Graph Shifts
.' o, ney
is a_ m e d ium of exchange AD/AS Curves Positive AD shock (from Y')
AE Curve
m place of bar ler mg s1utf ( vhich needs a
-inflationary gap
co inc id ence of wants) . This makes II a
:
- supply increases
AE
, ,
Net tax rate goes up
useful
stor
e
of
val
ue
t?
kee_p
the
power
to
:
new
Ye
with
price
level
up
:
:
_
up - flatter
z down
buy stu f f unless there s hyperinflation
,
. .
: ::.:=.-- · -- tgraph
(inflation over so permon t h. ) Value
: , ' · .,
Cause stmtlar to_EC120 demand
.
-.. _ Ye down
measurement allo ws for it to be a unit of
•
y • anythin9 that shifts AE up
A
.-·: :
Other causes
account to bal ance.
Y"
• population up
-- -, ----- • MPC goes down
Coinage suffers_ from debasing (making
.
j Negative AS shock (from Y*)
Ye' v.
Y • Imports up
lower quali ty coins) causing people to
-recessionary gap
Foreign Income up
hoard the better ones (Gresham's law).
_:
-gov spending
can close gap
AE
-Xo up-NX up
Paper money are promi ses to pay holder
.
•
-new Yew il h price level up
•
-A up-shift up
of pap er the money. Can lead to runs on
.
y causes similar to EC120 supply
····-=-•..:'
-Ye up by Xo x 1/(1-z)
1
-t
A···-- :---- : :
the bank when everyone asks for money
Y"
• technology level down
Other causes
at once and there isn't enough money.
Both can cause • people/capital down
•
' '
• Wealth goes up
Fiat money is not conve rtable into gold stagflation (price level • factor prices up
" ------ v • Future expectations up
or an ything at all. Inst ead p•ay to bearer and unemployment up) (e.g. oil, wages, commodities)
v. v.:
• Interest rate down
on demand". fiat bills say "this is legal
lnrettc:;iuses/effectslogeltheolherdlrKrions
AE;
:
.
Relative foreign
tende· r . Almost all money now is fiat.
Bank of Canada is Canada's central bank and
' . .-;... ,,-;.:. - -· pri!eddown/atprciate
Deposit money is made-up money in
has 4 main functions: (1) Banker to the chartered
A ..._ !· - · ·- · :
I\()
own-s i I down
banks that people "have· . Banks promise (commercial) banks. They keep deposits with the Boe,
; __••
•
- a ls o IM up
more money than exi sts (fractional
called rese rves. (2) Banker to the federal gov, who keeps
.-.
-graph flatter
reserves ). Deposits are demand or
some deposits. (3) Regulator of the money supply by
-· ..
y -Ye goes down
notice depending if you can withdraw
buying and selling gvmt bonds. (4) Regulator of financial
AE
v.
whenever. Term deposits collect interest institutions alongside OSFI (Office of the Superintendent
: .- : Relative domestic
and no withdrawal until term is finished. of Financ ial Institutions). Bank of canada Balance Sheet
, ? --- ·:· prices down/depreciate
Near money is stuff with value easily
Reserves
Assets
Liabilities A.. .. ·_·····- _- ;-:-·:
:,· - Xo up-shift up
converted (q!l uidated) into n:ioney, like
are a commercial bank's •
g i osits
_,: -also IM down
term epos1ts. Money substitutes are
cash and deposits at BoC.
• Commercial Bank
: -graph steeper
used_m exchan9e but are not stores of
Commercial banks in Canada
Deposits
v. v;Y -Ye goes up
value, like creditca r•d debt.
have a fractional banking system, so they reserve only some deposits . Reserves.;.deposits is the reserve
Money Creation in banking
ratio, and banks have a target reserve ratio (v). When above, lend excess reserves to collect interes t.
happens from: (l) immi9rants bringing Example lf a commerc ial bank with target ratio 10% gets a new deposit of $250. Target reserves are
cash to Canada (2) fmdmg i:noneyu nedr 10%x$1250 = $125 so excess reserves are $300 + $50 - $125 = $225 (BoC deposits are pan of reserves)
beds and (3) when the Boe increases
•
. .. .
. .. .
