Hey Guys, I notoced that most of Economics Sections ask about the impact of Expansionary and/or Restrictive, either Monetary or Fiscal policies, well implemented or unanticpated, in both the short and long run, on: demand, supply, prices, interest rates, output, inflation and unemplyment. I think we should figure out all the different effects of such policies and commit that into to emmory before sitting to the exam L1. Let me start with the effects of an unanticipated decrease in money supply: ==> Demand: Decrease. ==> Prices: Increase. ==> Interest Rates: Increase. ==> Inflation: Decrease. ==>Unemplyment: Increase in the short run, no impact in the long run… Correct me if I’m wrong!! Thanks!! M.
malek I am still working thro’ Macro (one of the areas I have most trouble understanding). But just from looking at the above - when Prices increase - isn’t inflation increasing?
cpk123, I think that Inflation decreases in the long run. I don’t have any idea about what it happens to inflation in the short run, but I guess that there will be no impact on it in the short run. I don’t think that an increase in prices is systematically related to an increase in inflation…
thanks Malek. This thread I find extremely useful… let’s carry on, even if others do not.
>I don’t think that an increase in prices is systematically related to an increase in inflation… Then what is inflation if not an increase in the price level?
I think Inflation is the declining purchasing power of the currency (currency has being depreciationg…). If prices are increasing, but the purchasing power of people is increasing, too, but in a higher rate, I think that would lead inflation to decrease… That’s what I understood, nothing for sure… Correct me if I’m wrong. Thanks!! M.
I’m weak in ECON. Thanks for the thread
Not quite sure about Unemployment. Decrease in Money Supply>> Increased Interest Rates>> Decrease in Demand>>Isn’t the short-run Unemployment supposed to increase? Correct me if i m wrong guys.
I’m afraid that’s rubbish malek. Type define:inflation into google or just go to wikipedia. The only way you can experience a rise in prices without inflation is a one-off increase in the price level. Inflation is a persistent increase in the price level so if it’s not persistent the best you can say about inflation in this case is that is doesn’t change. Short run result of unexpected DECREASE in money supply: INCREASE in interest rates DECREASE in aggregate demand DECREASE in prices DECREASE in real GDP Long term result Lower price level, no change in others, as economy returns to full employment.
Chrismaths is right. Or in other words: Unexpected Increase in Money Supply Lets assume the FED wants to increase the money supply. What policy does it follow? 1. Open market operations - FED buys bonds // “sells” money 2. Bond prices rise - interest rates fall. 3. Interest rates fall - investment goes up, domestic currency depreciates More exports less imports. X up, M down. 4. AD is a function of Y=C+I+G+X-M, if I & X go up then AD increases. Recall that M goes down as well. 5. AD increases SR effect: prices increase, real GDP increases - the situation is called inflationary gap. Employment is below the natural rate of unemployment. LR effect: money wage rate adjusts upward, shifting the SRAS (Short run aggregate supply) curve. Employment returns to it’s long run level. Output too. However, the price level is higher.
oops… SR effect:… Employment is ABOVE the natural rate.
Guys, I think we should figure out whether an increase, decrease or no impact will occur if any of the following policies is applied;) We’ll be sure we covered all the possible cases… Any suggestions? 1- well implemented Monetary Expansionary Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 2- Unanticipated Monetary Expansionary Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 3- Well Implemented Monetary Restrictive Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 4- Unanticipated Monetary Restrictive Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 5- Well Implemented Fiscal Expansionary Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 6- Unanticipated Fiscal Expansionary Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 7- Well Implemented Fiscal Restrictive Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment 8- Well Implemented Fiscal Expansionary Policy =>In the Short run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment =>In the Long run: ==>Demand ==>Supply ==>Prices ==>Interest Rates ==>Output ==>Inflation ==>Unemployment
**bump** We should keep this thread alive (and to the top always … till 1st) Malek has done an amazing job by consolidation all the effects, Thanks!! - Dinesh S
that’s brilliant… thanks malek…
ok, so what happens when. From what I can gather this is just a template that needs to be filled out.
Yeah, this needs to be completed. Whoever puts this template into an excel file with the answers will go to heaven.
even better… “Will be in the L2 formum 1 month from now” [apcarlso - heaven doesn’t sound that lucrative at this point in time) lol] … any takers? - Dinesh S
This is an excellent proforma… just waiting for someone who is hot in econ to fill it out. Thanks dude.
dinesh - i was under the impression that our respective referenced destinations are one in the same… haha… kidding of course. it’s all relative
Any takers?