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Macro Notecards

Interm Macro Econ Analy (Seton Hall University)

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Bureau of Labor Statistics: In a Nutshell Produces CPI, determines the weight of each group of product,
and defines what should go to the basket, assign percentages (like for housing, food, transportation),
monitor prices under regular basis and calculate
Consumption function C=C (Y-T)
Cost of High Inflation: Increased Uncertainty When inflation is high, it's more variable and
unpredictable: π turns out different from Eπ more often, and the differences tend to be larger, though
not systematically positive or negative.

So, arbitrary redistributions of wealth more likely.

This increases uncertainty, making risk-averse people worse off.

Cost of Unexpected Inflation: Arbitrary Redistribution of Purchasing Power Many long-term
contracts not indexed, but based on Eπ.

If π turns out different from Eπ , then some gain at others' expense.

Example: borrowers & lenders
If π > Eπ , then (i − π) < (i − Eπ )
and purchasing power is transferred from lenders to borrowers.
If π < E π, then purchasing power is transferred from borrowers to lenders
Costs of Expected Inflation: General Inconvenience Inflation makes it harder to compare nominal
values from different time periods.
This complicates long-range financial planning.
Costs of Expected Inflation: Menu Cost Definition: The costs of changing prices.

Examples:
Cost of printing new menus
Cost of printing & mailing new catalogs

The higher is inflation, the more frequently firms must change their prices and incur these costs.
Costs of Expected Inflation: Relative Price Distortions Firms facing menu costs change prices
infrequently.

Example:
A firm issues new catalog each January.
As the general price level rises throughout the year, the firm's relative price will fall.

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Different firms change their prices at different times, leading to relative price distortions . . .
. . . causing microeconomic inefficiencies in the allocation of resources.
Costs of Expected Inflation: Shoe leather Cost Definition: the costs and inconveniences of reducing
money balances to avoid the inflation tax.

If π increases, i increases (b/c Fisher effect), so people reduce their real money balances.

Remember: In long run, inflation does not affect real income or real spending.

So, same monthly spending but lower average money holdings means more frequent trips to the bank
to withdraw smaller amounts of cash.
Costs of Expected Inflation: Unfair Tax Treatment Some taxes are not adjusted to account for
inflation, such as the capital gains tax.
Example:
Jan 1: you buy $10,000 worth of Apple stock
Dec 31: you sell the stock for $11,000, so your nominal capital gain is $1,000 (10%).
Suppose π = 10% during the year.
Your real capital gain is $0.
Yet, you must pay taxes on your $1,000 nominal gain!
CPI: In a Nutshell Measure of the overall level of prices
Uses:
tracks changes in the typical household's cost of living
adjusts many contracts for inflation ("COLAs")
allows comparisons of dollar amounts over time
Constructed:
1. Survey consumers to determine composition of the typical consumer's "basket" of goods
2. Every month, collect data on prices of all items in the basket; compute cost of basket
3. 100 x (cost of basket for that month)/(cost of basket in base period)
Understanding:
The CPI is a weighted average of prices.
The weight on each price reflects that good's relative importance in the CPI's basket.
Note that the weights remain fixed over time.
Efficiency wages Theories in which higher wages increase worker productivity.

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Result: structural unemployment

Equilibrium condition actual expenditure=planned expenditure
Equilibrium: Expected Inflation Over the long run, people don't consistently over- or under-forecast
inflation, so Eπ = π on average.

In the short run, Eπ may change when people get new information.

E.g.: The Fed announces it will increase M

next year. People will expect next year's P to be higher, so Eπ rises.

This affects P now, even though M hasn't changed yet...

Equilibrium: How P responds to ΔEπ An increase in Eπ leads to:
i. Increase in i (the Fisher effect)
ii. Decrease in (M/P)^d (the money demand)
iii. Increase in P to make (M/P) fall to re-establish eqauilibrium
Equilibrium: How P responds to ΔM M/P= L(r +Eπ, Y)
For given values of r, Y, and Eπ, a change in M causes P to change by the same percentage—just like in
the quantity theory of money.
Equilibrium: Theory and What Determines It M/P= L(r + Eπ, Y)
variable how determined (in the long run)
M exogenous (the Fed)
r adjusts to ensure S = I
Y Y = F(K,L)
P adjusts to ensure M/P= L(i, Y)
Equilibruim the interest rate adjusts to equate the supply and demand for money
Fisher Effect: Equation : i = r + π
Chapter 3: S = I determines r .
Hence, an increase in π (inflation rate) causes an equal increase in i.
Nominal interest rate, i, not adjusted for inflation
Real interest rate, r, adjusted for inflation: r = i − π
Fisher Effect: Key Concepts i. An economist who talked about the difference between the real and
nominal interest rates
ii. Analysis: Nominal interest rate = real interest rate + inflation
a)Exogenous: Inflation (pi), Money supply (M), mm (money multiplier)

