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SRAS
[3]
[2]
[1]
Trend
Actual
Time/Year
GDP
Development comes from productivity or labor force. For Vietnam it came from productivity. Vietnam is more of capitalist type of politics. More open door. Growth becomes more easier. No
new invention required when compared to Canada. And not the labor force either.
Vietnam
GDP
Cana da
Time/Year
General Model
SRAS’
SRAS
C
PB B
PA
A
AD’
AD
• Aggregate demand
○ Is a function of consumption(C), Investments (I), Government spending(G), Net exports minus imports(X-M)
• Boom
○ causes inflation
○ x is the inflationary gap
GDP
U
P
○ SRAS goes up(left)
Adjustment via labor market
Firms costs move up
• Recession
Price Level LRAS
SRAS
○
A
B
C
AD
x
AD’
SRAS
○
A
B
C
AD
x
AD’
• Currencies
○ Sell CAD to buy USD => USD demand increases => USD appreciates
○ USD=1.1 CAD to USD=1.20 CAD => CAD has depreciated
○ If CAD appreciates, exports go down and imports increase and vice versa
○ Low interest rates => Low CAD and vice versa
○ CAD = func(PPP, Poil, (i-CAN - i=USA) + Error
CAD=PPP+Poil+i-CAN-i-USA+E
PPP is for 85%
I-CAN-i-USA is short term yield chasing drivers CAD
Exports and imports(oil for eg) are medium
Poil to commodity index - is the new change to equation to improve
Probably commodities change faster than [I spread[ so they could be long run
○ Three concerns
What causes it
What are the implications(consequences)
□ Overall effect/impact
□ Distributional conseuqnces
Wealth distribution
Exp imp
Distributional shock
Stratford example
Response
○ Cause
US Prints money
Commodities
Oil demand increases, CAD appreciates(other trade aspects as wlel)
Emerging markets buy Canadian goods
Equation of CAD
AD shift might raise interest rates
□ Aus, Norway and CAD might go up
Unexpected rates
High interest rates => higher demand for AUD => Value rises
Why emerging markets buy more from CAN and not US?
□ CAN is a commodity market and more tied towards Canada as opposed to US
○ Impact/implicaiton
Exports are more expensive. Imports are cheap.
Exports suffer
Regional hits
Stratford festival example
Richard Ivey School of business(demand side is bad but supply side is good)
• Good for acquiring international Professors but bad for attracting international students
Jobs market
○ Response
Monetary policy
• Decrease interest rates?
If almost zero then what?
◊ Increase money supply
◊ Buy USD; BOC intervenes in currencies
Also, raising interest rates may cause housing prices to go up and the bubble needed to be pricked
◊ Is housing boom better than low interest rates?
► Because Population?
► No. Population and bubble in housing are not linked
China buying USD might save Canada
Rates unchanged conditionally(Mark Harney's announcement)
◊ Hedging on inflation
Fiscal policy
• Inc G spending
• Misc
○ E.g. for as GDP rises, prices falling
Scale of economy
Consolidation of firms(aggregate)
However, most economies believe the other way round, as GDP rises, prices increase.
○ E.g. for supply shock
Hurricane in gulf
○ Increase in spending during elections may be good for political reasons, but probably not for economically
○ Quebec is the oldest state and growth in labor force is fast
○ Central banks must be more aggressive
○ IMF prediction: Global GDP gorwth forecast 3.9% negative
○ How USD went up when interest rates went down?
People take time to adjust. Too late argument
Fed keeps the rates unchanged, as much as possible
○ Quantitative easing
Crazy things like buy mortgages or GE debt, etc
○ Leading indicators
• Existing home sales falling => people's equity in homes is going down => people save money for interests => this is a leading indicator or W phenomena
○ GDP can take shapes like L,W and V
○ CAD is proportional to price of oil. Correlation more than 0.9 historically.
○ Making money in HongKong
• US bond interest rates: 1.5% to 2%
• Borrow $780b HKD
• Xchange USD for $100b
• 1 year later, US$=$102b
• Exchange in HLD and get $795b HKD and pay $780b HKD to investors
• Profit = $1b USD
• Money supply in HK shrinks
• Arbitration
• Attractive investment
□ Overnight rates I HK go upto 280% annualized rates
• In Hong Kong, low government involvement. Canada medium and SW it's high.
○ Inflation is about 1.6% in Canada and about -.8% in US
○ Sometimes BOC increases i but CAD depreciates. Why?
• Unanticipated rate move
• Proportions in money movement not enough
○ Only central banks can increase or decrease money supply
○ Ricardian equivalence, (also known as the Barro-Ricardo equivalence proposition) is an economic theory that suggests consumers internalise the government's budget constraint and
thus the timing of any tax change does not affect their change in spending. Consequently, Ricardian equivalence suggests that it does not matter whether a government finances its
spending with debt or a tax increase, the effect on total level of demand in an economy will be the same.[citation needed] It was proposed, and then rejected, by the 19th-century
economist David Ricardo.
○ Laffer curve
Tax Revenues
Ma x
0 Tax Rates
100