Economics 100B - 15 (3-6-07)

Economics 100B - 15 (3-6-07) - Economics 100B Professor...

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Economics 100B Professor Steven Wood 3/06/07 Lecture 15 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course LECTURE Today we will look at combining both our IS and LM curve in our IS-LM model. We will also explain how new equilibriums are reached. IS-LM Model This is the backbone of short-term microeconomics. We put our IS and LM curve together to form the IS-LM Model. We are in general equilibrium in this model. General Equilibrium Requires: 1) Equilibrium in the goods market 2) Equilibrium in the money market. This does not imply long-term equilibrium. This would only represent long- term equilibrium if output were the same as potential output. Our intersection represents our short- term equilibrium. Notice how this is not necessarily long-term equilibrium because we are not necessarily at potential GDP. We know by using government policy we can influence these curves to bring us to equilibrium. We will discuss this later. Endogenous Variables of IS-LM These are values that will be determined inside our IS-LM model. 1) Income – Y = C + I + G + (X – M) 2) Interest rates – R 3) Consumer spending – C = Co + mpc(1 – t)Y – α R. 4) Investment – I = Io – δ R 5) Exports – X = Xo + xYf – θ R 6) Imports – M = Mo + mY + ψ R 7) Taxes – tY 8) Money demand – L = Lo + hY – kR Notice that each one of these variables is dependent on interest rates, income, or both. Exogenous Variables of IS-LM These are values that will be determined outside our IS-LM model. 1) Autonomous Consumption Activity – Co Æ Wealth and consumer confidence.
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ASUC Lecture Notes Online Economics 100B 3/06/07 Sharing or copying these notes is illegal and could end note taking for this course 2 2) Autonomous Investment Activity – Io Æ Corporate profits, business confidence, changes in technology. 3) Government Spending – G. 4) The Tax Rate – t. 5) Exogenous Exports – Xo 6) Exogenous Imports – Mo 7) Money Supply – Ms. 8) Autonomous Demand for Money – Lo Æ Payments technology, wealth, riskiness or liquidity of non-money alternative assets etc. 9) Price level – P. We assume a short- enough period of time where inflation is 0. Notice that G, t, and Ms are government determined. This means that the government can exercise some influence over the position of our curves and thus our equilibrium income. Disequilibria Dynamics
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Economics 100B - 15 (3-6-07) - Economics 100B Professor...

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