keynespolicy

keynespolicy - 3. As prices fall, the real wages rise,...

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The Keynesian System III: The Keynesian System III: Policy Effects in the IS-LM Model Policy Effects in the IS-LM Model Professor Steve Cunningham Graduate Macroeconomics I ECON 309
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2 Increasing the Money Supply Increasing the Money Supply IS LM(M 1 ) LM(M 0 ) r r 0 r 1 Y 0 Y 1 M M d M s 0 M s 1 r r 0 r 1
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3 Increase in Gov’t Spending Increase in Gov’t Spending IS(G 0 ) LM r r 1 r 0 Y 0 Y 1 IS(G 1 ) Recall that: Y = C + I + G + NX. When G then Y .
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4 AS Y Y=F(N,K) N d w 0 P w/p N AD 0 AD 1 AD 2 N Y AD NOTES: 1. G rises, increasing AD. 2. Employment and output result from AD increases. 3. Prices (P) also rise. 4. As prices rise, the real wages fall, making labor more attractive. 5. As more workers are employed, and unemployment falls. (w/p)
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5 Increase in Taxes Increase in Taxes LM IS(T 1 ) LM r r 0 r 1 Y 1 Y 0 IS(T 0 ) Recall that: Y = C + I + G + NX. When T then Yd , and so must C and Y .
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6 Investment Falls Investment Falls IS(I 1 ) LM r r 0 r 1 Y 1 Y 0 IS(I 0 ) Recall that: Y = C + I + G + NX. When I then Y .
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7 AS Y Y=F(N,K) N d w 0 P w/p N AD 2 AD 1 AD 0 N Y AD NOTES: 1. Rising taxes or falling investment reduces AD. 2. Final sales and output (Y) fall.
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Unformatted text preview: 3. As prices fall, the real wages rise, making labor more expensive to firms. 4. Firms require fewer workers to build products and find workers more expensive, so they lay off workers. 5. Unemployment rises. (w/p) 8 Monetary Policy Effectiveness Monetary Policy Effectiveness Investment not responsive to interest rate changes Investment is responsive to interest rate changes IS IS LM 1 LM 2 ? Y Y r r LM 1 LM 2 9 Fiscal Policy Effectiveness Fiscal Policy Effectiveness Money demand is responsive to interest rate changes IS 1 LM LM ? Y Y r r IS 2 Money demand not responsive to interest rate changes IS 1 IS 2 10 Keynesian Theory of Inflation Keynesian Theory of Inflation AS P Y Keynesian or Depression Region Classical Region Bottleneck Region AD 1 AD 2 AD 3 AD 4 AD 5 AD 6 Y P=0 Y P P Y=0...
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keynespolicy - 3. As prices fall, the real wages rise,...

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