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ECON2004Lecture03a

ECON2004Lecture03a - The IS-LM model Lecture 3a Using IS-LM...

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ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 1 Lecture 3a: Using IS-LM Reading. Core: Carlin and Soskice Ch 2, sect 1-4, Ch3 sect 2 Williamson Ch 12 Blanchard Ch 3,4,5 Optional: Advanced: Leijonhufvud: “What was the matter with IS- LM” Krugman, “Thinking about the liquidity trap”. ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 2 The IS-LM model Y Y AD M/P r r
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ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 3 An increase in G: goods market r Y Y AD Y=AD AD=C+I+G 0 ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 4 An increase in G: adjustment AD=C+I+G 0 AD=C+I+G 0 M D /P r r Y Y AD Y=AD M/P M S /P
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ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 5 An increase in G: words Step 1: G increases Step 2: Step 3: Final result: Output increases, but by less than the full effect because of ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 6 An increase in M S M S /P AD=C+I+G M D /P r r Y Y AD Y=AD M/P
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ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 7 Speed of adjustment The money market adjusts: The goods market adjusts: So adjustment is along the ECON2004 Macro Term 1, Lecture 3a: Using IS-LM 8 How to stimulate a depressed economy Target output Y* Y r LM IS Y r LM IS Y r LM
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