Chapter 7

Introduction
-​ Earlier chapters covered:
+​ the long-run effects of fiscal policy on interest rates, investment, economic
growth
+​ the long-run effects of monetary policy on the price level and inflation rate
-​ This chapter focuses on the short-run effects of fiscal and monetary policy, which
work through aggregate demand.
Aggregate demand
-​ Recall, the AD curve slopes downward for three reasons:
+​ The wealth effect
+​ The interest-rate effect (the most important of these effects for the U.S
economy)
+​ The exchange-rate effect
-​ Next: A supply-demand model that helps explain the interest-rate effect and how
monetary policy affects aggregate demand.
The theory of liquidity preference
-​ A simple theory of the interest rate (denoted r)
-​ r adjusts to balance supply and demand for money
-​ Money supply: assume fixed by central bank, does not depend on interest rate
-​ Money demand reflects how much wealth people want to hold in liquid form.
-​ For simplicity, suppose household wealth includes only two assets:
+​ Money - liquid but pays no interest
+​ Bonds - pay interest but not as liquid
+​ Other assets
-​ A household's "money demand" reflects its preference for liquidity.
-​ The variables that influence money demand: Y, r and P

Money demand
-​ Suppose real income (Y) rises. Other things equal, what happens to money
demand?
-​ If Y rises:
+​ Households want to buy more g&s, so they need more money.
+​ To get this money, they attempt to sell some of their bonds.
-​ I.e., an increase in Y causes an increase in money demand, other things equal.

How r is determined
-​ MS curve is vertical: Changes in r do not affect MS, which is fixed by the Fed.
-​ MD curve is downward sloping: A fall in r increases money demand.
How the interest-rate effect works
-​ A fall in P reduces money demand, which lowers r.
-​ A fall in r increases I and the quantity of g&s demanded.
Why have commercial bank: họ vận hành như một tổ chức doanh nghiệp, doanh
nghiệp cần tiền và maximize profit. Họ kiếm lợi nhuận từ việc cho vay. họ nhận tiền
savings gửi vào xong cho vay, họ trả lãi suất tiền gửi(r2) và thu lãi suất vay(r3)=>
profit= r3-r2
Why have mutual fund: Aim profit. Họ phát hành Issue certificate như trái phiếu và rồi
cho vay, invest= bond(đế hưởng lợi từ % lãi suất) và stock
=> cho vay và đầu tư càng nhiều thì lượng tiền xoay chuyển trong nền kte càng lớn

Monetary Policy and Aggregate Demand

-​ To achieve macroeconomic goals, the Central Bank can use monetary policy to
shift the AD curve.
-​ The Central Bank's policy instrument is MS.
-​ The news often reports that the Fed targets the interest rate.
+​ More precisely, the inter-bank funds rate - which banks charge each
other on short-term loans
-​ To change the interest rate and shift the AD curve, the Fed conducts open
market operations to change MS.
Macroeconomics goal: maintain GDP growth, Expand standard of living, Maintain
trade balance and Saving - Investment, Inflation balance, Unemployment rate(<5%),
Environmental protection,...

The Effects of Reducing the Money Supply

-​ The Central Bank can raise r by reducing the money supply.
-​ An increase in r reduces the quantity of g&s demanded.

Money Supply Creation process

-​ Monetary Base:
MB = Cu + R (7.1)
+​ Where:
MB is (Monetary Base)
Cu (Currency): tiền mặt trong lưu thông
R (Reserve): tiền dự trữ trong các ngân hàng
-​ Identify Money Supply:
MS = m x MB (7.2)
+​ Where:
MS: Money supply
 m: Monetary multiplier
MB: Monetary base by the central bank released: MB = Cu + R
-​ Identify money supply level:
Suppose: cr is the currency rate over the savings and rr is the real compulsory rate in
commercial banks, then:
cr = Cu/D (7.3)
rr = R/D (7.4)
rr: tỷ lệ dự trữ bắt buộc của ngân hàng trung ương (yêu cầu ngân hàng phải có)
cr: tỷ lệ dự trữ của ngân hàng thương mại
-> m= MS/B = (Cu+D)/(Cu+R) = ((Cu/D)+1)/((Cu/D)+(R/D)) = ((cr+1)/(cr+rr))
-> MS= ((cr+1)/(cr+rr)) x MB
Central Bank and tools to control money supply
-​ Tools to control money supply by the central bank:
+​ Open Market operation
Need to increase money supply → the central bank buys bonds at
open markets
Need to decrease money supply → the central bank sells bonds
at open markets
+​ Regulation for Compulsory reserve rate
+​ Discount rate: is the rate by the central bank applied to loan to
commercial banks to fulfil their reserve.
Needed to increase money supply → the central bank decrease
discount rate encourage commercial banks borrow more from
the central bank, and reserve at a lower proportion.
Needed to decrease money supply → the central bank increases
discount rate → commercial banks borrow less from the central
bank, and increase reserve.
Hoạt động thị trường mở của ngân hàng nhà nước là phát hành và thu mua trái phiếu,
tại sao chính phủ mua trái phiếu tăng cung tiền (trái phiếu chính phủ là chứng minh
các khoản nợ của chính phủ có kỳ hạn)? Chính phủ thu trái phiếu về, họ trả tiền gốc và
lãi của trái phiếu họ phát hành làm tăng lượng cung tiền của thị trường => làm tăng
MB ( và ngược lại chính phủ sẽ bán bonds) Đây là hoạt động chính phủ tác động vào
MS

Fiscal Policy and Aggregate Demand

-​ Fiscal policy: the setting of the level of govt spending and taxation by govt
policymakers
-​ Expansionary fiscal policy
 +​ an increase in G and/or decrease in T
+​ shifts AD right
-​ Contractionary fiscal policy
+​ a decrease in G and/or increase in T
+​ shifts AD left
-​ Fiscal policy has two effects on AD…
The Multiplier Effect
-​ If the govt buys $20b of planes from Boeing, Boeing's revenue increases by
$20b.
-​ This is distributed to Boeing's workers (as wages) and owners (as profits or
stock dividends).
-​ These people are also consumers and will spend a portion of the extra income.
-​ This extra consumption causes further increases in aggregate demand.
=>Multiplier effect: the additional shifts in AD that result when fiscal policy increases
income and thereby increases consumer spending
ex: việc chính phủ chi 11 nghìn tỷ( mỗi người 100k) vào 2/9 để tác động lớn vào tổng
cầu của nước( tăng tốc độ tăng trưởng)
-​ Formula for the Multiplier
Notation: ΔG is the change in G,ΔY and ΔC are the ultimate changes in Y
and C
Y= C+ I + G + NX identity
ΔY=ΔС + ΔG (I and NX do not change)
ΔY = MPC ΔY + ΔG because ΔC = MPC ΔY
solved for ΔY
ΔY =1/(1 - MPC) x ΔG
The multiplier: 1/(1 - MPC)
A bigger MPC means changes in Y cause bigger changes in C,
which in turn cause more changes in Y.
E.g: if MPC = 0.5 multiplier = 2
if MPC = 0.75 multiplier = 4
if MPC = 0.9 multiplier = 10

CONCLUSION
-​ Policymakers need to consider all the effects of their actions. For example:
+​ When Congress cuts taxes, it should consider the short-run effects on
aggregate demand and employment, and the long-run effects on
saving and growth.
 +​ When the Fed reduces the rate of money growth, it must take into
account not only the long-run effects on inflation but the short-run
effects on output and employment.
tính cán cân ngân sách(BB): BB= T x Y - GDP
T: xuất thế
Y: thu nhập