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

Econ+310+Fall+2009+Topic+6b - Economics 310 Money and...

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Click to edit Master subtitle style Lecture 1 Economics 310 Money and Banking Topic 6(b) IS-LM Applications
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Lecture 1 22 Reading Applications of the IS-LM model n Chapter 21
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Lecture 1 33 The IS-LM model Y i, r IS LM r* = i* Y*
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Lecture 1 44 Expansionary Monetary Policy i.e. M rises via open market bond purchase Y r IS LM 0 Y 0 r 0 LM 1 Y 1 r 1
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Lecture 1 55 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
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Lecture 1 66 Expansionary Fiscal Policy Government spending (G) increases Y r IS0 LM r 0 Y 0 IS1 r 1 Y 1
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Lecture 1 77 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
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Lecture 1 88 Notes Regarding Fiscal Policy 1. Sterilization 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.
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