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b)Endogenous: Nominal(r) and real interest rates (R), income (I)

iii. Analysis: Changes in money growth or inflation do not affect the real interest rate.
Frictional unemployment caused by the time it takes workers to search for a job. Occurs when
wages are flexible and there are enough jobs to go around
GDP: In a Nutshell Total value of all market goods and services; the components of the GDP
(consumption, investment, gov. expenditures, export)
b. Consumption has the highest share (roughly around 70% in the US economy)
c. Real GDP(adjusted for inflation) and Nominal GDP: IN order to convert the nominal into real, you need
the price index (called GDP deflator)
Govt employment agencies Disseminate info about job openings to better match workers and jobs
Govt policy variables G=G (bar)
T= T (bar)
How does the fed raise the interest rate? To increase the interest rate (r) the Fed must reduce
(M)
Hyperinflation: Background Common definition: π ≥ 50% per month

All the costs of moderate inflation described above become HUGE under hyperinflation.

Money ceases to function as a store of value, and may not serve its other functions (unit of account,
medium of exchange).

People may conduct transactions with barter or a stable foreign currency.

Hyperinflation: Causes Hyperinflation is caused by excessive money supply growth.

When the central bank prints money, the price level rises.

If it prints money rapidly enough, the result is hyperinflation.

Hyperinflation: Why Governments Create Them When a government cannot raise taxes or sell bonds, it
must finance spending increases by printing money.

In theory, the solution to hyperinflation is simple: stop printing money.

In the real world, this requires drastic and painful fiscal restraint.
If the tax multiplier is GREATER THAN ONE In absolute value a change in taxes has multiplier effect
on income

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If the tax multiplier is NEGATIVE A tax increase reduces C, which reduces income
If the Tax multiplier is SMALLER THAN THE GOVT SPENDING MULTIPLIER Consumers save the fraction (1-
MPC) of a tax cut, so the initial boost in spending from a tax cut is smaller than from an equal increase in
G
Inflation: Benefit Nominal wages are rarely reduced, even when the equilibrium real wage falls.
This hinders labor market clearing.

Inflation allows the real wages to reach equilibrium levels without nominal wage cuts.

Therefore, moderate inflation improves the functioning of labor markets.

Inflation: Social Costs 1. costs when inflation is expected
2. costs when inflation is different than people had expected
Insiders Employed union workers whose interest is to keep wages high
IS Curve Factors & Purpose (Negative slope) Shows us the level of income that brings the goods
market into equilibrium.
Fiscal policy shifts the curve
Shift Right: When taxes decrease, expenditure increases,
Shift Left: Decrease in gov purchases or increase in tax shifts it inwards.
IS curve: Concept Comes from Keynesian cross when planned investments depends negatively on
interest rate
Keynesian CrossIs a basic model of income determination.

Takes fiscal policy and investment as exogenous

fiscal policy has a multiplier effect on income

Keynesian CrossThe equilibrium in the Keynesian cross is the point at which income (actual expenditure)
equals planned expenditure.
PE = C + I + G.
PE= planned expenditure, C= consumption, I= income, G= government purchases

Increase in government purchases: Causes increase in expenditure and equilibrium income.

Relates to IS curve
Final equation:
Y = C(Y − T ) + I(r) + G

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Final Summary: a basic model of income determination. It takes

fiscal policy and planned investment as exogenous and then shows that
there is one level of national income at which actual expenditure equals
planned expenditure. It shows that changes in fiscal policy have a multiplied impact on income.
labor Unions *exercise monopoly power to secure higher wages for their members
*unemployment occurs when union wage exceeds equilibrium wage
LM Curve is a graph of all combinations of r and Y that equate the supply and demand for real
money balances
MACRO REFERENCE KEYEndogenous Variables: one that is explained by model
Exogenous Variables: one that is not affected by the model (constant/assumption) [above score]

Demand Eq: Q^d = D (P,Y)

