Lecture 9.pdf - Macroeconomic Analysis for Management Lecture 9 IME IIT Kanpur Goods Market and Money Market the IS-LM Model The previous two major

# Lecture 9.pdf - Macroeconomic Analysis for Management...

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Macroeconomic Analysis for Management Lecture 9 IME, IIT Kanpur Goods Market and Money Market: the IS-LM Model  The Goods Market and the IS RelationIn Goods Market equilibrium, we discussed demandZas the sum ofconsumption, investment, and government spending.Z=C+c(Y-T) +I+GWe now let Investment to be affected by ‘i’. Assuming a linear relationbetween investment and interest rate,I=a-bi.Then, in equilibrium,Y=C+c(Y-T) + (a-bi) +G. Why did we writeYon the LHS? The Goods Market and the IS RelationIn Goods Market equilibrium, we discussed demandZas the sum ofconsumption, investment, and government spending.Z=C+c(Y-T) +I+GWe now let Investment to be affected by ‘i’. Assuming a linear relationbetween investment and interest rate,I=a-bi.Then, in equilibrium,Y=C+c(Y-T) + (a-bi) +G. Why did we writeYon the LHS?  The IS Curve and its shifts Income, Output, Y Interest rate, i 0 i Y IS 1 Shifts of the IS Curve An exogenous increases in government expenditure by dG shifts IScurve outward. By how much? The IS Curve and its shifts Income, Output, Y Interest rate, i 0 i Y IS 1 Y IS 2 An increase in G increases Y . Shifts of the IS Curve An exogenous increases in government expenditure by dG shifts IScurve outward. By how much? The IS Curve and its shifts Income, Output, Y Interest rate, i 0 i Y IS 1 Y IS 2 An increase in G increases Y . By dG (1 - c ) amount. Shifts of the IS Curve An exogenous increases in government expenditure by dG shifts IScurve outward. By how much? The IS Curve and its shifts - II Income, Output, Y Interest rate, i 0 IS 1 i Y An increase in T decreases Y . Shifts of the IS Curve An exogenous increase in taxes shifts IS curve inward. By how much? The IS Curve and its shifts - II Income, Output, Y Interest rate, i 0 IS 1 i Y An increase in T decreases Y . IS 2 Y By c (1 - c ) dT amount. Shifts of the IS Curve An exogenous increase in taxes shifts IS curve inward. By how much? Money Market and LM Relation Recall the equilibrium condition in Money Market: M = | Y L ( i ) The left side is the Money stock in the economy. And the right side shows the demand for money, which depends upon income (positive relation) and interest rate(negative relation). Money Market and LM Relation Recall the equilibrium condition in Money Market: M = | Y L ( i ) The left side is the Money stock in the economy. And the right side  • • • 