Brief Outline of Topics Covered in Lecture 10
Chapter 20 The IS-LM Model
- The LM Curve
- Derive LM curve from money demand - money supply diagram
- Shifts in the LM curve
- Equilibrium
- Stability of equilibrium
Chapter 21 Monetary and Fiscal Policy in the IS-LM Model
- Changes in the equilibrium values of output and the interest rate
- Monetary policy in the IS-LM model
- Fiscal policy in the IS-LM model
Materials from class:
None for today
Video:
Lecture 10 - Chapter 20, pgs. 531-535; Chapter 21, pgs. 539-546
Google Video
Additional Reading:
Tim Duy: Third Quarter GDP, Part II
Paul Krugman: Bursting Bubble Blues
Application:
Treasuries a tad firmer, Fed's hawkish Lacker weighs, by Lucia Mutikani, Reuters: ...Richmond Federal Reserve President Jeffrey Lacker, who in recent months has been the most hawkish Fed member on inflation, said the U.S. economy can withstand further policy tightening and that his outlook for inflation was "discomforting."
Lacker's remarks caused Treasuries to surrender earlier gains, with prices slipping into negative territory.
"Lacker's comments about inflation did not help the market and they are not going to be positive for bonds going forward," said Don Kowalchik, a debt strategist at A.G. Edwards & Sons in St. Louis.
Benchmark 10-year notes traded 1/32 in price for a yield of 4.67 percent, compared with 4.66 percent shortly before Lacker's initial comments and versus 4.68 percent late on Friday. Bond yields and prices move inversely.
But in contrast to Lacker's comments, Dallas Federal Reserve Bank President Richard Fisher told Reuters in an interview that he was encouraged on the inflation front and was comfortable with where the Fed was in terms of monetary policy.
Fisher is not a voting member of the Fed's interest rate setting committee this year.
Two-year notes, which respond closely to expectations on Federal Reserve interest rate moves, were flat in price, yielding 4.76 percent, unchanged from late Friday. ...
Core Inflation Measure Eases But Leaves Questions for Fed, by Christopher Conkey and Campion Walsh, WSJ: A closely watched measure of consumer prices eased somewhat last month, but inflation remains a big question for Federal Reserve policy makers and the economy.
The Fed's preferred inflation measure -- the price index for personal consumption expenditures excluding food and energy -- rose 0.2% in September after an upwardly revised 0.3% gain in August, the Commerce Department said. Compared with a year earlier, this measure of "core" inflation was up 2.4% last month, less than the 2.5% pace in August.
Despite the slight downtick last month, the annual increase in the measure of core inflation remains well above the informal range of 1% to 2% that Fed policy makers would prefer. At the same time, the economy's growth rate in the third quarter was considerably below normal. [Inflation Measure]
That combination, economists said, will continue to keep the Fed from raising or lowering interest rates until it becomes clear which is a more serious threat. "As long as there are no large changes on either side of this equation, a somewhat uneasy standstill is probably the most likely outcome for monetary policy," wrote Joshua Shapiro, chief U.S. economist at MFR Inc., in a research note.
The overall index of personal consumption expenditure prices fell 0.3% last month after a 0.3% rise in August, driven down by lower gasoline prices. Consumer spending rose a modest 0.1% in September, a bit lower than the 0.2% gain in August, the report showed. Given the overall drop in consumer prices last month, inflation-adjusted spending rose 0.4% last month.
Economists took these figures as a sign that lower gasoline prices are raising consumer spending. "We're seeing pretty good, respectable advances in real spending despite the fact that the housing market is weak," said Brian Bethune, an economist at Global Insight. "It looks like the drop in gasoline prices is having the bigger impact."
Personal income jumped 0.5% last month after a 0.4% gain in August, suggesting that solid gains in wages and other forms of compensation also are buoying spending growth. With income growth outpacing spending growth last month, the savings rate -- personal savings as a percentage of after-tax income -- improved to negative 0.2% in September from negative 0.5% the previous month.
Economists are also concerned that significant wage growth could put upward pressure on prices by raising business costs when productivity growth is slowing. The Labor Department will release its latest estimates on employee compensation and productivity trends, starting today with the release of third-quarter employment costs.
Meanwhile, the Fed's quarterly survey of senior loan officers found that "demand for most loan types declined somewhat" in August through October. U.S. banks reported weaker demand for commercial-real-estate and residential-mortgage loans amid the housing market's downturn. Lending standards for residential-mortgage loans tightened.
Demand for commercial and industrial loans was essentially flat from the previous survey, although U.S. banks reported easing lending standards for these loans.