Supply Eq: Q^s = S (P,P_S)
The Quantity Equation: MP = VY (nominal GDP)
Keynesian Cross (relates to IS curve): Y = C(Y − T ) + I(r) + G
Liquidity Preference (relates to LM curve): M/P = L(r, Y )
Money Demand Function: (M/P )^d = L(i, Y)
i = r + Eπ = nominal interest rate
Equilibrium: M / P = L(r + Eπ, Y)
Money Supplied Function: (M/P)^s= (Fixed supply of M/P)
IS-LM: Investment/Saving(fiscal policy)-Liquidity Preference/Money Supply(monetary policy)
R = reserves
C = consumption = C(Y - T)
G= government spending
NX = net exports
Y= total value of import
pi = inflation rate
M = money supply
P = market price
Q =quantity
E = cost of basket
K = capital

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L = labor
W = nominal wage
R = nominal rental rate
P = price of output
W/P = real wage(measured in UNITS of output)
R/P = real rental rate
T = taxes
Any letter with an above score: becomes a unit of measurement (exogenous)
I = Investment
r = real interest rate

B = monetary base
rr = reserve-deposit ratio
cr = currency-deposit ratio
Y in production: output

U = unemployment
U/L = unemployment rate
E= employed workers
U / L = s / (s + f)= equilibrium unemployment rate

Production Function: Y = F(K,L); reflects economy's level of tech. and exhibits constant returns to scale
z= scaling all inputs w/same factor

MPL = F (K, L +1) - F (K, L)

MPL = W/P
MPK(capital) = R/P
total labor income: MPL x L(underlined)
total capital income: MPL x K(underlined)

α = capital's share of total income:

capital income = MPK × K = αY

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labor income = MPL × L = (1 - α )Y

The Cobb-Douglas production function is:
Y = AK^(alpha)L^(1-alpha)
where A represents the level of technology
MPK= (alpha x Y)
MPL= [(1-alpha)Y]/L
Model of Aggregate demand. (IS-LM model) Leading model in Keynesian Theory. Goal: to show what
determines national income for a given price. (what causes income changes) or what causes aggregate
demand to shift.
IS- investments & Savings
LM- Liquidity & Money

Final summary: The IS-LM model combines the elements of the Keynesian cross and the elements of the
theory of liquidity preference. The IS curve shows the points that satisfy equilibrium in the goods
market, and the LM curve shows the points that satisfy equilibrium in the money market. The
intersection of the IS and LM curves shows the interest rate and income that satisfy equilibrium in both
markets for a given
price level.
Monetarists vs. Keynesian's Sight on Velocity of Money: Keynesian Fifth Commandment Use Big
Brother;
A prime responsibility of elected government is to design fiscal policies so that they both stabilize
aggregate demand and involve the government in socially worthwhile programs.
Monetarists vs. Keynesian's Sight on Velocity of Money: Keynesian First Commandment Money matters
somewhat; a number of institutional forces can in practice weaken the potency of monetary policy.
Monetarists vs. Keynesian's Sight on Velocity of Money: Keynesian Fourth Commandment Be
ready to stabilize with fiscal policy;
Carefully used, fiscal policy can be a potent stabilizer of aggregate demand. The "multiplier" effect of
larger deficits outweighs any tendency they may have to crowd our some private spending.
Monetarists vs. Keynesian's Sight on Velocity of Money: Keynesian Second Commandment Watch
interest rates as well as the money supply; The money supply affects the GNP via interest rates. Often
what looks like a strong effect of the money supply on GNP is partly a response of money supply and
bank lending to aggregate demand.
Monetarists vs. Keynesian's Sight on Velocity of Money: Keynesian Third Commandment Don't bank on
monetary policy; Three things limit in efficacy:
a) The problem of "pushing on string"
b) the special sensitivity of certain sectors, esp. housing, to changes in monetary policy
c)the real danger that the Fed, not being elected by the people, may have the wrong goals.

