Money Demand, Money Supply, Liquidity Trap презентация

Md

MS3

MS4

A

C

D

r1

r0

πe = 0

As very low interest rates, investors are indifferent between bonds and money – money demand becomes perfectly elastic.
Increase in the money supply is held as cash.

MS2

B

Md (Y1)

C

B

r1

r0

A

Y

Y2

Y3

Y1

A

B

C

Md (Y2)

Md (Y3)

r2

LM

r1

r2

r0

πe = 0

As income falls below Y3 , no effect on the interest rate. The LM-curve is horizontal.

YF

LM1

IS

r

LM0

LM2

A

B

Y1

πe = 0

The economy is at Y0 below full employment potential. Monetary policy is ineffective in pushing the economy beyond Y1.

YF

LM

IS1

Y1

πe = 0

IS2

But, fiscal policy seems to work and you get the full multiplier effect as you move from Y0 to Y1. Why do you get the full multiplier effect?

YF

LM

IS1

Y1

πe = 0

IS2

IS3

Y

LM1

IS1

πe = 0

IS2

Case where real sector of the economy experiences shocks causing shifts in the IS-curve.
If the Fed targeted the money supply, go to points B’ and C’.

IS3

rtarget

LM2

LM3

A

B

C

B’

C’