Ch5.2 - 3 The IS-LM model 25 3.1 Putting the IS and the LM...

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3. The IS-LM model 25
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3.1 Putting the IS and the LM Curves Together quilibrium in the goods ± Equilibrium in the goods market implies that an crease in the interest rate IS relation: Y = − + + CY T IYi G () ( , ) increase in the interest rate leads to a decrease in output. ± Equilibrium in financial LM relation: P = YL i ( ) markets implies that an increase in output leads to an increase in the interest rate. ± When the IS curve intersects the LM curve, both goods and financial markets are in quilibrium 26 equilibrium. Figure 5 - 8 The IS-LM Model
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3.2. Fiscal Policy, Activity, and the Interest Rate ± Fiscal policy comprises all policy measures r lated to the government budget. e ated to t e go e e t budget ± An increase in tax (T) or a decrease in overnment spending (G) is called a fiscal government spending (G) is called a fiscal contraction. n increase in government spending or a ± An increase in government spending or a decrease in tax is called a fiscal expansion. ± A change in taxes or government spending shifts the IS curve rather than the LM curve. 27
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Fiscal Policy, Activity, and the Interest Rate ± An increase in taxes shifts the IS curve to the left, and leads to a decrease in the equilibrium level of output and the equilibrium interest rate. ± See notes_fiscalpolicy for details ± Also read Fig 5-9 and its explanations in your text. 28
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Fiscal Policy, Activity, and the Interest Rate Figure 5 - 9 The Effects of an Increase in Taxes n increase in taxes shifts ± An increase in taxes shifts the IS curve to the left, and
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This note was uploaded on 02/19/2011 for the course ECON 1021 taught by Professor Kokwanwai during the Fall '08 term at CUHK.

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Ch5.2 - 3 The IS-LM model 25 3.1 Putting the IS and the LM...

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