Recitation X

1
Recitation X

• Classical and Keynesian
• Business Cycles

2
Reference

• Williamson, S
• Macroeconomics, 2nd edition
• Chapter 10
• Note that he has FOUR markets Labour, Goods,
  Bonds and Money We collapsed the Labour and
  Goods market into one

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The Markets

• Goods
• Demand
• Supply
• Money
• Money Demand

4
The Markets

• Money Supply?

5
The Markets

• Money Supply?
• Policy variable - Exogenous

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The Markets

• Money Supply?
• Policy variable Exogenous
• Bond market
• Borrowers Savers (Closed Economy)

7
The Markets

• Money Supply?
• Policy variable Exogenous
• Bond market
• Borrowers Savers (Closed Economy)

8
The Markets

• Money Supply?
• Policy variable Exogenous
• Bond market
• Borrowers Savers (Closed Economy)
• Demand for bonds Supply of bonds

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The Markets

• Money Supply?
• Policy variable Exogenous
• Bond market
• Borrowers Savers (Closed Economy)
• Demand for bonds Supply of bonds
• Some people ARE borrowing, but exactly as much as
  others are saving

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Equilibrium Walrass Law

• IF

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Equilibrium Walrass Law

• IF
• Budget Constraint is satisfied

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Equilibrium Walrass Law

• IF
• Budget Constraint is satisfied
• Two out of Three markets are in Equilibrium

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Equilibrium Walrass Law

• IF
• Budget Constraint is satisfied
• Two out of Three markets are in Equilibrium
• The Third MUST also be

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Equilibrium Walrass Law

• IF
• Budget Constraint is satisfied
• There are N markets
• N-1 of them are in equilibrium
• The last MUST also be

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Equilibrium Walrass Law

• IF
• Budget Constraint is satisfied
• Two out of Three markets are in Equilibrium
• The Third MUST also be
• Show on blackboard if there is public interest

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Equilibrium

• Classical

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Equilibrium

• Classical
• P and r will always move so that the three
  markets clear
• Two prices are enough because of Walrass Law

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Equilibrium
r
P
r
Ms
C
C
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Analyzing the Effects of Changes

• Direct effects in the market the change occurs
• Indirect effects in the Goods Market
• Labour supply effect
• Consumption demand effect
• Equilibrium Y and r
• Plug into Money Market, find P

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Analyzing the Effects of Changes

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently

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Analyzing the Effects of Changes

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently
• Assume the current oil price does not change

22
Analyzing the Effects of Changes

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently
• Assume the current oil price does not change
• What are the effects on prices, output and
  interest rates

23
Exam technique

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently
• Assume the current oil price does not change
• What are the effects on prices, output and
  interest rates

24
Exam technique

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently
• Assume the current oil price does not change
• What are the effects on prices, output and
  interest rates

25
Exam technique

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently
• Assume the current oil price does not change
• What are the effects on prices, output and
  interest rates

26
Classical vs Keynesian

• Classical
• P and r will always move so that the three
  markets clear
• Keynesian
• In the short run prices do not move (Prices are
  sticky)

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Classical vs Keynesian

• Classical
• P and r will always move so that the three
  markets clear
• EQUILIBRIUM
• Keynesian
• In the short run prices do not move (Prices are
  sticky)
• DISEQUILIBRIUM

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Keynesian view

• Keynesian
• In the short run prices do not move (Prices are
  sticky)
• Why?
• Menu Costs
• Uncertainty
• Is this a good description?
• Are all markets like this?

29
Analyzing the Effects of Changes

• Example 1
• As the economy learns of events in Iraq, the
  economy expects the future oil price to be higher
  permanently
• Assume the current oil price does not change
• What are the effects on prices, output and
  interest rates