Lectures in Macroeconomics- Charles W. Upton Spending Foolishly

The Y and M Curves P r Y M PoPo roro

Spending Foolishly The Y Curve P r Y M PoPo roro Pick any point on the Y curve. D Y =S Y

Spending Foolishly The Y Curve P r Y M PoPo roro Does the event (e.g. people become more confident about the future) mean D Y >S Y or D Y <S Y ? D Y =S Y

Spending Foolishly The Y Curve P r Y M PoPo roro Suppose D Y >S Y. To get back on the Y curve, the Auctioneer would have to raise r or P. Thus Y curve shifts up and to the right. D Y =S Y

Spending Foolishly The M Curve P r Y M PoPo roro Pick any point on the M curve. D M =S M

Spending Foolishly The M Curve P r Y M PoPo roro Does the event (e.g. people become more confident) about the future mean D M >S M or D M <S M ? D M =S M

Spending Foolishly The M Curve P r Y M PoPo roro D M =S M Suppose D M >S M. To get back on the M curve, the Auctioneer would have to raise r or lower P. Thus M curve shifts down and to the right.

Spending Foolishly Some Problems The government decides to spend $X this year on a foolish project. –People pay a surcharge on last year’s tax return. –No Labor Supply Effects

Spending Foolishly The Foolish Expenditure Pick a point on the Y curve. P r Y M PoPo roro

Spending Foolishly The Foolish Expenditure Pick a point on the Y curve. D Y >S Y –Govt Spending up by $X –Wealth down by $X; consumption down by (say) 0.04X P r Y M PoPo roro D Y >S Y

Spending Foolishly The Foolish Expenditure Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y P r Y M PoPo roro D Y >S Y

Spending Foolishly The Foolish Expenditure Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y P r Y M PoPo roro D Y >S Y Memo to the auctioneer: To cut D Y, raise r To raise D Y lower r

Spending Foolishly The Foolish Expenditure Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y P r Y M PoPo roro D Y >S Y

Spending Foolishly The Foolish Expenditure Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y The Y curve shifts up and to the right P r Y M PoPo roro D Y >S Y

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. P r Y M PoPo roro

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. D M <S M P r Y M PoPo roro

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. D M <S M –Wealth down –Consumption Down –Money Demand Down P r Y M PoPo roro D M <S M

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. D M <S M The Auctioneer must raise D M P r Y M PoPo roro D M <S M

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. D M <S M The Auctioneer must raise D M P r Y M PoPo roro D M <S M Memo to the auctioneer: To cut D M, raise r To raise D M lower r

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. D M <S M The Auctioneer must raise D M P r Y M PoPo roro D M <S M

Spending Foolishly The Foolish Expenditure Pick a point on the M curve. D M <S M The Auctioneer must raise D M The M curve shifts up and to the left P r Y M PoPo roro D M <S M

Spending Foolishly The Foolish Expenditure The Y curve shifts up and to the right. The M curve shifts up and to the left P r Y M PoPo roro

Spending Foolishly The Foolish Expenditure The Y curve shifts up and to the right. The M curve shifts up and to the left Price level up Interest rate uncertain. P r Y M PoPo roro

Spending Foolishly End ©2003 Charles W. Upton. All rights reserved