6 islm(2)
-
Upload
nader-allam -
Category
Business
-
view
233 -
download
0
Transcript of 6 islm(2)
![Page 1: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/1.jpg)
The IS-LM Model (2) Monetary and Fiscal Policy
in the ISLM Model
Chahir Zaki
FEPS, Cairo University
Second semester, 2012
![Page 2: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/2.jpg)
Factors that Shift the IS Curve
• A change in autonomous factors that is unrelated to the interest rate
– Changes in autonomous consumer expenditure
– Changes in planned investment spending unrelated to the interest rate
– Changes in government spending
– Changes in taxes
– Changes in net exports unrelated to the interest rate
![Page 3: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/3.jpg)
![Page 4: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/4.jpg)
![Page 5: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/5.jpg)
![Page 6: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/6.jpg)
Factors that Shift the LM Curve
• Changes in the money supply
• Autonomous changes in money demand
![Page 7: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/7.jpg)
![Page 8: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/8.jpg)
![Page 9: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/9.jpg)
Response to a Change in Monetary Policy
• An increase in the money supply creates an excess supply of money
• The interest rate declines
• Investment spending and net exports rise
• Aggregate demand rises
• Aggregate output rises
• The excess supply of money is eliminated
• Aggregate output is positively related to the money supply
![Page 10: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/10.jpg)
![Page 11: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/11.jpg)
Response to a Change in Fiscal Policy
• An increase in government spending raises aggregate demand directly; a decrease in taxes makes more income available for spending
• The increase in aggregate demand cause aggregate output to rise
• A higher level of aggregate output increases the demand for money
![Page 12: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/12.jpg)
Response to a Change in Fiscal Policy (cont’d)
• The excess demand for money pushes the interest rate higher
• The rise in the interest rate eliminates the excess demand for money
• Aggregate output and the interest rate are positively related to government spending and negatively related to taxes
![Page 13: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/13.jpg)
![Page 14: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/14.jpg)
Monetary versus Fiscal Policy
• Complete crowding out – Expansionary fiscal policy does not lead to a rise in
output
– Increased government spending increases the interest rate and ‘crowds out’ investment spending and net exports
• The less interest-sensitive money demand is, the more effective monetary policy is relative to fiscal policy
![Page 15: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/15.jpg)
![Page 16: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/16.jpg)
![Page 17: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/17.jpg)
![Page 18: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/18.jpg)
![Page 19: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/19.jpg)
ISLM Model in the Long Run
• Natural rate level of output (Yn) – Rate of output at which the price level has no tendency
to change
• Using real values, so when the price level changes, the IS curve does not change
• The LM curve is affected by the price level – As the price level rises, the quantity of money in real
terms falls, and the LM curve shifts to the left until it reaches Yn
(long-run monetary neutrality)
• Neither monetary or fiscal policy affects output in the long run
![Page 20: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/20.jpg)
![Page 21: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/21.jpg)
![Page 22: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/22.jpg)
Shifts in the Aggregate Demand Curve
• ISLM analysis shows how the equilibrium level of aggregate output changes for a given price level
• A change in any factor except the price level, that causes the IS or LM curve to shift, causes the aggregate demand curve to shift
![Page 23: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/23.jpg)
![Page 24: 6 islm(2)](https://reader033.fdocuments.net/reader033/viewer/2022060117/55846840d8b42a7f1d8b51f0/html5/thumbnails/24.jpg)