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Monetarists vs. Keynesian's Sight on Velocity of Money: Monetarist Fifth CommandmentFear Big
Brother; Active fiscal policy means big government. Big government takes away our freedoms and stifles
initiative.
Monetarists vs. Keynesian's Sight on Velocity of Money: Monetarist First Commandment Know that
money matters a lot;
The most powerful determinent of the level of GNP is the money supply. A 10% rise in the money supply
will sooner or later raise GNP by 10% or more.
Monetarists vs. Keynesian's Sight on Velocity of Money: Monetarist Fourth Commandment Do not
bank on fiscal policy; Though tax cuts might have been a good idea in the 1930's fiscal policy has a weak
effect on aggregate demand. Raising government deficits(raise in taxes) outs private spending (less
buying) somewhat. Fiscal policy also takes effect only with a lag, so that well-meant attempt to stabilize
usually bring instability.
Monetarists vs. Keynesian's Sight on Velocity of Money: Monetarist Second Commandment Watch
the money supply;
To understand how the money supply affects GNP, do not watch interest rates. A rise in the money
supply raises GNP directly, not through interest rates. A rise in the money supply could raise interest
rates as easily as lower them.
Monetarists vs. Keynesian's Sight on Velocity of Money: Monetarist Third Commandment
Stabilize the growth of the money supply;
To stabilize the economy, the Fed should not at all try to stabilize interest rates. It should not even use
its own discretion and judgment much. The Fed should follow only one simple rule; no matter what,
keep the money supply growing moderately.
Money Demand and the Nominal Interest Rate In the quantity theory of money, the demand for real
money balances depends only on real income Y.
Another determinant of money demand: the nominal interest rate, i.
the opportunity cost of holding money (instead of bonds or other interest-earning assets).

So, money demand depends negatively on i.

Money Supply The supply of real money balances is FIXED
Natural rate of unemployment (U / L)= [s / (s+f)]
Natural Rate of unemployment The average rate of unemployment around which the economy
fluctuates.
Rise: During recession
Fall: During boom
Neutrality of Money Changes in the money supply do not affect real variables.

In the real world, money is approximately neutral in the long run.

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Outsiders Unemployed non-union workers who prefer equilibrium wages, so that there would be
enough jobs for them
Policy Implication A policy will reduce the natural rate of unemployment only if it lowers S or
increases F
Production Function in the Short Run: In a Nutshell Pt.1 Y = F(K,L); reflects economy's level of tech. and
exhibits constant returns to scale
z= scaling all inputs w/same factor, therefore
K2 = zK1 and L2 = zL1

What happens to output, Y2 = F (K2, L2 )?

If constant returns to scale, Y2 = zY1
If increasing returns to scale, Y2 > zY1
If decreasing returns to scale, Y2 < zY1

assumptions:
technology, supplies and capital of labor are fixed
Production Function in the Short Run: In a Nutshell Pt.2 Assume markets are competitive: each firm
takes W, R, and P as given.
Marginal Product of Labor:The extra output the firm can produce using an additional unit of labor
(holding other inputs fixed):
MPL = F (K, L +1) - F (K, L)

More labor added, MPL falls.

As one input is increased (holding other inputs constant), its marginal product falls.
Intuition: If L increases while holding K fixed
machines per worker falls,
worker productivity falls.
Each firm hires labor up to the point where MPL = W/P.
Production Function in the Short Run: In a Nutshell Pt.3 Marginal Product of Capital: how productive the
capital is

The same logic shows that MPK = R/P:

Diminishing returns to capital: MPK falls as K rises
The MPK curve is the firm's demand curve for renting capital.
Firms maximize profits by choosing K such that MPK = R/P.

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total labor income: MPL x L(underlined)

total capital income: MPL x K(underlined)
Production Function in the Short Run: The Cobb-Douglas One α = capital's share of total income:
capital income = MPK × K = αY
labor income = MPL × L = (1 - α )Y
The Cobb-Douglas production function is:
Y = AK^(alpha)L^(1-alpha)
where A represents the level of technology
MPK= (alpha x Y)
MPL= [(1-alpha)Y]/L
Public Job Training programs help workers displaced from declining industries get skills needed for
jobs in growing industries
Reasons for wage rigidity 1. Minimum- wage laws
2. Labor Unions
3. Efficiency wages
Sectoral shifts Changes in the composition of demand among industries or regions

Example: technological change and a New international trade agreement

Simple Money Demand Function (M/P)^d = k Y;
k = how much money people wish to hold for each dollar of income. (k is exogenous)
Steady State Condition the labor market is in steady state, or long run equilibrium, if the
unemployment rate is constant.