. ...
money supply . When money is "created"
Assets
L1ab1ht1es
As sets
L1ab1l1t1es
Assets
L1ab1ht1es
( i.e. deposited in a commercial bank), it
Cash' 250
so Deposi1s'250 1000
cash-m
300 Deposi ts 12so
Cash
75 Dep osi ts 1250
moves through the balance sheets Boe Deposits so Kapital
100
Boe Deposit s so Kapi tal
1oo
Bo e Deposi ts so
Kapital 100
The total deposit money created is
Loan s
900
Loans' 225 900
Loans
1125
( epositHt_arget reserve ratio)
So the bank loans out $225 so cash decreases and loans increase. Lending to a second-hand bank
Fiat money 1s created by the central ?nk increases their cash, so they lend, repeating the cycle to make $250/10%= $2500 of new deposit money:
(the BoC} through purchase of securities.
Money is "destroyed· in the opposite
Commercial Bank Balance Sheet
A central bank digital currency would still have banks
ets.
Liablli iesdeposits
.
acting
as lenders
and borrowe
s butofcommercial
process to creation.
ReservesAs(,nctud,ng
• Demand/Notice
no
longer
be providers
of medrum
exchange. banks will
::. : ":P-z' f::l:U !:
p : r::
M
Oney
ar e 5
M . k t
!:
•deposltsat_t eBoCJ
•Terrndepo lts
secunlies
deposits
T rend S Actual GDP stays around potential. Labor force
•• Gov
Loans
(incl. mortgages) ••Gov
Foreign
liabilities
Apply S/0 logi c to the interest rate
(price) and quantity of money.
• Canadian securities
• Shareholder equity
grows, so (un)employment rises. Unemployment rate has no
Increase in y or P shifts MD up. MS • Foreign currency
long term trend (except for the massive COVID drop, of course)
1
is erlical because it's not affected
Actual COVID Effects
DJ's COVID Obsession AE < y but production
by interest rate - i
• Inventory down (decrease in 10)
didn't rise, so GDP fell .
The MD curve I
l
Quantitative easing: Boe buys federal bonds at all
Oil price drop
O
- ·comes from
·· ;··· - · ··· ·
·· ·- ·- ·
maturities to fund CERB (MS shift up)
-'
(see below) so AD down
three reasons: i,
;
• Boe lower interest rate (decrease in i)
To fix, gov did CERB
transactions
;
• Boe buys provincial bonds for first time {MS shift up)
(tr an sfer/negative tax)
demand (spending), MSo MS,
• Governm nt increa ed budget defe it (increase in D)
so To fell and AD up
precautionary demand (rainy-day fund • Commer 1al banks increased depo 1ts al BoC
-Wage subsidy (CEWS)
/ keeping money in your pockets), and • Exports/imports drop ed (NX relatively unaffected)
,
lowers factor price;
speculative demand (investing/
• MPC felt (lot more savings)
Y"
Y
shi fts AS right
diversification strategy). The
Potential COVID Effects
]
Canadian oil prices
opportunity cost of money is the real
.
• •
.
-'
fall: Fall in 10 so AD
Interest rate on bonds.
Possible high mflat1on post-pandemicas reserves
of ba kmg system get loaned out
ii.
down (because o­il
Assume money neutrality in the long
• Possible long term decline in potential GDP (Y*) as
industry worth less)
run: % change in MS - same %
people_were une ployed (get rusty) and missed out
AS curve shifts right
change in P. Money neutrality is highly
on choohng leading to less productivity/human
(lower facto r price)
debated: hysterisis effects (reasons
capital
y
why it shouldn't be) change Y* and
• P pulation decrease as immigration dipped
make AS and AD move different
Stimulus packages could cause inflation
amoun ts when AS returns to a new Y* :
(l) investr:n_ent can lead to growth in Y*
(2) red uc tio n in human capital during
recessions decreases Y* (people get
rusty when unemployed)
.
1
Scanned with Cam Scanne r
Ch at
EC
, 40 Final
e
W•lp verSI·OO VO. 2 Sheet
Factors
H)AEVariablesDESIREDlhe
Macro Mod eI
cu rrcnl X 100 n Gf:>_!l=ft(K.
ew o l d X 100'¼
= C +I+ G +X -1
Index
old
%change
KapitaI Price level is the average
.
