Econ+310+Fall+2009+Topic+6b

Econ+310+Fall+2009+Topic+6b - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style Lecture 1 Economics 310 Money and Banking Topic 6(b) IS-LM Applications Lecture 1 22 Lecture 1 Reading Applications of the IS-LM model n Chapter 21 Lecture 1 33 Lecture 1 The IS-LM model Y i, r IS LM r* = i* Y* Lecture 1 44 Lecture 1 Expansionary Monetary Policy Y r IS LM Y r LM 1 Y 1 r 1 Lecture 1 55 Lecture 1 Expansionary Monetary Policy Suppose the nominal money supply increases n i.e The Fed purchases bonds from the market Increased demand for bonds causes bond prices to rise n i.e. interest rates fall Lower interest rates encourage increased real investment Increase in aggregate demand results in higher level of national income n Observe an adjustment along the IS curve n Y increases and r falls Lecture 1 66 Lecture 1 Expansionary Fiscal Policy Y r IS0 LM r Y IS1 r 1 Y 1 Lecture 1 77 Lecture 1 Expansionary Fiscal Policy Increase in government spending or reduction in taxation Excess demand for goods and services: n Inventories run down n Firms increase output to replace inventories As Y increases, demand for real money balances increases n People look to convert bonds into money n Bond prices fall/interest rates rise Adjustment along the LM curve n Y increases and r increases Lecture 1 88 Lecture 1 Notes Regarding Fiscal Policy How is the fiscal expansion financed? 1. Taxation n This would be a distinct exogenous effect 2. Printing money n This would lead to a monetary expansion in addition to the fiscal expansion n Not a pure fiscal effect 3. Sale of bonds n This ensures there is no monetary effect n...
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This note was uploaded on 09/28/2010 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

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Econ+310+Fall+2009+Topic+6b - Click to edit Master subtitle...

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