multiplier
Figure 10.4

15. Start from an equilibrium in the goods market
Figure 10.04
Start from an equilibrium in the goods market
45°
DD(Y)
Desired demand Y DD A
Output
Figure 10.4

16. Figure 10.4 45° DD´(Y) Desired demand DD(Y) DD A Y Output Output
Government expenditures increase
DD(Y)
Desired demand DD A Y
Output
Output
Figure 10.4

17. Output increases to match increase in demand
Figure 10.04
Output increases to match increase in demand
45°
DD´(Y) B
DD(Y) A´
Desired demand Y A Y
Output
Output
Figure 10.4

18. BA´ increase in income means DD´ increases too
Figure 10.04
BA´ increase in income means DD´ increases too
45°
DD´(Y) B´ B
DD(Y) A´
Desired demand Y A Y
Output
Output
Figure 10.4

19. Output increases again to meet induced demand, A´B´
Figure 10.04
Output increases again to meet induced demand, A´B´
45°
DD´(Y) B´
A´´ B
DD(Y) A´
Desired demand Y A Y
Output
Output
Figure 10.4

20. The government spending multiplier
Figure 10.04
The government spending multiplier
45°
DD´(Y) E B´
A´´ B
DD(Y) A´
Desired demand Y A DY Y Y*
Output
Output
Figure 10.4

21. Demand Multipliers: Five Examples
Table 10.02
Demand Multipliers: Five Examples
The numbers represent the effect of a change in government expenditure of 1% of real GDP in 2000 and 2001 in all five regions on each economy's output (as percentage deviation from baseline).
Table 10.2

22. Figure 10.05
Deriving the IS curve
Figure 10.5

23. Identifying an equilibrium combination of i and Y
Figure 10.05
Identifying an equilibrium combination of i and Y
Y=DD
Desired demand
Output
Interest rate
Output A A
Figure 10.5

24. Equilibrium output will change if the interest rate changes
Figure 10.05
Equilibrium output will change if the interest rate changes
Y=DD A
Desired demand B
Interest rate B A
Output
Output
Figure 10.5

25. IS curve derived by finding Y’s for all i’s
Figure 10.05
IS curve derived by finding Y’s for all i’s
Y=DD IS
Desired demand
Output
Interest rate
Output A B B A
Figure 10.5

26. To the right of the IS curve supply of goods exceeds their demand
Figure 10.05
To the right of the IS curve supply of goods exceeds their demand
Y=DD IS
Desired demand
Output
Interest rate
Output D C A
Excess supply of goods B B C A D
Figure 10.5

27. Figure 10.5 Convince yourself that this is true!
To the left of the IS curve demand for goods exceeds their supply IS
Convince yourself that this is true! A
Excess supply of goods
Interest rate B
Excess demand for goods
Hint: interest rates are lower than along the IS curve where Y=DD(i)
Output
Figure 10.5

28. Exogenous increase in aggregate demand
Figure 10.06
Exogenous increase in aggregate demand
Figure 10.6

29. Start from equilibrium in the goods market...
Figure 10.06
Start from equilibrium in the goods market...
Y=DD IS
Desired demand
Interest rate A A
Output
Output
Figure 10.6

30. Figure 10.06
Exogenous increase in aggregate demand (e.g. G increases, but hold i constant at first)
Y=DD IS
Desired demand B
Interest rate A B A
Output
Output
Figure 10.6

31. Figure 10.06
Similar shift to that from A to B would occur for all other values of the interest rate
Y=DD
IS´ IS
Desired demand B
Interest rate A B A
Output
Output
Figure 10.6

32. GDP growth and Tobin’s q in the USA
Figure 10.07
GDP growth and Tobin’s q in the USA
Figure 10.7

33. Figure 10.08
Deriving the LM curve
Figure 10.8

34. Figure 10.08
Holding the real money supply constant, we determine i for some given level of output...
Real money supply
Nominal nterest rate
Nominal nterest rate A A
Real money stock
Output
Figure 10.8

35. Same question for a higher level of output...
Figure 10.08
Same question for a higher level of output...
Real money supply
Nominal nterest rate
Nominal nterest rate B B A A
Real money stock
Output
Figure 10.8

