Thursday, April 28, 2016

Fiscal & Monetary

Independence and Interdependence of Fiscal & Monetary Policy

It appears to me that the AP is interested as an explanation for the direction of the RIR using the Price Level as an explanation.

Let me take a shot at explaining. (This is not for the AP explanation)
 (If the Money Supply is increasing then the amount of money in circulation is increasing which with our understanding of supply and demand means that the value of the money decreases. (more money less value) The RIR is about purchasing power so if the quantity (supply) of money increases then the purchasing power of each dollar falls. As the more money supplied gets into people's hands they spend it,, more people spending money pushes the price level up, price levels increase. 

Next connection & clarification. 
If the money supply is increasing then the value of the currency is falling as more people have more of it and therefore demand for it falls reducing the value.  RIR is a direct reflection of the cost to purchase money (borrow, get a loan). So if the supply is increasing the banks want to make loans so they lower the cost to purchase money, RIR decreases. 

Next connection & clarification.
If the banks have more loanable funds then their opportunity cost of holding more cash increases and they therefore lower their interest rates (price to borrow) to entice more people to borrow. Remember that the demand curve is downward sloping on the purchasing of money (borrowing),, and to get more people to borrow the banks must lower their rates.

To explain for the AP, monetary policy expansion and the RIR, I think it is best to say that since the Price Level (PL) is increasing therefore the RIR must be falling.

Still easier than this stuff.

Tuesday, April 26, 2016

Perfect Competition Show Me Quiz

Perfect Competition Show Me Quiz

Monday, April 25, 2016

Fiscal Policy & Monetary (Contractionary) (2of3)

Fiscal Policy & Monetary (Contractionary) (2of3)

What does it look like when fiscal and monetary policies are contractionary.

Not many questions that have dealt with both being contractionary but possibly would reduce an inflationary economy.

Sunday, April 24, 2016

Fiscal Policy Cheat Sheet (Updated)

Fiscal Policy Cheat Sheet (Updated)
(Corrections, comments or critique,
The big change is the addition of how to explain what happens on the money market graph when there is expansionary or contractionary fiscal policy.

Tuesday, April 19, 2016

Fiscal Policy & Monetary Policy (Expansionary) (1of3)

Fiscal Policy Expansion & Monetary PolicyExpansion

Monetary & Fiscal, how do they work when used at the same time. Lets start by looking at what is the cause and effect of Fiscal and Monetary policy when both are expansionary.

When Monetary and Fiscal are both expansionary AD (increases) and the IR (no change).

How would this knowledge have helped us with the following question?

2008 AP Micro Exam
Answer - C
To bring the economy out of a recession, AD must shift right. 
Expansionary Fiscal & Monetary Policy can be used.
GS increases (expansionary fiscal) & a lowering of the Federal Funds Rate (expansionary monetary)
Of course you need to know that lowering the Fed. Funds Rate increases the MS.
If the FED lowers the Fed. Funds Rate banks can get loans at a lower rate and banks will therefore make more loans and create more money. (Expansionary)

From the Monetary Policy Cheat Sheet (Link)

2000 AP Micro 
Answer - C - Higher Interest Rates

Fiscal Policy tends to get higher interest rates.
Government Spending Increases and Consumption increases and Investment increases which shifts AD rightward which increases GDP and (Y) incomes and when incomes increases the Demand for Money increases pushing up the Nominal Interest rates and the government borrowing to spend money causes the Demand for loanable funds to increase thus driving up the Real Interest Rate.
Fiscal Policy Expansion causes AD to Increases and Interest Rates to Increase.

Saturday, April 2, 2016

Monopoly cheat sheet

Monopoly Cheat Sheet
If you need a copy just send an e-mail.

Thanks Hui Jing Seah