Unformatted text preview: ADAS Model: Extra Handout Key idea: Unlike in the ISLM model (where prices are fixed), in the ADAS model prices can change. In particular, whenever Y (production) increases prices (p) increase Next, remember that the position of the LM depends on p (prices)! Higher prices push the LM to the left! In fact, higher prices mean lower real money supply. In a sense, you can think that an increase in prices has the same effects of a reduction in money supply (pushing the LM back) We are now going to see the effects of expansionary fiscal and monetary policy in the ADAS model and compare them with those in the ISLM model Expansionary Fiscal Policy IS' IS
This movement of the LM to the left is the only difference from the ISLM model This movement is due to the increase in prices i Overall Effects i ;Y ;p C I G LM
Remember: prices are increasing because output Y is increasing! Y Expansionary Monetary Policy i IS LM Overall Effects i ;Y p After moving to the right, the LM tends to move C I G= back (to the left) because
prices are increasing This is the only difference from the ISLM model LM'
Remember: prices are increasing because output Y is increasing! Y ...
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 Spring '08
 MINETTI
 Macroeconomics, Fiscal Policy, ISLM Model, Monetary Policy, ADAS model

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