<p>@tan2007: um…shouldn’t the terms of trade between the opportunity costs for one of the goods? Kinda hard to explain…
So like, if you say Artland is 1Bike = 2Hats, and Rayland is 1Bike = 4Hats, then a good terms of trade would be 1Bike = 2-4 Hats</p>
<p>Im sure I UNDERSTAND everything. I’m just having trouble adjusting some graphs and I hate the MPS MPC parts…blllaaahh… other than that, im okay. Quick question though: EVERYBODY LISTEN UP!</p>
<p>when the aggregate demand decreases, the RGDP obviously decreases as well. How would that change look like on the AD/AS curve?</p>
<p>Do we need to know Say’s law</p>
<p>^is that the law that says supply creates its own demand?</p>
<p>well the thing is, the PR book has so much crap(like Say’s Law, detail about classical vs. Kea., etc.) that’s not in the 5to5 book or we didn’t learn in class. Someone who took it last year said the PR book didin’t help at all, so I’m just wondering.</p>
<p>hey people. does anyone know if changing the federal funds rate is the first step in changing monetary policy or is it the result of open market operations (like buying and selling bonds)? ugh im confused!</p>
<p>It is the result of OMO. Think of the FFR as a target rate the fed want banks to charge, so by, for example, buying bonds, the interest rate is lowered</p>
<p>Thanks a lot! And so when the federal fund rate increases, the supply of federal funds (and thus the supply of money?) decreases, all due to decreased reserves?</p>
<p>bingo. fellow ohioan</p>
<p>sweet ;-). im pretty pumped. i just started reading the mcconnell brue book because my teacher hardly taught macro and we use the mankiw book but im slowly learning :-)</p>
<p>briguy - no, you’re order is a little mixed up.</p>
<p>1) The Federal Reserve makes a conscious decision to raise the interest rate. But them just saying “ok, let’s raise it” doesn’t make it magically rise. So:</p>
<p>2) They conduct Open Market Operations, and sell government securities on the open market (usually they are purchased by banks). Thus, banks give money (cash reserves) to the government in exchange for securities.</p>
<p>3) This means that banks have to raise more reserves in order to stay on or above the reserve requirement, so they call in loans or make less loans. And when the banks make less loans, the money multiplier works in reverse to decrease the supply of money in the economy.</p>
<p>4) The supply of money has decreased, which shifts the vertical MS (Supply of Money) line to the left on the Money Market Graph, moving the equilibrium quantity of money to the left, and meaning that the interest rate is raised.</p>
<p>5) What really happens is the federal funds rate is raised (I think?), but this rate is VERY closely tied to most all interest rates - so an increase in the federal funds rate will cause an increase in the average interest rate. Thus, it’s acceptable to label the y axis in the Money Market Graph simply “Nominal Interest Rates”</p>
<p>Oh and Re Terms of Trade - holy ■■■ I am still f’ed.</p>
<p>thanks for clearing that up mcgoogly</p>
<p>Wth is terms of trade? I don’t think my Macro class ever learned about it. Never even heard of it either…</p>
<p>My teacher just skimmed over the international trade stuff, so I don’t really get it at all. Could someone explain why in the foreign currency market, a higher interest rate in a country attract foreign investors, but in the country a high interest rate will decrease investment?</p>
<p>Well for a foreign market you have supply and demand of currency. (You think socks or shoes, its essentially the same). When a country increases the supply of its own currency in the foreign market supply has gone up. This is done when we purchase goods in Japan, because we put dollars in the foreign exchange and got back yen. Essentially we increased the demand for yen in the foreign market and we put more dollars in the foreign market. This means the dollar will depreciate compared to the yen.</p>
<p>Now interest rate needs to be separated for foreigners and domestic use. Higher interest rate means that investment in capital will go down, domestically. This is essentially because it will be harder to get a return on investment greater than the interest rate. This will mean that there will be less investment. However for a foreigner they see higher interest rate they can essentially get the interest rate as return. They act as a lender by investing money that will be loaned out. Think about it as if its the interest in the bank. You are more inclined to dump money in the bank if it were to increase the interest paid on that money. That is why foreigners would increase investment when the interest rate goes up. Firms, domestically however, would not be able to get the funds to invest so that is whey investment would go down. </p>
<p>Hopefully that helps.</p>
<p>Does tax cut shift AD or AS?
Exapnsionary fiscal policy, which involves decreasing taxes, shift AD to the right.
But, according to TPR page 115, tax cuts will shift AS to the right. Is this tax cut referring to the tax cut on business? And the tax cut in the expansionary fiscal policy is on individuals?
Then, can someone explain 2007 AP Macro Form B FRQ 2? In the question, tax cut on business (part a) shifts Demand curve to the right, while tax cut on individuals (part b) shifts supply curve to the right.
Confusing…</p>
<p>It depends on the but a business tax cut shifts both AD and AS. It shifts AS because it lowers per unit consumption cost and that means the business will higher more workers to increase production. That increase in workers will lead to an increase in AD as well since income is part of GDP. A personal tax cut would only increase AD, since it simply increases the disposable income of each household. </p>
<p>Yes Expansionary wants to increase AD, by decreasing taxes and lowering interest rates. </p>
<p>That is assuming a business tax cut or corporate tax cut. Well expansionary is both. Expansionary can refer to individuals or corporations since it all still expands the economy by increasing GDP. </p>
<p>Question 2 is referring to the demand of loanable funds not AD or AS. Tax cuts means that the business has more money to invest so it will increase the demand of loanable funds. For the individuals it states that there is no tax on interest earned. That will increase the incentive to get interest for one’s money. That means that the supply of money being loaned will increase. </p>
<p>Hope that helps.</p>
<p>
Yeah, the problem is bad definitions (it’s the textbook’s fault, not yours). When we say “investment,” as in the component of GDP, which is when firms invest in capital production (like factories), it is a totally different meaning of the word from when we say “foreign investment.”</p>
<p>“Foreign investment” means what you would think it means: foreigners see the interest rate rise in America so they jump to put their money in American banks that are paying higher interest rates. Essentially they’re speculators and traders, not really “investors”. This is important on questions pertaining to the exchange rate, because international financial flows (of trading in the stock market, etc) effects the exchange rate. But it really won’t come up on questions involving capital production and the AD-AS curve.</p>
<p>And of course, “Investment” is just production of capital by firms. As the interest rate increases, it means they have to pay a higher price for taking out the loan to build their factory, so they might just not build the factory at all. Rather basic. It’s often called Real Investment, but the “real” doesn’t have anything to do with inflation-adjusted, it means that the investment is in real assets (building houses, building factories, etc) as opposed to the type of investment that “foreign investment” is (investment in financial assets - stocks, bonds, etc)</p>
<p>Ok thanks a bunch that actually clarifies it a lot.</p>
<p>what % of mc do u need to get right for a 4?</p>