ISLM - (I) gets stimulated Y i Case 3: Expansionary...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Case 1: Expansionary Fiscal Policy Case 1: Expansionary Fiscal Policy IS IS’ LM Overall Effects i ; Y C I G Mechanism: In the goods market increase in public expenditures (G) stimulates production/income (Y), which stimulates consumption (C) In the money market the increase in production raises money demand and this increases interest rate (i) This feeds back on goods market: as interest rate rises, private investment (I) gets depressed (“crowding out” effect) Y i
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Case 2: Case 2: Contractionary Contractionary Fiscal Policy Fiscal Policy IS IS’ LM Overall Effects i ; Y C I G Mechanism: In the goods market decrease in public expenditures (G) depresses production/income (Y), which depresses consumption (C) In the money market the decrease in production reduces money demand and this decreases interest rate (i) This feeds back on goods market: as interest rate drops, private investment
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: (I) gets stimulated Y i Case 3: Expansionary Monetary Policy Case 3: Expansionary Monetary Policy IS LM Overall Effects i ; Y C I G= Mechanism: In the money market increase in money supply reduces the interest rate (i) In the goods market reduction in interest rate stimulates investment (I), raising production/income (Y). The increase in production/income also raises consumption Y i LM Case 4: Case 4: Contractionary Contractionary Monetary Policy Monetary Policy IS LM Overall Effects i ; Y C I G= Mechanism: In the money market reduction in money supply increases the interest rate (i) In the goods market the increase in interest rate depresses investment (I), reducing production/income (Y). The decrease in production/income also shrinks consumption Y i LM...
View Full Document

This note was uploaded on 07/25/2008 for the course ECON 330 taught by Professor Minetti during the Spring '08 term at Michigan State University.

Page1 / 4

ISLM - (I) gets stimulated Y i Case 3: Expansionary...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online