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Macroeconomic Graphs Analysis: Interest Rates, Exchange Rates, and Economic Variables

Explore the effects on interest rates, exchange rates, and economic variables through detailed graph analysis in the context of the FED, money market, loanable funds market, capital stock, GDP, inflation, and unemployment.

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Macroeconomic Graphs Analysis: Interest Rates, Exchange Rates, and Economic Variables

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  1. FED buys bonds from the publicDraw graph showing effect on interest rate. What happens to value of $ in foreign exchange market?

  2. Sm2 Sm1 i Money Market i1 i2 Dm Q1 Q Q2

  3. Draw graph showing effect on the interest rate from increased saving in the U.S. What happens to nation’s capital stock?

  4. Loanable Funds Market i SLF1 SLF2 i1 i2 DLF Q1 Q Q2

  5. Effect on P and GDP when $ depreciates

  6. ASLR AS P AD/AS P2 P1 AD2 AD1 GDP Qf Q2

  7. FED sells bonds. Draw graph showing effect on interest rate. What happens to the value of the $ in the foreign exchange market?

  8. Sm2 i Sm1 Money Market i2 i1 Dm Q Q2 Q1

  9. Government & FED do nothing in response to short-run recession

  10. ASSR1 ASLR P AD/AS ASSR2 P1 P2 AD GDP Q1 Qf

  11. Effect on interest rate when government runs a budget deficit

  12. Loanable Funds Market SLF i i2 i1 DLF2 DLF1 Q1 Q Q2

  13. Value of U.S. $ and Japanese yen when U.S. interest rates increase. What happens to American imports and exports?

  14. Foreign Exchange Market P ($) P (Yen) SYen1 S$ SYen2 P2 P1 P1 D$2 P2 DYen D$1 Q1 Q2 Q Q1 Q Q2 Yen Dollars

  15. Effect on P, GDP when $ appreciates

  16. ASLR AS P AD/AS P1 P2 AD1 AD2 GDP Qf Q2

  17. Effect on AD of FED’s bond sales during inflation

  18. ASLR AS P AD/AS P1 AD1 P2 AD2 GDP Qf Q1

  19. Government and FED do nothing in response to short-run inflation

  20. ASSR2 ASSR1 ASLR P AD/AS P2 P1 AD GDP Qf Q1

  21. Effect on AS and SRPC when price of oil increases dramatically

  22. Inflation rate P AS2 AS1 P2 P1 SRPC2 AD SRPC1 GDP2 GDP1 GDP Unemployment rate P goes up Unemployment rises

  23. Expansionary fiscal policy during a recession

  24. ASLR AS P AD/AS P2 P1 AD2 AD1 GDP Q1 Qf

  25. Effect on ASLR and LRPC when U.S. capital stock increases

  26. Effect on AS P Inflation ASLR1 LRPC1 LRPC2 ASLR2 NRU2 Unem. Qf1 Qf2 NRU1 GDP

  27. The FED and Monetary policy • Always affects the money market • Money market has vertical supply curve • Increase in money supply lowers interest rates – increases investment and consumption and AD • Lower interest rates cause $ to depreciate – exports increase, imports decrease • Decrease in money supply has opposite effect

  28. Loanable funds market • S affected by savings; D affected by increased budget deficit (increasing G or decreasing taxes) • Upward sloping S curve • Increase in budget deficit raises interest rates (decreases I and C – crowding out) • Increase in savings lowers interest rates • Changes in income affect BOTH savings and consumption in the same direction

  29. Short run vs. long run • If unemployment rises in the short run, wages fall • Falling wages increases AS (shifts to right) • If unemployment falls in the short run, wages rise • Rising wages decreases AS (shifts to left) • Long run equilibrium is at the NRU

  30. Capital Flows • Money coming into a country increases D for that currency and increases S of other currency • Increasing D for a currency causes it to appreciate; increasing S for a currency causes it to depreciate • Higher interest rates in a country increases D for its currency b/c it increases the D for that country’s financial assets • A higher P in a country decreases D for its currency b/c people will buy another country’s goods instead

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