Equation: s # x E= F (# of unemployed people who find jobs)

Structural unemployment Results from wage rigidity: the real wage remains above the equilibrium
level. its caused by minimum wage, unions, efficiency wage
Supply and Demand: In a Nutshell The values of endogenous variables are determined in the
model.
The values of exogenous variables are determined outside the model:
The model takes their values and behavior
as given.
In the model of supply & demand for cars,
endogenous: P, Q^d, Q^s
exogenous: Y, Ps

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Demand Eq: Q^d = D (P,Y)

Demand Law: quantity of good decreases as price rises
Supply Eq: Q^s = S (P,P_S )
Supply Law: Quantity of good supplied increases as market price rises
The Actual Two Real Interest Rates i - Eπ = ex ante real interest rate:
the real interest rate people expect at the time they buy a bond or take out a loan
i - π = ex post real interest rate:
the real interest rate actually realized
The Classical Dichotomy Itself the theoretical separation of real and nominal variables in the classical
model, which implies nominal variables do not affect real variables.
The Classical Dichotomy: Nominal Variables Measured in money units, e.g.,
nominal wage: Dollars per hour of work.
nominal interest rate: Dollars earned in future by lending one dollar today.
the price level: The amount of dollars needed to buy a representative basket of goods.
The Classical Dichotomy: Real Variables Measured in physical units—quantities and relative prices, for
example:
quantity of output produced
real wage: output earned per hour of work
real interest rate: output earned in the future by lending one unit of output today
The government purchases multiplier the increase in income resulting from a $1 increase in G

Formula: Change in y/Change in G

Example: if MPC=0.8

___1______= 5
1-0.8
The Keynesian Cross A simple closed-economy model in which income is determined by expeniture

I= planned investment
PE= C+I+G= planned expenditure
Y= real GDP= actual expenditure

The difference between actual and planned expenditure= unplanned inventory investment
The Monetary Base: General Ideas i. Add currency to the reserve [B = C + R is the theory]

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ii. Can be converted to other types of equations

1. Like use money supply as [M = B x m(money multiplier)]
iii. Other types of multiplier when you expand
iv. The simple MM will be related to the reserve requirement
1. The portion of the money the Fed has in the bank they keep, while lend out the rest
v. Can play with that to have other type of money multipliers
The Monetary System: Model of the Money Supply Exogenous Variables

Monetary base, B = C + R
controlled by the central bank

Reserve-deposit ratio, rr = R/D

depends on regulations & bank policies

Currency-deposit ratio, cr = C/D

depends on households' preferences

M= C + D = [(C + D)/B] x B = m x B
m = cr + 1 / cr + rr
The Monetary System: Money Itself Functions: Medium of exchange, store of value, unit of account
Types:
1. Fiat money
has no intrinsic value
example: the paper currency we use
2. Commodity money
has intrinsic value
examples: gold coins, cigarettes in P.O.W. camps
The Monetary System: Quantitative Easing i. The Fed is buying long-term bonds and mortgages
ii. WE had this in 2008: To keep the long term interest rate at the lower level, and mortgage-bank
securities improved due to the Housing Market Crash

The Fed also bought mortgage-backed securities to help the housing market.

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But after losses on bad loans, banks tightened lending standards and increased excess reserves, causing
money multiplier to fall.

If banks start lending more as economy recovers, rapid money growth may cause inflation. To prevent,
the Fed is considering various "exit strategies."
The Monetary System: The Feds and Their Roles Roles: Control money supply by:
1) Using open market operations (purchase & sale of gov. bonds),
2) Reserve deposit ratio
a) Reserve requirements: Fed regulations that impose a minimum reserve-deposit ratio
b) Interest on reserves: The Fed pays interest on bank reserves deposited with the Fed
c) To reduce the reserve-deposit ratio, the Fed could pay a lower interest rate on reserves and reduce
reserve requirements
3) The interest rate the Fed charges on loans and banks (discount rate)
a) To increase the base, the Fed could lower the discount rate, encouraging banks to borrow more
reserves.

Reason: In order to follow expansive/contracted minded policy

Fact: Since 2008, the Fed was following expansive-minded policy by lowering the reserve ratio, buying
securities, and buying at discount rates

Trump Administration raised interest rates twice due to fear of inflation, as well as the increase of risk-
taking.
The Monetary System: The Money Multiplier If rr < 1, then m > 1

If monetary base changes by ΔB, then

ΔM = m × ΔB

m is the money multiplier, the increase in the money supply resulting from a one-dollar increase in the
monetary base.
The Money Demand Function (M/P )^d = L(i, Y)
(M/P )^d = real money demand, depends
i. negatively on i
a. i is the opp. cost of holding money
ii. positively on Y

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b. higher Y increases spending on g&s,

so increases need for money

("L" is used for the money demand function because money is the most liquid asset.)
The Money Demand Function: Nominal Interest Rate (M/P)^d=L(r + Eπ, Y)
When people are deciding whether to hold money or bonds, they don't know what inflation will turn out
to be.

