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Lecture 5 Slides Post after

# Lecture 5 Slides Post after - Economics 134 Spring 2012...

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L ECTURE 5 Review of IS–LM/MP Framework January 31, 2012 Economics 134 Christina Romer Spring 2012 David Romer

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I. T HE IS–LM/MP M ODEL
Y r MP or LM IS The IS–LM/MP Model: Where We Are Headed Y is output; r is the real interest rate

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What Have You Seen in Previous Courses? IS plus an interest rate rule for monetary policy (IS–MP)? IS plus a curve describing equilibrium in the money market under the assumption that the central bank is targeting the money supply (IS–LM)? Both? Neither or don’t know?
A Key Assumption The starting point of the IS–LM/MP model: prices and wages are not completely flexible. In today’s lecture, a stronger assumption: the price level and expected inflation are exogenous. A general comment about models and assumptions: The purpose of a model is not to be “realistic.” It is to provide insights about particular features of the world.

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The Equations of the IS Curve #1: Planned Expenditure and Output E = Y E is planned expenditure, Y is output.
The Equations of the IS Curve #2: Modeling Planned Expenditure E = C(Y – T) + I(r) + G T is taxes (net of transfers) G is government purchases C (Y – T) is a function giving consumption as a function of disposable income. I(r) is a function giving desired investment as a function of the real interest rate.

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Assumptions about Planned Expenditure E = C(Y – T) + I(r) + G T is exogenous:
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Lecture 5 Slides Post after - Economics 134 Spring 2012...

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