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Expectations, Output, and Policy

Expectations, Output, and Policy. Chapter 17. 17-1 Expectations and Decisions: Taking Stock. Figure 17-1 Expectations and Spending: The Channels. 17-1 Expectations and Decisions: Taking Stock. 17-1 Expectations and Decisions: Taking Stock. Figure 17-2 The New IS Curve.

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Expectations, Output, and Policy

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  1. Expectations, Output,and Policy Chapter 17

  2. 17-1 Expectations and Decisions: Taking Stock Figure 17-1 Expectations and Spending: The Channels

  3. 17-1 Expectations and Decisions: Taking Stock

  4. 17-1 Expectations and Decisions: Taking Stock Figure 17-2The New IS Curve • A decrease in the current real interest rate, given unchanged expectations of the future real interest rate, does not have much effect on spending. • A change in current income, given uchanged expectations of future income, is likely to have a small effect on spending.

  5. 17-1 Expectations and Decisions: Taking StockThe LM relation • The decision about how much money to hold is largely myopic. • How much money you want to hold depends on your current level of transactions. • The opportunity cost of holding money today depends on the current nominal interest rate. • Therefore, expectations do not enter into the LM relation.

  6. 17-2 Monetary Policy, Expectations, and Output Figure 17-3 The New IS–LM

  7. 17-2 Monetary Policy, Expectations, and Output

  8. 17-2 Monetary Policy, Expectations, and Output Figure 17-4 The Effects of an Expansionary Monetary Policy

  9. 17-2 Monetary Policy, Expectations, and Output • Given expectations, an increase in the money supply leads to a shift in the LM curve and a movement down the steep IS curve. The result is a large decrease in r and a small increase in Y. • If an increase in money leads to an increase in expected output and a decrease in the expected interest rate, the IS curve shifts to the right, leading to a lerger increase in Y.

  10. 17-2 Monetary Policy, Expectations, and Output • The effects of monetary policy depend crucially on its effect on expectations. • If a monetary expansion leads financial investors, firms, and consumers to revise their expectations of future interest rates and output, then the effects of the monetary expansion on output may be very large. • If expectations remain unchanged, the effects of the monetary expansion on output will be small.

  11. 17-3 Deficit Reduction, Expectations, and Output Figure 17-5 The Effects of a Deficit Reduction on Current Output

  12. Focus: Can a Budget Deficit Reduction Lead to an Output Expansion? Ireland in the 1980s Table 1 Fiscal and Other Macroeconomic Indicators, Ireland, 1981 to 1984, and 1986 to 1989

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