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Chapter 5: IS-LM Model

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Chapter 5: IS-LM Model

- Equilibrium in goods market: IS curve
- Equilibrium in financial market: LM curve
- Monetary policy
- Fiscal Policy
- Monetary and Fiscal Policy mix

Deriving the IS curve

The IS curve shows all the eq. points in the goods market for different interest rates!

Shifters of the IS curve

- Fiscal policy variables:
- Government spending
- Taxes

Deriving the LM curve

The LM curve shows all the eq. points in the money market for different interest rates!

Shifters of the LM curve

- Monetary policy variables:
- Money supply
- Price level

IS-LM framework

We can analyze the effect of monetary and fiscal policies and answer the question: what determines the interest rate and output in the short run!

IS-LM framework (changes to fiscal policy)

The Effects of an Increase in Taxes

IS-LM framework (changes to monetary policy)

The Effects of a Monetary Expansion (M increases)

Does the IS-LM framework apply to the real world (2001)?

Figure 1 The U.S. Growth Rate, 1999–1 to 2002–4

Does the IS-LM framework apply to the real world?

Figure 2 The Federal Funds Rate, 1999–1 to 2002–4

Does the IS-LM framework apply to the real world?

Figure 3 U.S. Federal Government Revenues and Spending (as Ratios to GDP), 1999–1 to 2002–4

Does the IS-LM framework apply to the real world (2008)?

Figure 1 The U.S. Growth Rate, 2006–1 to 2013–2

Does the IS-LM framework apply to the real world?

Figure 2 The Federal Funds Rate, 2006–1 to 2013–2

Does the IS-LM framework apply to the real world?

Figure 3 U.S. Federal Government Revenues and Spending (as Ratios to GDP), 2006–1 to 2010–2

Does the IS-LM framework apply to the real world?

Figure 4 The U.S. Recessions of 2001/2008 and the policy response

Does the IS-LM framework apply to the real world?

Figure 5-9 The Empirical Effects of an Increase in the Federal Funds Rate (cont.)

Does the IS-LM framework apply to the real world?

Figure 5-9 The Empirical Effects of an Increase in the Federal Funds Rate (cont.)