ACTUAL ·ce of everything. Power of money
G
p es down as price level goes up.
r. D P=Y (national income) Var,ableds D
t ·bute to GDP by value adde - oes g
.
irms conn for ille al/black markets, leisure,
Today dollars _are nominal. lnd xed
i!Jt·c ; sting rir real GDP is better, to
against part cular b se yearis_ real.
account to'r inflation. Stuff with no clear market Real natIona_l mcome 1s qu_ant1ty now @
base yea r prices. Measure price of the
I ·1s counted at cost.
va ue
( I)
I ff lative to some year as the
1ncom St den:+Yln=d r t x s;i: i d e: it:
ti h fse calculated as an index.
.
fi
.
d fl t
_
· I/ 1
0eprec1a 10
NOi =Wages+ Interest+ Business pro its
For any index, e a ?r - omma r ea_ .
1
Expenditure Side: Y = Caonsume + lanvestment e
! i o ieW; :l d :- d fal ti on
+ Gavmt+ EX.,port-s IMaports. _
.
deflater= last year deflator x inflation
Investment=
N
t
lnvesment
+
Oeprec1at1
n:
not
. rn
. afllion- isde
·investing· but inventory, plants, and equipment. Negativ
i fladitio.n
inflation
1
Count only gvmt spend on firms, not alslpend .
s = :insal: inflation:
:i f
Model desired
(same as GDP expenditure side)
aggreM
gate
expenditure AE with a
auto'!omous part A and induced part zY( . thn
marginal propensity to spend) E
d z IS e
.
variables on back side tog e ·t .
xpan AE =A+ zY with
4E. - ( + 1 Ii
•
-o
7;J + Go + X
u )+_ (li(J- t-) m)l '
.
- , c1
_ <a" '' ' '°"'"">•
AE ends to eq 1libnum when desired= actual, that is,
E - X- Otherwise, AE ,_..
.
•
mflat1onary or
A. iuc1 < Desired
.,_ - ·
defhlationary gaps
:nr : 1
i : .•)···
pus actua1
production and
A
: ;..c,ual , o,,,rco
i ti/i
L ;: c;1u ir :
inv ntory towards
desired amounts.
,
v
Solve
AE
=
Y
for
Y
o
get
e = A/1( z- . )
v.
flYe/ M = 1/(1-z) Is the simple multiplier relating
auto omous spending (vertical shift) to equilibium.
Busir:,ess Cycle Regular short•yun GDP People plan for normal, anticipated
Shifts See ariables + graphs on back page
fluctu t1ons. Measure actual vs potent I G P _ inflation. If price level goes u efore
Basic Wealth nses - co sume more(a ) - s h i ft up
(Y*) with full employment. Output ga-p %dif-f
people plan, inflation is unant1c1pated, Interest rates up-less inventory (1) - s h i ft down
0
Recession is decreasing
Y- r
x 100% like being paid back in weaker dollars .
E pectations up:-- consu ":le more (a) - sh_ift up
?utput 9ap, recover when
Y·
.
Exchange rate is the price in Canadian
Higher sales-h1gh_er desired stock (I0)- shift up
increasing. Depressions re long re essrons.
dollars to buy one of another currency. Government Spending up (G)- shift up
Peak/trough when GDP hits local mm/max.
More val uable currency is appreciating, TO up - shift down, t up-flatter
Output gaps put pressure on wages and working less valuable depre ciating.
Trade Foreign GDP up- X up- shift up
h urs. For exa ple, COVI_D screwed GDP.
Labour force is people who Labour Domestic price up-X down/m up-down and flatter
Biggest recession ever with fastest recovery
are l 5+ and employed or unemployed
CAD weaker- X up/m down-shift up and steeper
Modelling Change Express as
Gob searchin -) Unemployment rat.e is Fiscal Policy Government can take your money,
growth rates, normally pe centages er year,
unemployed.,. labo r force. Potential or spend your money, or give bonus money. Affect.s
e.g. $2 after 50 yrs @ 5% rs 2x(1.05_)a The
full employme t till has some
disposable income YD=Y- T. The budget balance Is T-G,
rule of 72 says it takes 72/x years for x%
unemployed : frictio_nal frof!) turnover
aka the primary budget surplus (orde fci it . )
growth to
Growth
is causea
limited bydouble.
resources: xhaustion of
supply or degragatron of the environment can
halt growth. Sustained economic growth must
be tech change (by· definition
·
' this is janky).
