Islm

IS-LM Econ 302 Macroeconomic Analysis
Slide #1
Goods & Financial Markets: The IS-LM Model
The IS-LM Model
The determination of output and
interest rates in the short-run
Slide #2
Equilibrium in the goods market:
Production (Y) = Demand (Z)
Demand (Z)= C+I+G
C=C(Y-T)
T, I, & G are given
The goods market and the IS relation
A Review
Slide #3
Equilibrium: Y=C(Y-T)+I+G
Changes in C, I, & G impact the
equilibrium Y
A Review (Continued)
Slide #4
Investment, sales, and the interest rate
Investment depends on:
The level of sales
The interest rate
Therefore:
) , (
) , (
+
= i Y I I
Slide #5
The IS curve
) , ( i Y I I =
G I T Y C Y + + = ) (
Equilibrium:
G i Y I T Y C Y + + = ) , ( ) (
Supply of
Goods
Demand for
Goods (Z)
Slide #6
The IS curve
D
e
m
a
n
d
,

Z

Output, Y
45
b
a
Y Y
ZZ (i)
ZZ (i > i)
ZZ: Demand, a function of
Y for given i
equilibrium at a, Y
ZZ: Demand with higher i
equilibrium at b, Y
Slide #7
The IS curve
D
e
m
a
n
d
,

Z

Output, Y
45
Y Y
ZZ (i)
ZZ (i > i)
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Output, Y
A
A
Y
i
A
A
Y
i
IS
Slide #8
Observation:
In the goods market, the higher
the interest rate, the lower the
equilibrium output.
Slide #9
i
Y
IS (T)
The IS curve
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Shifts in the IS Curve:
IS (T > T)
Y
An increase in taxes shifts the IS curve to the left
Slide #10
IS (G)
Y
i
The IS curve
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Y
IS (G > G)
Shifts in the IS Curve:
An increase in G shifts the IS curve to the right
Slide #11
Shifts in the IS curve
Goods & Financial Markets: The IS Curve
What do you think:
How would a decrease in consumer
confidence shift the IS curve?
Slide #12
Money market equilibrium revisited
Financial Markets and the LM Relation
Equilibrium Interest Rate:
M=$YL(i)
M = nominal money supply (controlled by
the Central Bank)
$YL(i) = Demand for money (function of
nominal income and the interest rate)
Slide #13
Real money, real income, and the interest rate
Real Income
P
Y
Y
$
) ( =
Real Money Supply =Real Money Demand: Y(L)i
|
.
|
\
|
P
M
LM relation: i L Y
P
M
) ( =
Slide #14
M
d
(for Y)
M/P
A
i
M
s
The LM curve
(Real) Money, M/P
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Increase in Y => increases M
d
which increases i
A
i
M
d
(for Y > Y)
Slide #15
A
M
d
(for Y > Y)
LM (M/P)
A
A
Y
i
i
M
d
(for Y)
M/P
M
s
i
A
Y
i
The LM curve
I
n
t
e
r
e
s
t

R
a
t
e
,

i

(Real) Money, M/P
Interest Rate, i
Income, Y
Slide #16
The LM curve
Shifts in the LM Curve:
Showing changes in M & P
I
n
t
e
r
e
s
t

R
a
t
e
,

i

(Real) Money, M/P
b
a
M/P
LM (M/P)
Interest Rate, i
Income, Y
a
b
Y Y
i
i
M
d
(for Y)
i
i
M
s
M
d
(for Y > Y)
M/P
LM
(M/P > M/P)
i
2
i
2

i
2
i
2

M
s
a
b
a
b
Slide #17
Equilibrium Requires:
The IS-LM Model Exercises
G i Y I T Y C Y IS + + = ) , ( ) ( :
) ( : i YL
P
M
LM =
LM IS or =
Slide #18
The IS-LM Equilibrium Graphically
The IS-LM Model Exercises
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

