Chapter 11 - Kimberly Zhang Chapter 11 Increase in...

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Kimberly Zhang Chapter 11 Increase in government purchases (decrease in taxes) in IS-LM model o Shifts to the right by G/(1 – MPC) or T*MPC/(1 – MPC) o Government increases purchases increase in planned expenditure Y increases increases quantity of money demanded at every interest rate (LM) supply of money has no changed, equilibrium interest rate rises instead decrease in investment offsets expansionary effect of increase in government purchases Increase in money supply o Fed Reserve increases supply of money deposit extra money in banks, buy bonds interest rate decreases stimulates planned investment, increases planned expenditure, production, income LM IS 2 IS 1 A B r Y IS LM 2 LM 1 A B r Y
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If Congress raises taxes and (see p. 286)… o Fed holds money supply constant Tax increases shifts IS curve left income falls interest rate falls (lower income reduces demand for money) o Fed wants to hold interest rate constant
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