In mo els, change ,s either endogenous
nd srtuc tu r a l from skilm
1
a feas
.h .
al:ro yearly l si:;mJa ;tcJ;•:cty
e u. Te:s cyw·th eople
per um a our, 1 P
(worse) or hours worked (better).
Agg re_gate SuppI Y shows
J:
Unlike
monetary policy,
fiscal policyl
a g s. toItimplement
takes timeor
to get information
and decide,
b_ut.also
execute the plans. This makes timmg really hard.
•
_
•
.
.
Savings !he sum pnvate ubhc where private Is
S = Y-C (=lam Baby) and public rs budget balance T-G.
l-b is marginal propensity to save opposite of MPC
(explained by the model) or exo9enous (not
the quantity of aggregate output V
. '
.. .
.
explained ). E. g., in the neoclassical model
created if it's sold at price level P.
Aggregate Demand 1s all equ,hbrra pomts
tech is exogenous but endogenous technology AS slopes up
.;;
for different price levels. w
••• Pr ci emodels argue tech is affected by the macro
from increasing § ·
Ast he dom e s ti c price
<
model (so it's explained).
unit (marginal)
level goes up, exports
Growth outside of the neoclassical model (i.e.
costs. There's a er. ...1..-go down and imports go up,
exogenous tech) is also called the Solow
flat "Keynesian· ..._
--'--- making the AE curv e shift L -.,• ,:_;.._. ----- Price+
residual (or total
factor productivity).
range
somewhere
Y*
Y Th
down
be ·flatt.
r11 the
••••:
*hatnodf Y*. °':ii
D.curve
1.s ae
a.:.•_ • .,;.. , ;...--, --------- v
Growth
Models
The neoclassical AS sle
tefteopfY
rig
e_A.and
I
growth mo el has di inishing marg!nal
The Philips
u
firu ! b Ir :
returns to either Kap1tal, Human capital, or
curve shows
*
y
P.
. .:
:
Labour, and c nstant returns to scale if both
sticky wages:
Y
The curve s sens1t1vIty to er.
:
go up p oporlronaUY- In the long ru . the only
wages rise quickly in inflationary gaps
s ocrs de) n s_on the AD
:
1'!1P e mbu t,phierf stnce _
change 1s tech which means LRAS 1s a
and fall slowly in recessions, since AS
,
,
:
AD
constant vertical line.
can't shift as fast to fix them.
, s Iust a unc o Y" points. ------------------------------- Y
Modern models say tech is endogenous like, !he true multipli r (chang in Y,., given /J.A)
learning by doing or innovation/competition,
Living
1s smaller than simple (horizonta l shift)
which lead to increasing marginal returns. This
inc a;::ter :
whenever AS slopes up.
is the only way we can get sustained growth,
than scale :
The paradox of thrift is that if everyone
like the industrial revolution (see graph- )
g; --saves, b goes down and everyone gets
....,a,..,-,:,,-- ...
Neoclassical model adjustment process in
C!).
_;
poorer (Yc down)
response t ?n output gap always
forces
1soo nme
Automatic StabiI izers are parts
1
supply toY in the long run
Supply/Demand of tax-and-transfer systemst ha t reduces the
1
:ii 1 s ta u; i ! s
Fac: 1 ": sr
th f! p to
}i1,J
D+- P+ Y + read .s AD up causes
multiplier mak ing AD more stable (small er
nd
and tech
Iechnology still const
changing
pr ic e upa
GDP up
changes in re al GDP due to shock) .
St - P· Y+ S· - Pt Y·
1·
D+ - P+ Y+ o- - p. vUnli ke discretionary (purpose ful ) 1f sca Ipo icy
s+ D+ - P? Y+ s- D·- P? Yadjusting Ga or T0 , automatic stab ilizers are
s > D - P· Y? D >s - P+ Y?
induced (autom atic ally shift). Example.s
Use r o ta b le 1 0 loo up causefr om i nclude emplo m
y ent i nsurance, progressi ve
result or vice 1-ersa
taxes , and the wel fare system.
© James/Mahbod/lmaad/Ainsley 2021. Don't upload me to Cour ehero :(
Jg
i'
r: :
]
•
:i t t d :: rr;l)i!
c!
Y*
V
Y*
y
y
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