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Macroeconomics
Goods Market, Money Market, and IS/LM model
12
Economics
Undergraduate 2
03/16/2011

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Cards

Term
Reserve Rate Equation
Definition
Change in Deposits = Change in Reserves = 1/rr
Term
Money Multiplier Equation
Definition
m=C+D/C+R
C+D=Money Supply
C+R=Monetary Base
Term
Money Demand Formula
Definition
Md=L0-L1(inlfation exp.)+L2(Y)-L3(r)
Term
Interest Rate Formula (from Money Demand)
Definition
r=[L0-L1(inflation exp.)+L2(Y)-MD]/L3
Term
Reasons for holding more money
Definition
stock market gets riskier
bond prices increase
interest rate decreases
income increases
Term
effects of holding more money
Definition
Money demand shifts right, so...
interest rate increases
bond prices drop
LM curve shifts left
Term
Effects of increase in money supply
Definition
Interest rates drop
LM shifts down and to the right
Term
Derive the LM curve
Definition
Draw money market graph. r is y axis and m is x axis. MS is vertical and MD is downward sloping. When MD increases (from increase in income or whatever) so does r. To the right of this graph put the LM graph with r as y axis and Y as x axis. Slope of upward sloping LM curve is L2(income elasticity) over L3 (interest rate elasticity)
Term
If L3 is small...
Definition
inelastic, steep MD curve and LM curve. takes a big increase in r to get to equilibrium.
Term
If L3 is big...
Definition
elastic, flat MD and LM curve. takes small change in r to get to equilibrium.
Term
Classical vs Keynes on elasticity
Definition
Classical: L3=0(perfectly inelastic/steep)
Keynes: L3=infinity(perfectly elastic/flat);liquidity trap
Term
LM curve shifts
Definition
Increase in MS: Down on LM curve
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