36. LM curve derived by finding i’s for all Y’s
Figure 10.08
LM curve derived by finding i’s for all Y’s
Real money supply LM
Nominal nterest rate
Nominal nterest rate B B A A
Real money stock
Output
Figure 10.8

37. Excess demand for money
Figure 10.08
To the right of the LM curve demand for real balances exceeds their supply
Real money supply LM
Nominal nterest rate
Nominal nterest rate B B
Excess demand for money C A C A
Real money stock
Output
Figure 10.8

38. Figure 10.08
To the left of the LM curve supply of real balances exceeds their demand
Real money supply
Excess supply of money LM
Nominal nterest rate
Nominal nterest rate C B C B A A
Real money stock
Output
Figure 10.8

39. Figure 10.8 Money market equilibrium on the LM curve LM
Excess supply of money LM
Nominal nterest rate
Excess demand for money
Output
Figure 10.8

40. Increasing money supply shifts LM outward
Figure 10.09
Increasing money supply shifts LM outward
Figure 10.09

41. Figure 10.09
Increasing money supply shifts LM outward (at the same interest rate, we need Y to go up for greater D)
Real money supply LM
LM´
Nominal nterest rate
Nominal nterest rate A A B B
Real money stock
Output
Figure 10.09

42. Figure 10.09
Increasing money supply shifts LM outward (at the same Y, we need i to go down)
Real money supply LM
LM´
Nominal nterest rate
Nominal nterest rate A A C C
Real money stock
Output
Figure 10.09

43. The balance of payments line
Figure 10.10
The balance of payments line i*
Financial integration line
Interest rate
Output
Figure 10.10

44. Figure 10.11
General equilibrium
Figure 10.11

45. Equilibrium in the goods market
Figure 10.11
Equilibrium in the goods market
Changes in output will occur when we are not on the IS curve (as response to shortage to the left of IS and surplus to the right). IS
Interest rate
Output
Figure 10.11

46. Equilibrium in the money market
Figure 10.11
Equilibrium in the money market LM
Changes in the interest rate will occur when we are not on the LM curve. Below LM there is an excess demand for money (bonds chase money). Above the LM there is an excess supply of money (money chases bonds).
Interest rate
Output
Figure 10.11

47. Equilibrium in international capital markets
Figure 10.11
Equilibrium in international capital markets
When domestic and foreign rates of return are not the same, capital will flow towards the higher returns until returns are equalized. i*
Financial integration line
Interest rate
Output
Figure 10.11

48. Figure 10.11 General equilibrium LM A i* IS Financial integration line
Interest rate
Output
Figure 10.11

49. Money policy under fixed exchange rates
Figure 10.12
Money policy under fixed exchange rates
Figure 10.12

50. Figure 10.12
Starting from general equilibrium, there is an unanticipated increase in the supply of money LM A
Financial integration line i*
Interest rate IS
Output
Figure 10.12

51. Figure 10.12
Starting from general equilibrium, there is an unanticipated increase in the supply of money LM
LM´ A
Financial integration line i*
Interest rate IS
Output
Figure 10.12

52. Figure 10.12
Note: points A,B,C each satisfy only two of three equilibrium conditions
LM´ A C
Financial integration line i*
Interest rate B
This condition is not moving! IS
Output
Figure 10.12

53. Figure 10.12
Implication of fixed exchange rates in this case: No reason for the IS curve to move.
LM´ A C
Financial integration line i*
Interest rate B
This condition is not moving either! IS
Output
Figure 10.12

54. Figure 10.12
The central bank has to bring LM back to the original position to keep the exchange rate fixed.
LM´ A
Financial integration line i*
Interest rate IS
Output
Figure 10.12

55. Figure 10.12
The central bank has to bring LM back to the original position to keep the exchange rate fixed. LM
LM´ A
Financial integration line i*
Interest rate
Monetary policy is ineffective for changing output. IS
Output
Figure 10.12

