Lecture 7.docx - Lecture 7 IS-LM Equilibrium for Both Goods Financial Markets(part I Announcements Assigned Reading Textbook Chapter 5(the most

# Lecture 7.docx - Lecture 7 IS-LM Equilibrium for Both Goods...

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Lecture 7 September 26, 2019 IS-LM: Equilibrium for Both Goods & Financial Markets (part I) Announcements Assigned Reading: Textbook, Chapter 5 (the most important chapter before midterm exam), Section 5.1 and 5.2 Supplementary reading for financial markets: (optional reading; not subject to exam) Negative interest rates Negative interest rate definition Negative interest rate policy (NIRP) definition What Negative Interest Rates Mean for Investors Negative interest on excess reserves 2 IS-LM 3 In an economy, people trade good and financial assets  For the economy at “equilibrium”, both good and financial market should be at their equilibrium IS-LM is a framework to analyze both markets at the same time (How the “grand equilibrium” is reached) Good market: Y; Financial market: i IS-LM focus on the equilibrium in SHORT RUN Connection to previous chapters We start with IS curve (based on Ch3) Then we work on LM curve (based on Ch4) 4 IS: Investment-Saving
5 Previously, Demand: Z = C(Y – T) + I + G Interest rate has no role there (for simplicity) Investment (I) is assumed to be exogenous But, investment depends on? Volume of business (level of sales) Interest rate Here, we convert our previous simple model into a bit more complicated one: I  I (Y,i) ( , ) IS: Investment-Saving Determining Output The demand for goods is