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1Chapter 12Aggregate Demand II:Applying the IS-LMModel
2Context§Chapter 10 introduced the model of aggregate demand and supply. §Chapter 11 developed the IS-LMmodel, the basis of the aggregate demand curve.
3IN THIS CHAPTER, YOU WILL LEARN:§how to use the IS-LMmodel to analyze the effects of shocks, fiscal policy, and monetary policy§how to derive the aggregate demand curve from the IS-LMmodel§several theories about what caused the Great Depression
5Policy analysis with the IS-LM modelWe can use the IS-LMmodel to analyze the effects of•fiscal policy: Gand/or T•monetary policy: MISYrLMr1Y1YC YTIrG=-++()()(,)MPL r Y=
14Estimates of fiscal policy multipliersfrom the DRI macroeconometric modelAssumption about monetary policyEstimated value of Y/GFed holds nominal interest rate constantFed holds money supply constant1.930.60Estimated value of Y/T1.190.26