Y from y 1 to y2 y md rfrom r 3 to r2 final

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Monetary Policy in the IS-LM Framework(b) The Effect of a Decrease in the Nominal Money Stock on r* & Y*(c) The Effect of an increase in the money demand on r* & Y*(d) The Effect of a Decrease in the price level on r* & Y*D.I.Y.
Fiscal Policy in the IS-LM Framework(a) The Effect of an Increase in Government Spending & Crowding-Out Effectr1LMIS0IS1E’DErY2Y0Y1Yr0GIS curve shift to the right (from IS0to IS1)Y(from Y0to Y2)YMDr(from r0to r1) rI  Y(from Y2to Y1)Final equilibrium: r1, Y1Conclusion: G  Y (but up to Y1only and not Y2)Crowding-out effectY(from Y2to Y1)The size of the crowding-out effect = Y1Y2Crowding-out effect
Fiscal Policy in the IS-LM Framework(b) The Effect of an Increase in Taxesr0LMIS1EE’rY1Y0Yr1TIS curve shift to the left (from IS0to IS1)Y(from Y0to Y1)r (from r0to r1) Final equilibrium: r1, Y1Conclusion: T Y(from Y0to Y1)IS0
The Size of the Crowding-Out Effect & The Slope of the IS Curve(a) Interest-elastic investmentr1LMIS0IS1E’DErY2Y0Y1Yr0GIS curve shift to the right (from IS0to IS1)Y(from Y0to Y2)YMDr(from r0to r1) rI  Y(from Y2to Y1)Final equilibrium: r1, Y1Conclusion: G  Y (but up to Y1only and not Y2)Crowding-out effectY(from Y2to Y1)The size of the crowding-out effect = Y1Y2The size of the crowding-out effect is biggerwhen IS curve is elastic (flatter).Crowding-out effectSince the I is interest elastic, an increase in interest rate causes a larger C-Oeffect or larger decrease in I (and causes only a small increase in Y).
The Size of the Crowding-Out Effect & The Slope of the IS Curve(b) Interest-inelastic investmentr1LMIS0IS1E’DErY2Y0Y1Yr0GIS curve shift to the right (from IS0to IS1)Y(from Y0to Y2)YMDr(from r0to r1) rI  Y(from Y2to Y1)Final equilibrium: r1, Y1Conclusion: G  Y (but up to Y1only and not Y2)Crowding-out effectY(from Y2to Y1)The size of the crowding-out effect = Y1Y2The size of the crowding-out effect is smallerwhen the IS curve is inelastic (steeper).Crowding-out effectSince the I is interest inelastic, an increase in interest rate causes a smallerC-O effect or smaller decrease in I (and causes a larger increase in Y).
The Size of the Crowding-Out Effect & The Slope of the LM Curves(a) Interest-elastic Money Demandr1LMIS0IS1E’DErY2Y0Y1Yr0GIS curve shift to the right (from IS0to IS1)Y(from Y0to Y2)YMDr(from r0to r1) rI  Y(from Y2to Y1)Final equilibrium: r1, Y1Conclusion: G  Y (but up to Y1only and not Y2)Crowding-out effectY(from Y2to Y1)The size of the crowding-out effect = Y1Y2The size of the crowding-out effect is smallerwhen LM curve is elastic (flatter).Crowding-out effectSince the MD is interest elastic, only a small rise in interest rate isrequired to reequilibrate the money market after the increase in themoney stock. As a consequence, I & Y decrease by a smaller amount.
The Size of the Crowding-Out Effect & The Slope of the LM Curves

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