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Chapter 5: IS-LM Model

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!.

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Chapter 5: IS-LM Model

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  1. 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

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

  3. Shifters of the IS curve • Fiscal policy variables: • Government spending • Taxes

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

  5. Shifters of the LM curve • Monetary policy variables: • Money supply • Price level

  6. 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!

  7. IS-LM framework (changes to fiscal policy) The Effects of an Increase in Taxes

  8. IS-LM framework (changes to monetary policy) The Effects of a Monetary Expansion (M increases)

  9. Does the IS-LM framework apply to the real world (2001)? Figure 1 The U.S. Growth Rate, 1999–1 to 2002–4

  10. Does the IS-LM framework apply to the real world? Figure 2 The Federal Funds Rate, 1999–1 to 2002–4

  11. 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

  12. Does the IS-LM framework apply to the real world (2008)? Figure 1 The U.S. Growth Rate, 2006–1 to 2013–2

  13. Does the IS-LM framework apply to the real world? Figure 2 The Federal Funds Rate, 2006–1 to 2013–2

  14. 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

  15. Does the IS-LM framework apply to the real world? Figure 4 The U.S. Recessions of 2001/2008 and the policy response

  16. 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.)

  17. 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.)

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