56. The Mundell-Fleming model: Summary
Table 10.04
The Mundell-Fleming model: Summary
Effect on real GDP
Fixed exchange
Flexible exchange
Exogenous change
rates
rates
Expansionary demand disturbance
Increase
No effect
Expansionary monetary disturbance
No effect
Increase
Increase in foreign interest rates
Decrease
Increase
Table 10.4

57. Sterilized and unsterilized foreign exchange market interventions
Table 10.3
Sterilized and unsterilized foreign exchange market interventions
Table 10.3

58. Demand disturbance, fixed exchange rates
Figure 10.13
Demand disturbance, fixed exchange rates
Figure 10.13

59. Figure 10.13
Starting from general equilibrium, there is an unanticipated increase in the demand for goods LM A
Financial integration line i*
Interest rate IS
Output
Figure 10.13

60. Figure 10.13
Starting from general equilibrium, there is an unanticipated increase in the demand for goods LM
IS´ A
Financial integration line i*
Interest rate IS
Output
Figure 10.13

61. Figure 10.13
Note: points A,B,C each satisfy only two of three equilibrium conditions LM B A
Financial integration line C i*
Interest rate
IS´
This condition is not moving!
Output
Figure 10.13

62. Figure 10.13
Implication of fixed exchange rates in this case: No reason for the IS curve to move (further). LM B A
Financial integration line C i*
Interest rate
This condition is not moving either!
IS´
Output
Figure 10.13

63. Figure 10.13
The central bank has to move LM to the right to maintain the fixed exchange rate. LM
IS´
Financial integration line C i*
Interest rate
Output
Figure 10.13

64. Figure 10.13
The central bank has to move LM to the right to maintain the fixed exchange rate. LM
Note: M0 increased by forex purchases of the central bank.
LM´
IS´
Financial integration line C i*
Interest rate
Fiscal policy is effective for changing output.
Output
Figure 10.13

65. Review: Demand disturbance, fixed exchange rate, no capital controls
Figure 10.13
Review: Demand disturbance, fixed exchange rate, no capital controls LM IS i*
Financial integration line A
Interest rate
Output
Figure 10.13

66. Review: Demand disturbance, fixed exchange rate, no capital controls
Figure 10.13
Review: Demand disturbance, fixed exchange rate, no capital controls LM
IS´ A
Financial integration line C i*
Interest rate IS
Output
Figure 10.13

67. Review: Demand disturbance, fixed exchange rate, no capital controls
Figure 10.13
Review: Demand disturbance, fixed exchange rate, no capital controls LM
LM´
IS´ A
Financial integration line C i*
Interest rate IS
Output
Figure 10.13

68. The Mundell-Fleming model: Summary
Table 10.04
The Mundell-Fleming model: Summary
Effect on real GDP
Fixed exchange
Flexible exchange
Exogenous change
rates
rates
Expansionary demand disturbance
Increase
No effect
Expansionary monetary disturbance
No effect
Increase
Increase in foreign interest rates
Decrease
Increase
Table 10.4

69. Figure 10.13
Compare: Demand disturbance, fixed exchange rate, with capital controls LM IS i*
Financial integration line A
Interest rate
Output
Figure 10.13

70. Figure 10.13
Compare: Demand disturbance, fixed exchange rate, with capital controls
Note: central bank independence is possible for a short-time now LM
IS´ B A
Financial integration line i*
Interest rate IS
Output
Figure 10.13

71. Figure 10.14
Argentina
Figure 10.14

72. Figure 10.15
Policy mix
Figure 10.15

73. Figure 10.15
Policy mix: monetary policy moves with fiscal policy deliberately to change output holding i=i* LM IS i*
Financial integration line A
Interest rate
Output
Figure 10.15

74. Figure 10.15
Policy mix: monetary policy moves with fiscal policy deliberately to change output holding i=i*
IS´
LM´ LM
M0 increased by securities purchases by central bank. A
Financial integration line B i*
Interest rate IS
Output
Figure 10.15

75. Financial disturbance, fixed exchange rate
Figure 10.16
Financial disturbance, fixed exchange rate
Figure (a)

76. Increase in rate of return on foreign assets, fixed exchange rate
Figure 10.16
Increase in rate of return on foreign assets, fixed exchange rate LM IS
Interest rate i* A
Output
Figure (a)

