Lecture 8-IS-LM II.pdf - 30-Jan-18 MACROECONOMICS LECTURE 8...

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30-Jan-18 1 MACROECONOMICS LECTURE 8 IS-LM II CONTENTS OF THE LECTURE 1. Analysing policy effects in the IS-LM model 2. The effects of fiscal policy 3. The effects of monetary policy 4. Policy mix CONTENTS OF THE LECTURE 1. Analysing policy effects in the IS-LM model 2. The effects of fiscal policy 3. The effects of monetary policy 4. Policy mix
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30-Jan-18 2 1. ANALYSING POLICY EFFECTS IN THE IS-LM MODEL The IS-LM model allows us to analyse how the economy is affected when fiscal and/or monetary policy is conducted. In order to analyse the effects of changes in policy, always go through the following 4 steps : (1) Ask how the change affects the equilibrium in the goods market and the financial market (i.e. how does it shift the IS and/or the LM curves?) (2) Characterise the effects of these shifts on the intersection of the IS and the LM curves (i.e. what does this do to equilibrium output and the equilibrium interest rate?) (3) Describe the effects on equilibrium output and interest rate in words. (4) Describe the effects on the composition of output in words. 4 CONTENTS OF THE LECTURE 1. Analysing policy effects in the IS-LM model 2. The effects of fiscal policy 3. The effects of monetary policy 4. Policy mix 2. THE EFFECTS OF FISCAL POLICY 6 Suppose that the government decides to reduce the budget deficit and does so by increasing taxes . This fiscal policy is contractionary . Expansionary fiscal policy: G or T Contractionary fiscal policy: G or T What are the effects of fiscal contraction on output, its composition and the interest rate?
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30-Jan-18 3 2. THE EFFECTS OF FISCAL POLICY Step 1: How does it shift the IS and/or the LM curves?
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