Slide Show #7
AGEC 430
Macroeconomics of Agriculture
Spring 2010
Handout #10
QM
This is the money market
in the Keynesian model.
Transmission of Monetary Policy
Two essential forms of monetary policy actions:
1. Change the fractional reserve requirement ratio (rrm)
2. Change the level of total reserves (TR) in banking
system
The level of total reserves is affected by:
1. Fed buying or selling of government bonds
2. Fed changing the discount rate on loans from Fed to
banks
Transmission of Monetary Policy
Expansionary policy actions:
1. Lowering discount rate
2. Buying government bonds
3. Lowering required reserve ratio
iE
iE1
QM
Contractionary policy actions:
1. Raising discount rate
2. Selling government bonds
3. Raising required reserve ratio
iE1
iE
QM
Handout #11
Assume government spending set by budget
and fixed in the short run.
Found by substituting
C, I, G and T equations
into 1st equation.
The increase in government spending in 2009 already exceeds the fiscal
stimulus employed in the last two major recessions, and much of the
approved spending has yet to be implemented.
Simplified labor
supply curve.
Size of the civilian
labor force.
Is there cost push
inflation from the labor
market here? Why?
More on this shortly.
T
tx
h
Yt-1
The tax base (h) would
include property taxes taxes.
Taxes paid this year based
on last year’s income.
Federal government receipts are down from their peak of $2.75 trillion in
2007. Why?
T
tx
h
Yt-1
Deficit determined by the
extent to which government
spending exceeds its revenue.
An increase in domestic
income increases imports
and reduces exports as
domestic consumption
increases.
A stronger dollar reduces
exports and increases
imports.
Both cause XN to fall.
An increase in domestic
interest rates relative to
interest rates in the rest of
the world increases the
value of the dollar.
Handout #12
Aggregate Production Function
So an increase in AD requires more production of goods to meet this demand.
This increases the demand for labor and increases capacity utilization rates.
Two Types of Inflation
Example of Demand Pull Inflation
AS
General price level
AD
P2
P1
Y1
Y2
Ypot
Inflation = sustained percent increase in general price level
Example of Demand Pull Inflation
AS
General price level
AD
Y1/Ypot < Y2/Ypot
so the ratio is greater
as the gap is closing
P2
P1
Y1
Y2
Ypot
Inflation = sustained percent increase in general price level
Example of Cost Push Inflation
AS
General price level
AD
As wage rates for
example increase,
we see cost push
inflation.
P2
P1
Y2 Y1
Ypot
Inflation = sustained percent increase in general price level
Lower US interest rates weakens the value of the dollar relative to
foreign currencies.
Lower US interest rates weakens the value of the dollar relative to
foreign currencies.
This makes it cheaper for other countries to buy our exports (i.e.,
takes fewer yen to buy wheat than before).
Lower US interest rates weakens the value of the dollar relative to
foreign currencies.
This makes it cheaper for other countries to buy our exports (i.e.,
takes fewer yen to buy wheat than before).
This also makes imports more expensive (i.e., takes more dollars
to buy imported goods).
The increase in net
exports, including ag
products, increases
prices, net income,
land values and net
worth.
Lower interest rates
reduces farm interest
expenses, which
increases net income,
land values and net
worth.
Let’s Step Through This Graphically
Price
D
S
Step 1:
Increase in export demand as value of
dollar declines. This increases prices for
agricultural products
P2
P1
Q1Q2
Quantity
Let’s Step Through This Graphically
Price
D
S
Step 1:
Increase in export demand as value of
dollar declines. This increases prices for
agricultural products
P2
P1
Q1Q2
Quantity
Step 2:
Farm revenue = price times quantity. Revenue increases as both price
and quantity increase (i.e., P2Q2 > P1Q1 )
Let’s Step Through This Graphically
Price
D
S
Step 1:
Increase in export demand as value of
dollar declines. This increases prices for
agricultural products
P2
P1
Q1Q2
Quantity
Step 2:
Farm revenue = price times quantity. Revenue increases as both price
and quantity increase (i.e., P2Q2 > P1Q1 )
Step 3:
Farm interest expenses decline as interest rates fall.
Let’s Step Through This Graphically
Price
D
S
Step 1:
Increase in export demand as value of
dollar declines. This increases prices for
agricultural products
P2
P1
Q1Q2
Quantity
Step 2:
Farm revenue = price times quantity. Revenue increases as both price
and quantity increase (i.e., P2Q2 > P1Q1 )
Step 3:
Farm interest expenses decline as interest rates fall.
Step 4:
Net farm income = farm revenue minus farm expenses. Net farm income
rises as a result of steps 2 and 3.
Let’s Step Through This Graphically
Step 4:
Net farm income = farm revenue minus farm expenses. Net farm income
rises as a result of steps 2 and 3.
Let’s Step Through This Graphically
Step 4:
Net farm income = farm revenue minus farm expenses. Net farm income
rises as a result of steps 2 and 3.
Step 5:
The capitalized value of farm land can be approximated by dividing net
farm income by a capitalization rate such as the rate of interest, or:
LV = Net farm income / interest rate.
If net farm income is rising and interest rates are falling, then farm land
values should increase.
Let’s Step Through This Graphically
Step 4:
Net farm income = farm revenue minus farm expenses. Net farm income
rises as a result of steps 2 and 3.
Step 5:
The capitalized value of farm land can be approximated by dividing net
farm income by a capitalization rate such as the rate of interest, or:
LV = Net farm income / interest rate.
If net farm income is rising and interest rates are falling, then farm land
values should increase.
Step 6:
Net worth = total assets minus total debt. If farm land values are rising
and net farm income is rising, then total assets will increase, thereby
increasing net worth.