is lm model (1) analysis
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IS-LM MODEL The Economics of Money, Banking, and Financial Markets7th
Frederic S. Mishkin
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what is IS-LM Model?
The Economics of Money, Banking, and
Financial Markets7th
• Economics Crystal ball.
• Tool for deeper understanding Government policy & GDP movements.
• John Hicks 1937.
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The Economics of Money, Banking, and
Financial Markets7th
Determination of Aggregate Output.
› Keynesian recognitions:
› Y=Yad ƒ(C+I+G+NX).
› Keynesian analysis simplification.
- Fixed price level.
- Planned investment (known value).
- Gradually assessment addition.
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The Economics of Money, Banking, and
Financial Markets7th
Determination of Aggregate Output.
› Equilibrium and Keynesian cross diagram.
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The Economics of Money, Banking, and
Financial Markets7th
Determination of Aggregate Output.
›Do not forget:
- Up ward slopping (MPC).
- Multiplier affect.
- What if NX added (100$).
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The Economics of Money, Banking, and
Financial Markets7th
Equilibrium in good market (driving IS curve).
› interest rate & planned investment.- Fund deficit.
- Fund surplus.
› Interest rate & net export.
› Interest rate & aggregate out-put.
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The Economics of Money, Banking, and
Financial Markets7th
Equilibrium in good market (driving IS curve).
![Page 8: Is lm model (1) analysis](https://reader033.vdocument.in/reader033/viewer/2022051503/5a6d27227f8b9acc418b50c5/html5/thumbnails/8.jpg)
The Economics of Money, Banking, and
Financial Markets7th
Equilibrium in good market (driving IS curve).
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The Economics of Money, Banking, and
Financial Markets7th
What is IS curve tell us?
› Good market clearance.
› Equilibrium level of out-put, given interest rate.
- Good market excess supply.
- Good market excess demand.
› Note: no unique out-put level.
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The Economics of Money, Banking, and
Financial Markets7th
Equilibrium in money market (driving LM curve).
› Equilibrium condition:
M.D = M.S
› Main building blocks:
- Liquidity preferences theory.
Money demand determents:
• Interest rate.
• income.
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The Economics of Money, Banking, and
Financial Markets7th
Equilibrium in money market (driving LM curve).
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The Economics of Money, Banking, and
Financial Markets7th
What is LM curve tell us?
› Money market clearance.
› Equilibrium level of interest rate, given level of
out- put.
- Excess money supply.
- Excess money demand.
› Note: no unique interest rate.
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The Economics of Money, Banking, and
Financial Markets7th
IS-LM determination aggregate out-put and
interest rate.
› Equilibrium in both
markets(IS-LM curves
intersection)
› Market forces to ward
General Equilibrium.
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The Economics of Money, Banking, and
Financial Markets7th
Factors causes IS curve to shift.
› Change in:
- Autonomous consumer expenditure.
- Investment spending (unrelated to interest rate).
- Net export (unrelated to interest rate).
- Government spending or taxes.
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The Economics of Money, Banking, and
Financial Markets7th
Factors causes IS curve to shift.
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The Economics of Money, Banking, and
Financial Markets7th
Factors causes IM curve to shift.
› Change in Money supply.
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The Economics of Money, Banking, and
Financial Markets7th
Factors causes IM curve to shift.
› Change in Autonomous Money demand.
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The Economics of Money, Banking, and
Financial Markets7th
Change in equilibrium level, interest rate and
aggregate out-put.
› Response to change in fiscal policy.
› Response to change in monetary policy.
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The Economics of Money, Banking, and
Financial Markets7th
Monetary policy VS Fiscal policy
› Solving high unemployment:
- Using fiscal policy.
- Using monetary policy.
› Conclusion.
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The Economics of Money, Banking, and
Financial Markets7th
Monetary policy VS Fiscal policy
› Stable IS curve.
- Targeting interest rate.
- Targeting money supply.
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The Economics of Money, Banking, and
Financial Markets7th
Monetary policy VS Fiscal policy
› Stable LM curve.
- Interest rate targeting.
- Money supply targeting.
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The Economics of Money, Banking, and
Financial Markets7th
IS-LM model in long run.
› Response to money supply.
› Response to government spending.
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The Economics of Money, Banking, and
Financial Markets7th
Driving aggregate demand curve.
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The Economics of Money, Banking, and
Financial Markets7th
Factors shift Aggregate demand curve.
› Shift in IS curve (is curve factors).
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The Economics of Money, Banking, and
Financial Markets7th
Factors shift Aggregate demand curve.
› Shifts in LM curve.
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The Economics of Money, Banking, and
Financial Markets7th
Mathematics on board
- Multiplayer affect.
- Solving IS-LM equations.