Econ 232H-Chapter 11 Reading NotesExplaining Functions with the IS-LM modelHow fiscal policy shifts the IS curve and changes the short run equilibrium•Increase in gov’t purchases 1) shifts IS curve right by (Delta G)/(1-MPC), 2) Which raises income 3) And the interest rate•Changes in taxes. IS curve shifts to right by (delta T)/(MPC/(1-MPC)), which raises income and interest rate. •Increase in MS shifts the LM curve downward, raises income, and lowers interest rate. •An increase in the MS lowers interest rate, which stimulates investment and expands the demand for G and S. Interaction between monetary and fiscal policy•Fed holds money supply constant 1) Tax increase shifts the IS curve, but the fed holds the MS constant, the LM curve stays the same.•Fed holds int rate constant; a tax increase shifts the IS curve and to hold the int. rate constant, the fed contracts the money supply.•A tax increase shifts the IS curve, and to hold income constant, the Fed expands the MS. IS-LM as a Theory of Aggregate Demand•A higher price level P shifts the LM curve upward, lowering income Y, the AD curve summarizes the relationship between P and Y.•A change in income in the IS-LM Model resulting from a change in the price level represents a movement along the aggregate demand curve. A change in income in the IS-LM model for a give price level presresents a shift in the aggregate demand curve.