lec17 - Keynesian Cross The IS-Curve The LM-Curve IS-LM...

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Keynesian CrossThe IS-CurveThe LM-CurveIS-LM ModelThe IS-CurveRecall that consumption and investment also depended on theinterest rate:Y=Ca(-r) +MPC×(Y-¯T) +I(-r) +¯GTheIS-curve: a graph of all combinations ofrandYthat resultin goods market equilibrium, i.e. actual expenditure (output)equals planned expenditure or equivalently, savings equals plannedinvestmentY=11-MPCCa(-r)-MPC×¯T+I(-r) +¯G
Keynesian CrossThe IS-CurveThe LM-CurveIS-LM ModelThe Slope of the IS-CurveY=11-MPCCa(-r)-MPC×¯T+I(-r) +¯GTaking thetotal differentialof this expression:dY=-Car1-MPCdr-MPC1-MPCdT-Ir1-MPCdr+11-MPCdGNotation:Car=-Car>0,Ir=-Ir>0We can use this to obtain the slope of the IS-curve in (Y,r)-space bysetting all infinitesimals to zero exceptdranddY:rY|IS=-1-MPCIr+Car<0
Keynesian CrossThe IS-CurveThe LM-CurveIS-LM ModelShifts in the IS-CurvedY=-Car1-MPCdr-MPC1-MPCdT-Ir1-MPCdr+11-MPCdGGovernment spending multiplier:YG|IS=11-MPC>0Tax multiplier:YT|IS=-MPC1-MPC<0
Keynesian CrossThe IS-CurveThe LM-CurveIS-LM ModelThe Slope of the LM-CurveWhy does the LM curve have a positive slope?