24 02 2012 the is lm model birthe larsen 3 mild

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24-02-2012The IS-LM model, Birthe Larsen3
‘Mild’ recession in EuropeMild recession in Europe24-02-2012The IS-LM model, Birthe Larsen4
The Keynesian CrossThe Keynesian Cross• A simple closed economy model in whichA simple closed economy model in which income is determined by expenditure. (due to J M Keynes)(due to J.M. Keynes)• Notation: I= planned investmentE= C + I + G= planned expenditureY= real GDP = actual expenditure• Difference between actual & plannedDifference between actual & planned expenditure = unplanned inventory investment24-02-2012The IS-LM model, Birthe Larsen5
The equilibrium value of incomeThe equilibrium value of incomeEplannedexpenditureE=YEC+I+GE=C +I +GMPCMPC1income outputYincome, output,YEquilibrium income24-02-2012The IS-LM model, Birthe Larsen7income
The government purchases multiplierDefinition:the increase in income resulting
.
Example: If MPC= 0.8, find Note: a multiplier is model specific.the gov. purchases multiplier.24-02-2012The IS-LM model, Birthe Larsen8

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