IS
Y
i
LM
i & Y is the only interest rate,
output combination that
yields a simultaneous
equilibrium in the goods and
financial markets
Slide #19
Fiscal Policy, Activity, and the Interest Rate
Question: What impact will the monetary
expansion have on output and
interest rate?
A Scenario:
The Fed engages in monetary
expansion, i.e., it increases the
money supply through open
market operations
Monetary Policy, Activity, and the Interest Rate
Slide #20
The IS-LM Equilibrium Graphically
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Y
i
LM (M/P)
Y
i
A
B
IS
A
LM (M/P > M/P)
IS & LM: Before increasing M
Equilibrium A: i & Y
LM: After increasing M
Disequilibrium at i (A, B)
New equilibrium A: i & Y
Monetary expansion
lowered i & increased Y
Slide #21
The effects of fiscal and monetary policy
Shift in IS Shift in LM Movement in
Output
Movement in
Interest Rate
Increase in taxes left none down down
Decrease in taxes right none up up
Increase in spending right none up up
Decrease in
spending
left none down down
Increase in money none down up down
Decrease in money none up down up
Slide #22
Using a Policy Mix
Recall:
Deficit reduction reduces output
Expansionary fiscal policy increases the
deficit
The policy
dilemma of
1992:
Record high federal budget deficit
(4.5% of GNP)
High unemployment and slow
growth
The Clinton-Greenspan Policy Mix
Solution:
Policy Mix
Deficit reduction and expansionary
monetary policy
Slide #23
Using a Policy Mix
The Clinton-Greenspan Policy Mix
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Y
i
LM
Y
i
B
A
IS
A
LM
IS & LM: Before policy changes
Equilibrium A: i & Y
IS: After deficit reduced
B equilibrium without monetary
expansion
LM after monetary expansion
New equilibrium i, Y
IS
Slide #24
Using a Policy Mix
German Unification & the German Monetary Fiscal
Tug-of-War
The Scenario:
Prior to unification, West Germany was
exhibiting strong growth, investment

After unification, strong fiscal stimulus
from increased governmental
spending on infrastructure and slow
investment growth.
Slide #25
Using a Policy Mix
Tug-of-War
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Y
i
LM
Y
i
A
IS
A
LM
A (i, Y) pre-unification
equilibrium
IS: Post-unification IS
LM: Post-unification LM:
Reduction in M to offset
IS expansion
A(i, Y) post-unification
equilibrium
IS
Slide #26
Using a Policy Mix
Tug-of-War
The West German Economy, 1998-1991
1988 1989 1990 1991
BDGP growth (%) 3.7 3.8 4.5 3.1
Investment*growth (%) 5.9 8.5 10.5 6.7
Budget surplus (% of GDP) -2.1 0.2 -1.8 -2.9
(minus sign: deficit)
Interest rate (short term) 4.3 7.1 8.5 9.2
Slide #27
Adding Dynamics
Observations:
Changes in output adjust slowly to changes
in the goods market (IS)
Interest rates adjust instantaneously to
changes in the financial markets (LM)
Slide #28
LM
Adding Dynamics
Dynamics Graphically
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Output, Y
A
Y
a
LM
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Output, Y
A
B
Y
a
i
A
IS
i
A
B
IS
Y
b
Interest rates
adjust
instantaneously
Output
decreases
slowly
Adjusting to a
tax increase
Adjusting to a
monetary contraction
i
B
Slide #29
Adding Dynamics
The Dynamics of Monetary Contraction with IS-LM
Output, Y
I
n
t
e
r
e
s
t

R
a
t
e
,

i

Y
i
LM
Y
i
A
A
IS
A
LM
A: Initial equilibrium (i & Y)
LM: After reducing money
supply
i rises to i
Higher i reduces demand and
output slowly A to A
Equilibrium restored at A: i, Y
i
Slide #30
Adding Dynamics
A Summary
Monetary policy changes interest rates
rapidly and output slowly
The Central Bank must consider the output
lag when implementing monetary policy
Slide #31
Does the IS-LM Model Actually Capture What
Happens in the Economy?
Does the IS-LM model pass two tests?
Are the assumptions of IS-LM reasonable?
Are the implications of IS-LM consistent
with real-world observations?
Slide #32
Are the assumptions of IS-LM reasonable?
Are the implications of IS-LM consistent
with real-world observations?
The Empirical Effects of an Increase in the Federal
Funds Rate
Slide #33
The IS-LM model is consistent with
economic observations
The IS-LM model explains movements in
economic activity over the short-run
Summary

Islm

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Islm

Hochgeladen von

Copyright:

Verfügbare Formate

IS-LM Econ 302 Macroeconomic Analysis

Das könnte Ihnen auch gefallen