Chapter 4 Classical Macroeconomic Theory Interest Rates and

Fundamental Issues 1. How is the real interest rate determined in the classical theory?

The Classical Market for Loanable Funds Figure 4– 1 Copyright © 2004 South-Western. All

Has the U. S. Saving Rate Really Declined So Dramatically? Sources: Richard Peach and

Government Deficits and Surpluses in the Classical Market for Loanable Funds Figure 4– 3

U. S. Inflation Rates and Nominal Interest Rates Sources: Economic Report of the President

The Value of the Dollar Sources: Economic Report of the President, 2002; Federal Reserve

Exchange Rates Source: Federal Reserve Bank of New York, Daily Noon Buying Rates, September

Exchange-Rate Determination in the Classical Model Figure 4– 6 Copyright © 2004 South-Western. All

The “Big Mac Index” of Currencies’ Purchasing Power *Purchasing power parity; local price divided

Slides: 10

Download presentation

Chapter 4 Classical Macroeconomic Theory: Interest Rates and Exchange Rates

Fundamental Issues 1. How is the real interest rate determined in the classical theory? 2. How do government spending and taxation policies influence the real interest rate in the classical model? 3. How is the nominal interest rate determined in the classical theory? 4. According to the classical model, how is the value of a nation’s currency determined? Copyright © 2004 South-Western. All rights reserved. 2

Has the U. S. Saving Rate Really Declined So Dramatically? Sources: Richard Peach and Charles Steindel, “A Nation of Spendthrifts? An Analysis of Trends in Personal and Gross Saving, ” Federal Reserve Bank of New York Current Issues in Economics and Finance 6 (September 2000); Economic Report of the President, various issues; authors’ estimates. Copyright © 2004 South-Western. All rights reserved. Figure 4– 2 4

The “Big Mac Index” of Currencies’ Purchasing Power *Purchasing power parity; local price divided by price in the United States. †Average of New York, Chicago, San Francisco, and Atlanta, ‡Dollars per pound, § Dollars per euro. Sources: Mc. Donald’s; The Economist. Copyright © 2004 South-Western. All rights reserved. Table 4– 2 10