1、Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-1,CHAPTER 10,Investment, Net Exports, and Interest Rates,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-2,Questions,How are the determinants of investment different in a sticky-price than in a flexib
2、le-price model? How are the determinants of net exports different in a sticky-price than in a flexible-price model? How do changes in interest rates affect the equilibrium level of production and income in a sticky-price model?,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,1
3、0-3,Questions,What is the “IS Curve”? What use is it? What determines the equilibrium level of real GDP when the central banks policy is to keep the real interest rate constant?,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-4,The Importance of Investment,Changes in invest
4、ment are the driving force behind the business cycle reductions in investment have played a powerful role in every recession and depression increases in investment have spurred every boom,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-5,The Importance of Investment,Underst
5、anding the causes and consequences of changes in investment will help us to understand business cycles,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-6,Figure 10.1 - Investment as a Share of Real GDP, 1970-2000,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights r
6、eserved.,10-7,The Role of Investment,In the flexible-price model, the real interest rate is a market-clearing price it is pushed up or down by supply and demand to equate the flow of savings to the flow of investment,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-8,The Rol
7、e of Investment,In the sticky-price model, the interest rate is not set in the loanable funds market it is set directly by the central bank or indirectly by the combination of the stock of money and the liquidity preferences of households and businesses businesses match the quantity they produce to
8、aggregate demand automatically creates balance in the financial market,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-9,Fluctuations in Investment,Fluctuations in investment have two sources changes in the real interest rate shifts in investors expectations about future gr
9、owth, profits, and risk,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-10,Investment and the Interest Rate,The opportunity cost of an investment project is the real interest rate the higher the interest rate, the lower the number and value of investment projects that will
10、return more than their current cost and the lower the level of investment spending,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-11,Investment and the Interest Rate,The interest rate that is relevant for determining investment spending is a long-term interest rate when co
11、nsidering an investment project, a manager must compare the potential profits of the project to the opportunity to make money from a long-term commitment of the funds elsewhere,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-12,Investment and the Interest Rate,Long-term and
12、 short-term interest rates are different and do not always move in step long-term interest rates are usually higher than short-term interest rates the term premium is the premium in the interest rate that the market charges on long-term loans vis-vis short term loans,Copyright 2002 by The McGraw-Hil
13、l Companies, Inc. All rights reserved.,10-13,Figure 10.2 - Bond Yield Curves,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-14,Investment and the Interest Rate,The interest rate that is relevant for investment spending decisions is the real interest rate,Copyright 2002 by
14、The McGraw-Hill Companies, Inc. All rights reserved.,10-15,Figure 10.3 - Gaps between Real and Nominal Interest Rates,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-16,Investment and the Interest Rate,The interest rate that a firm faces is the interest rate charged to risk
15、y borrowers the premium that lenders charge for loans to companies rather than to safe government borrowers is called the risk premium,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-17,Figure 10.4 - The Risk Premium: Safe and Risky Interest Rates,Copyright 2002 by The McGr
16、aw-Hill Companies, Inc. All rights reserved.,10-18,Investment and the Interest Rate,In the investment function the relevant interest rate (r) is the long-term, real, risky interest rate As r rises, the level of investment spending will decline,Copyright 2002 by The McGraw-Hill Companies, Inc. All ri
17、ghts reserved.,10-19,Figure 10.5 - Investment as a Decreasing Function of the Long-Term, Real, Risky Interest Rate,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-20,Exports and Autonomous Spending,Gross exports depend on foreign total incomes (Yf) the real exchange rate ()
18、 the real exchange rate depends on the domestic real interest rate (r) Like investment, gross exports are affected by changes in the real interest rate,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-21,Exports and Autonomous Spending,A higher interest rate reduces autonomo
19、us spending (A) by reducing exports (Xr r) as well as by reducing investment (Ir r),Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-22,Exports and the Interest Rate,A higher real interest rate reduces gross exports investing in the home country is more attractive foreign ex
20、change speculators shift their portfolio holdings to include more home currency-denominated assets the exchange rate falls exports are more expensive to foreigners,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-23,Figure 10.6 - From the Real Interest Rate to the Change in
21、Exports,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-24,Autonomous Spending and the Real Interest Rate,A one-percentage-point increase in the real interest rate (r) reduces autonomous spending by (Ir + Xr),Copyright 2002 by The McGraw-Hill Companies, Inc. All rights rese
22、rved.,10-25,Figure 10.7 - Autonomous Spending as a Function of the Real Interest Rate,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-26,The Investment-Saving (IS) Curve,Because a change in the real interest rate changes autonomous spending, it will change the equilibrium l
23、evel of real GDP the effect will be equal to the interest sensitivity of autonomous spending (Ir + Xr) times the multiplier,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-27,The Investment-Saving (IS) Curve,The relationship between the level of the real interest rate and t
24、he equilibrium level of real GDP is the IS curve IS stands for “Investment-Saving”,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-28,The Investment-Saving (IS) Curve,To find a point on the IS curve: pick a value for the real interest rate and determine the level of autonom
25、ous spending at that interest rate use the income-expenditure diagram to determine the equilibrium level of real GDP Repeat this procedure to find other points on the IS curve,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-29,Figure 10.8 - The IS Curve,Copyright 2002 by Th
