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321LecNote05Ch11

321LecNote05Ch11 - Instructor Kim H.H Fall 2009...

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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 1 Chapter 11. Aggregate Demand I : Applying the IS-LM Model In this chapter, you will learn: uses the IS–LM model to show the short-run effects of fiscal and monetary policies on output and the interest rate when prices are fixed explains how the IS–LM model provides a theory of aggregate demand. applies the model to study the Great Depression. Fiscal policy and the Short-run Equilibrium An increase in government purchase Fiscal policy and the Short-run Equilibrium An increase in taxes Y r r 1 Y 1 1 * LM 1 * IS
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 2 An increase in money supply Monetary Transmission Mechanism Tells how a monetary expansion induces greater spending on goods and services An increase in the money supply ________ that interest rate, which stimulates investment and thereby _____________ the demand for goods and services Y r Y 1 1 * LM 1 * IS r 1 Y r Y 1 1 * LM 1 * IS r 1
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 3 NOW YOU TRY: FED’s action Use the IS-LM model to predict the effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the Fed should do to keep income at its initial level. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems. A wave of credit-card fraud increases the frequency with which people make transactions in cash. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 4 Interaction between Monetary and Fiscal When tax increases, Fed holds money supply constant… When tax increases, Fed holds interest rate constant Y r Y 1 1 * LM 1 * IS r 1 Y r Y 1 1 * LM 1 * IS r 1
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Instructor : Kim, H.H.
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