Brief Outline of Topics Covered in Lecture 14
Chapter 21 Monetary and Fiscal Policy in the IS-LM Model
- The Fed cannot control both i and M simultaneously
- Poole's Pules
- Unstable IS curve
- Unstable LM curve
- The IS-LM model in the long-run
- Natural rate of output
- Monetary and fiscal policy in the short-run and long-run
- The aggregate demand curve
- Derive from IS-LM model
- Slope of aggregate demand curve
- Shifts in the aggregate demand curve
Materials from class:
Video
Lecture 14 - YouTube
Lecture 14 - Google Video
Additional Reading:
- International finance and economic growth - Dani Rodrik
- An Auto Bailout Would Be Terrible for Free Trade - WSJ.com
- Finance, market, globalisation: a plot against mankind? - Vox EU
- Drawing the wrong lessons from policy errors - Stephen Gordon
- How Obama can energise the economy - FT
- What’s the Value of a Big Bonus? - NYTimes.com
- FBR: Financial System Still Needs $1.0-$1.2 Trillion - Real Time Economics
- FOMC Minutes Signal Fed Is Open to More Rate Cuts - WSJ.com
Application:
FOMC Minutes Signal Fed Is Open to More Rate Cuts, WSJ: U.S. Federal Reserve officials stand ready to slash interest rates to levels not seen in half a century if the economic picture continues to worsen, minutes of their most recent policy meeting show. video Analyzing the Fed's Gloomy Outlook 2:53
CMC Markets' chief foreign exchange strategist Ashraf Laidi tells Dow Jones' Simon Constable what the Fed's minutes mean and why stocks won't be heading higher anytime soon. (Nov. 19)
Officials made clear that "unfolding economic developments" could require the Federal Open Market Committee "to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities," the FOMC's Oct. 28-29 meeting minutes said.
Additionally, officials generally expected the economy to contract in the second half of 2008 and the first half of 2009, according to the minutes, which were released Wednesday after the customary three-week lag. (See the full text of the FOMC's minutes.)
And some officials expected that the economic weakness "could persist for some time," according to the minutes.
Fed officials said they anticipate that economic data would show "significant weakness in economic activity" and that additional policy easing could well be necessary, according to the meeting minutes.
"In any event, the committee agreed that it would take whatever steps were necessary to support the recovery of the economy," the minutes said.
Overall, officials found that risks to the economy had greatly escalated, leaving them little choice but to cut interest rates to four-year lows. As the credit crisis worsened, the FOMC voted unanimously Oct. 29 to lower the target federal-funds rate at which banks lend to each other by 0.5 percentage point to 1%, its lowest level since the period between June 2003 and June 2004.
The Fed officials agreed that "significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures," the minutes said.
They also noted that the credit crisis expanded globally since their September policy meeting, at which they held rates steady.
"The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period," the minutes said. "This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on Oct. 8." That day, Fed officials agreed to an unprecedented joint rate cut with other major central banks including the European Central Bank and Bank of England.
Meanwhile, the Fed downgraded its 2008 forecasts for gross domestic product and the unemployment rate, according to a quarterly forecast the Fed released Wednesday.
The central tendency of officials' forecast is for gross domestic product growth this year to stand between 0.0% and 0.3%, which is lower than its June projection of a 1.0% to 1.6% range.
Meanwhile, they slashed their GDP growth projection for 2009 to a range of -0.2% to 1.1%. In June, they had seen a 2.0% to 2.8% range for 2009.
Officials also raised their forecasts for the unemployment rate. They now see the unemployment rate between 6.3% and 6.5% in 2008, up from the previous forecast of 5.5% to 5.7%, the Fed said.
Amid a deteriorating economy, the unemployment rate had already surpassed the Fed's previous forecast. Earlier this month, the Labor Department reported that the unemployment rate in October soared 0.4 percentage point to 6.5%, the highest level since March 1994.