77. Increase in rate of return on foreign assets, fixed exchange rate
Figure 10.16
Increase in rate of return on foreign assets, fixed exchange rate LM
Note: M0 will fall due to forex sales by central bank.
i*´
Interest rate i* A
This condition is not moving! IS
Output
Figure (a)

78. Increase in rate of return on foreign assets, fixed exchange rate
Figure 10.16
Increase in rate of return on foreign assets, fixed exchange rate
LM´ LM B
Note: M0 will fall due to forex sales by central bank.
i*´
Interest rate i* A
This condition is not moving! IS
Output
Figure 10.16

79. The Mundell-Fleming model: Summary
Table 10.04
The Mundell-Fleming model: Summary
Effect on real GDP
Fixed exchange
Flexible exchange
Exogenous change
rates
rates
Expansionary demand disturbance
Increase
No effect
Expansionary monetary disturbance
No effect
Increase
Increase in foreign interest rates
Decrease
Increase
Table 10.4

80. Figure 10.17
A devaluation
Figure 10.17

81. Figure 10.17
To devalue the currency the central bank will bid up the price of foreign money, creating more M0 LM IS i*
Financial integration line A
Interest rate
Output
Figure 10.17

82. Figure 10.17
To devalue the currency the central bank will bid up the price of foreign money, creating more M0 LM
LM´ A
Financial integration line i*
Interest rate IS
Output
Figure 10.17

83. Figure 10.17
To devalue the currency the central bank will bid up the price of foreign money, creating more M0 LM
LM´
IS´ A C
Financial integration line i*
Interest rate
Lower S increases demand for goods. IS
Output
Figure 10.17

84. Demand disturbance, flexible exchange rates
Figure 10.18
Demand disturbance, flexible exchange rates
Figure 10.18

85. Real demand increases…
Figure 10.18
Real demand increases… LM IS i*
Financial integration line A
Interest rate
Output
Figure 10.18

86. Real demand increases…
Figure 10.18
Real demand increases…
However, the resulting increase in S will reduce the demand for goods. LM
IS´ IS B A
Financial integration line i*
Interest rate
Output
Figure 10.18

87. …i>i* will attract capital inflows, so S appreciates
Figure 10.18
…i>i* will attract capital inflows, so S appreciates
However, the resulting increase in S will reduce the demand for goods. LM IS B A
Financial integration line i*
Interest rate
IS´
Output
Figure 10.18

88. The Mundell-Fleming model: Summary
Table 10.04
The Mundell-Fleming model: Summary
Effect on real GDP
Fixed exchange
Flexible exchange
Exogenous change
rates
rates
Expansionary demand disturbance
Increase
No effect
Expansionary monetary disturbance
No effect
Increase
Increase in foreign interest rates
Decrease
Increase
Table 10.4

89. Monetary policy under flexible exchange rates
Figure 10.19
Monetary policy under flexible exchange rates
Figure 10.19

90. Increase in money supply lowers the interest rate
Figure 10.19
Increase in money supply lowers the interest rate
Exchange rate depreciates increasing the demand for goods. LM
LM´
IS´ A C
Financial integration line i*
Interest rate B IS
Output
Figure 10.19

91. The Mundell-Fleming model: Summary
Table 10.04
The Mundell-Fleming model: Summary
Effect on real GDP
Fixed exchange
Flexible exchange
Exogenous change
rates
rates
Expansionary demand disturbance
Increase
No effect
Expansionary monetary disturbance
No effect
Increase
Increase in foreign interest rates
Decrease
Increase
Table 10.4

92. The Mundell-Fleming model: Summary
Table 10.04
The Mundell-Fleming model: Summary
Effect on real GDP
Fixed exchange
Flexible exchange
Exogenous change
rates
rates
Expansionary demand disturbance
Increase
No effect
Expansionary monetary disturbance
No effect
Increase
Increase in foreign interest rates
Decrease
Increase
Fixed exchange
Flexible exchange
rates
rates
Exogenous monetary instrument
Exchange rate
Money supply
Endogenous monetary instrument
Money supply
Exchange rate
Table 10.4