26、e McGraw-Hill Companies, Inc. All rights reserved.,10-30,The IS Curve,Define baseline autonomous spending (A0) to include the determinants of autonomous spending that do not depend on the real interest rate,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-31,The IS Curve,Rec
27、all that real GDP is equal to autonomous spending (A) divided by (1-MPE),Substituting, we get,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-32,The IS Curve,The term on the left is the horizontal intercept of the IS curve the value of equilibrium real GDP if the real inter
28、est rate was equal to zero The term on the right is the slope of the IS curve the responsiveness of real GDP to changes in the interest rate,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-33,Figure 10.9 - The IS Curve,Copyright 2002 by The McGraw-Hill Companies, Inc. All r
29、ights reserved.,10-34,The Slope of the IS Curve,The first term is the multiplier (1/1-MPE) The second term shows how large a change in investment or exports is generated by a change in the real interest rate,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-35,The Position of
30、 the IS Curve,The position of the IS curve depends on the baseline level of autonomous spending times the multiplier,Changes in any of these determinants will shift the position of the IS curve,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-36,Figure 10.10 - A Change in Fi
31、scal Policy and the Position of the IS Curve,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-37,Changes in the Interest Rate,To calculate how much a change in the interest rate will shift the equilibrium level of real GDP, you need to know four things: the marginal propensi
32、ty to spend (MPE) the interest sensitivity of investment (Ir) the interest sensitivity of the exchange rate (r) the exchange rate sensitivity of exports (X),Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-38,Moving to the IS Curve,If the economy is above the IS curve: real
33、GDP planned expenditure inventories rise firms cut production employment, real GDP, and national income fall If the economy is below the IS curve: planned expenditure real GDP inventories fall firms expand production employment, real GDP, and national income rise,Copyright 2002 by The McGraw-Hill Co
34、mpanies, Inc. All rights reserved.,10-39,Figure 10.11 - Off of the IS Curve,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-40,Shifting the IS Curve,Two kinds of government policies directly affect the position of the IS curve a shift in tax rates changes both the position
35、and the slope of the IS curve a change in the level of government purchases changes the position of the IS curve,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-41,Shifting the IS Curve,Example - an increase in government spending G = $200 billion MPE = 0.5 Ir = $0.11 Xr =
36、$0.015 r = 4%,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-42,Moving along the IS Curve,Changes in the real interest rate will move the economy along the IS curve a higher real interest rate will produce a lower level of aggregate demand and equilibrium real GDP a lower
37、real interest rate will produce a higher level of aggregate demand and equilibrium real GDP,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-43,Moving along the IS Curve,Example - cutting interest rates to boost equilibrium real GDP by $500 billion MPE = 0.5 Ir = $0.11 X = 5
38、% r = $0.003,To boost real GDP by $500 billion, the real interest rate must fall by 2 percentage points,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-44,Figure 10.12 - Cutting Target Interest Rates and Raising Real GDP,Copyright 2002 by The McGraw-Hill Companies, Inc. All
39、 rights reserved.,10-45,Changing Interest Rates,The Federal Reserve controls interest rates through open market operations buying and selling short-term government bonds for cash,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-46,Open Market Operations,When the Federal Rese
40、rve buys government bonds the total cash in the hands of the public and bank reserves increases households, businesses, and banks find that they are holding more money than they would like use the money to buy assets (such as bonds) bond prices rise and interest rates fall,Copyright 2002 by The McGr
41、aw-Hill Companies, Inc. All rights reserved.,10-47,Open Market Operations,When the Federal Reserve sells government bonds the total cash in the hands of the public and bank reserves decreases households, businesses, and banks find that they are holding less money than they would like try to get mone
42、y by selling assets (such as bonds) bond prices fall and interest rates rise,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-48,Figure 10.13 - Open Market Operations,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-49,Difficulties,Our knowledge of t
43、he structure of the economy is imperfect Even when policies have their expected effects, these effects do not necessarily arrive on schedule The interest rates the Federal Reserve can control are short-term, nominal, safe interest rates,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights re
44、served.,10-50,The IS Curve of the 1960s,In the 1960s, there was a rightward shift in the IS curve increased optimism on the part of businesses a cut in income taxes extra government expenditures (Vietnam War),Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-51,Figure 10.14 -
45、 Real GDP and the Interest Rate, 1960-1999,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-52,The IS Curve of the 1960s,In the late 1960s, there was a movement down along the IS curve as real interest rates declined the drop in real interest rates was caused (in part) by an
46、 increase in inflation,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-53,Figure 10.15 - Shifting Out and Moving along the IS Curve, 1960s,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-54,The IS Curve of the Late 1970s,From 1977 to 1979, the U.S.
47、 economy moved down and to the right of the IS curve the expansion toward potential output was accompanied by high and rising inflation In 1979, the Federal Reserve began fighting inflation raised real interest rates from 1979 to 1982,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights rese
48、rved.,10-55,Figure 10.16 - Moving along the IS Curve, Late 1970s,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-56,The IS Curve of the 1980s,The 1980s began with a large outward shift in the IS curve an increase in military spending a cut in income taxes an increase in inv
49、estor optimism The Federal Reserve responded to this shift by raising real interest rates,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-57,Figure 10.17 - Shifting the IS Curve Out, Early 1980s,Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.,10-58,The IS Curve of the 1980s,As inflation remained low through the mid- and late- 1980s, Federal Reserve policymakers gained confidence began reducing real interest rates causing a movement along the IS curve,