Hence, the nominal interest rate relevant for money demand is r + Eπ.
The Quantity Equation M × V = P × Y; It is an identity: it holds by definition of the variables.
The Quantity Theory of Money Assumes V is constant & exogenous:
M x V(underscore) = P x Y
The Quantity Theory of Money: Concepts Normal economic growth requires a certain amount of
money supply growth to facilitate the growth in transactions.

Money growth in excess of this amount leads to inflation.

ΔY/Y depends on growth in the factors of

production and on technological progress
The Quantity Theory of Money: Final ConclusionHence, the quantity theory predicts a one-for-one
relation between changes in the money growth rate and changes in the inflation rate.
The Quantity Theory of Money: Final Equation π (Greek letter pi ) denotes the inflation rate = change in
P/ P, therefore
Pi = (Change in M/M) - (Change in Y/Y)
The Quantity Theory of Money: How the Price Level is Determined With V constant, the money
supply determines nominal GDP (P × Y ).
Real GDP is determined by the economy's supplies of K and L and the production function (Chapter 3).
The price level is P = (nominal GDP)/(real GDP).
The Quantity Theory of Money: How the Price Level is Determined TIP If, on an exam or homework
problem, students forget the logical order in which endogenous variables are determined—or on a more
fundamental level, forget which variables are endogenous and which are exogenous—then they are
much less likely to earn the high grades that most of them desire.
The Quantity Theory of Money: Implications 1) Countries with higher money growth rates should
have higher inflation rates.
2) The long-run trend in a country's inflation rate should be similar to the long-run trend in the country's
money growth rate.
The Relationship Between Money and Demand The connection between them: k = 1/V

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When people hold lots of money relative to their incomes (k is large), money changes hands infrequently
(V is small).
The tax multiplier The change in income resulting from $1 increase in T

Change in Y/ Change in T

__-MPC________
1-MPC
The Theory of Liquidity Preference Relates to LM curve (positive slope): The supply and demand for
real money balances determine the interest rate.
In other words, higher income leads to a higher interest rate.
(M/P)^s= (Fixed supply of M/P)
M=Money
P=Price value
M/P= the supply of real money balances

Price level is fixed so a reduction in the money supply reduces supply of real money balances leading to
the equilibrium
interest rate rising

Monetary policy shifts:

Decrease of Money Supply: Upward
Increase of Money Supply: Downward
Opposite shifts inward.

Final equation: M/P = L(r, Y )

Theory of liquidity prefrence John Maynard Keynes: the interest rate is determined by money supply
and money demand

An increase in the money supply lowers the interest rate

Two Real Interest Rates: Notation π = actual inflation rate (not known until after it has occurred)
Eπ = expected inflation rate
unemployment insurance (UI) UI pays part of a worker's former wages for a limited time after the
worker loses his/her job. UI increases frictional unemployment because it reduces the opportunity cost
of being unemployed and the urgency of finding work

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Velocitythe number of times the average dollar bill changes hands in a given time period (value of all
transactions/money supply)
Velocity: Difference between Nominal GDP and total transactions Nominal GDP includes the value
of purchases of final goods;
total transactions also include the value of intermediate goods.
Velocity: Using Nominal GDP for total transactions V = (P x Y)/M; where P = price of ouput, Y=
quanitity of ouput and P x Y = value of output
What policy or policy can we come up to try to reduce the natural rate of unemployment? 1. Stop
raising the (nominal) minimum wage, so that is real value will gradually erode to zero
2. Regulate unions to reduce unions' impact on wages
3. Reduce the generosity of unemployment benefits
4. Increase public funding to help retrain workers displaced from jobs in declining industries
Why is the IS curve negatively sloped? A fall in the interest rate motivates firms to increase investment
spending, which drives up total planned spending (PE)

To restore equilibrium in the goods marker, output must increase

Why is the LM curve upward sloping? Because
1. An increase in income raises money demand
2. Since the supply of real balances is fixed, there is now excess demand in the money market at the
initial interest rate
3. The interest rate must rise to restore equilibrium in the money market
Why is the multiplier greater than 1? the increase of G causes an equal increase in Y.

Change in Y= Change in G

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