LECTURE5 - SESS1004 Introduction to Macroeconomics Lecture...

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SESS1004 Introduction to Macroeconomics Lecture 5 The IS-LM Model in an Open Economy Dragos Radu [email protected]
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outline lecture 5 recap IS-LM the algebra of IS-LM IS-LM in an open economy (to be continued after the reading week)
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recap IS-LM Y C Y T I Y i G ( ) ( , ) an increase in output leads: - via, its effects on both C and I, to an increase in demand for goods… - …this relation between demand and output, for a given interest rate, is represented by the ZZ curve.
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recap IS-LM Y C Y T I Y i G ( ) ( , ) an increase in output leads: - via, its effects on both C and I, to an increase in demand for goods… - …this relation between demand and output, for a given interest rate, is represented by the ZZ curve. - …as we allow the exogenous interest rate to vary, we construct a downward sloping IS curve and have a model in which the interest rate is endogenous
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i i i i I i Y Y’ IS Y A A’ 45 ° demand ZZ (for i ) ZZ’ (for i ’> i ) Y Y’ Y i I(i ’) I(i) I(i)
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A ' deriving the LM curve interest rate i (real) Money M/P M/P i M s M d M d' ( Y'> Y ) i' Y'> Y interest rate i Output Y A i LM curve i' A A ' Y Y '
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IS-LM model IS relation: Y C Y T I Y i G ( ) ( , ) LM relation: M P YL i ( )
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algebra of the IS-LM model IS relation: Y C Y T I Y i G ( ) ( , ) 0 1 0 1 ( ), 0, 0 1 C c c Y T c c 1 2 1 2 , , 0 I I d Y d i d d d 1 sensitivity of investment to income d 2 sensitivity of investment to the interest rate
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algebra of the IS-LM model IS relation: Y C Y T I Y i G ( ) ( , ) 0 1 0 1 ( ), 0, 0 1 C c c Y T c c 0 1 1 2 0 1 2 1 1 1 1 0 1 2 ( ) ( ) (1 ) Y c c Y T I d Y d i G Y c c T I d i G c d Y c d Y c I G c T d i     0 1 2 1 1 1 1 1 1 c I G c T d Y i c d c d 1 2 1 2 , , 0 I I d Y d i d d
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algebra of the IS-LM model 0 1 2 1 1 1 1 1 1 c I G c T d Y i c d c d 2 1 1 1 1 1 1 1 d Y A i c d c d 0 1 A c I G c T A 2 1 1 1 1 1 1 1 d i A Y c d c d   1 1 2 2 1 1 c d i A Y d d autonomous spending
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the position of the IS curve interest rate i Output Y IS Y 1 1 2 2 1 1 c d i A Y d d 2 1 A d 1 1 2 1 c d d intercept: slople:
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the position of the IS curve interest rate i Output Y i IS (e.g. for G) Y IS' (e.g. for G' > G) Y' 1 1 1 1 Y A c d  90 1 2 180 1 0.3 0.2 tutorial example: A G Y A A     Y 2 1 1 1 1 1 1 1 d Y A i c d c d
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the slope of the IS curve interest rate i Output Y i Y Y' 2 1 1 1 d i c d  Y i' i 2 1 1 1 d Y i c d  2 1 1 1 1 1 1 1 d Y A i c d c d IS
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