1 / 10

The Keynesian System III: Policy Effects in the IS-LM Model

The Keynesian System III: Policy Effects in the IS-LM Model. Professor Steve Cunningham Graduate Macroeconomics I ECON 309. Increasing the Money Supply. r. M s 0. M s 1. LM(M 0 ). r. LM(M 1 ). r 0. r 0. r 1. r 1. M d. IS. Y 1. Y 0. M. Increase in Gov’t Spending. r. IS(G 1 ).

philip-avila
Download Presentation

The Keynesian System III: Policy Effects in the IS-LM Model

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Keynesian System III:Policy Effects in the IS-LM Model Professor Steve Cunningham Graduate Macroeconomics I ECON 309

  2. Increasing the Money Supply r Ms0 Ms1 LM(M0) r LM(M1) r0 r0 r1 r1 Md IS Y1 Y0 M

  3. Increase in Gov’t Spending r IS(G1) IS(G0) LM Recall that: Y = C + I + G + NX. When G then Y. r1 r0 Y1 Y0

  4. P • NOTES: • G rises, increasing AD. • Employment and output result from AD increases. • Prices (P) also rise. • As prices rise, the real wages fall, making labor more attractive. • As more workers are employed, and unemployment falls. AS w0 AD AD2 AD1 AD0 w/p Y Y (w/p) N Nd Y=F(N,K) N

  5. Increase in Taxes r IS(T0) IS(T1) LM LM Recall that: Y = C + I + G + NX. When T then Yd, and so must C and Y. r0 r1 Y0 Y1

  6. Investment Falls r IS(I0) IS(I1) LM Recall that: Y = C + I + G + NX. When I then Y. r0 r1 Y0 Y1

  7. P • NOTES: • Rising taxes or falling investment reduces AD. • Final sales and output (Y) fall. • As prices fall, the real wages rise, making labor more expensive to firms. • Firms require fewer workers to build products and find workers more expensive, so they lay off workers. • Unemployment rises. AS w0 AD AD0 AD1 AD2 w/p Y Y (w/p) N Nd Y=F(N,K) N

  8. Monetary Policy Effectiveness r IS r LM1 IS LM1 LM2 LM2 ? Y Y Investment not responsive to interest rate changes Investment is responsive to interest rate changes

  9. Fiscal Policy Effectiveness LM IS2 IS1 r r IS1 IS2 LM ? Y Y Money demand is responsive to interest rate changes Money demand not responsive to interest rate changes

  10. Keynesian Theory of Inflation Bottleneck Region Keynesian or Depression Region P AS AD6 P AD5 AD4 AD3 AD2 Classical Region AD1 P P=0 Y=0 Y Y Y

More Related