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Macroeconomics > #13 Aggregate Demand II: Applying The IS-LM Model > Flashcards

#13 Aggregate Demand II: Applying The IS-LM Model Flashcards

1
Q

Fiscal Policy

Increase in G

A

Increase in G

IS curve to right

Income rises

Interest rate rises

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2
Q

Fiscal policy

Tax cut

A

Decrease in Taxes

IS curve to right

Income rises

Interest rate rises

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3
Q

Monetary policy

Increase in M

A

Increase in money supply

LM down

Income rises

Interest rate falls

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4
Q

Congress increases G

Fed Responses

A
  1. Hold M constant
  2. Hold r constant
  3. Hold Y constant
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5
Q

Congress increases G

Hold M constant

A

Increase in G —> IS curve to right

Money supply constant —> LM curve same

Income and interest rate rise

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6
Q

Congress increases G

Hold r constant

A

Increase in G —> IS to right

Keep r constant —> increases money supply

Increases money supply —> LM to right

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7
Q

Congress increases G

Hold Y constant

A

Increase in G —> IS curve to right

Keep Y constant —> decrease money supply

Decrease money supply —> LM to left

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8
Q

IS shocks

A

Exogenous changes in the demand for goods and services

  1. Stock market boom or crash
  2. Change in business or consumer confidence/expectations
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9
Q

LM shocks

A

Exogenous changes in the demand for money

  1. Switching to cashless methods
  2. More ATMs reduce money supply
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10
Q

Pigou effect

A

Prices go down, money supply go up —> income goes up

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11
Q

The destabilizing effects of unexpected deflation

Debt-deflation theory

A

P goes down unexpectedly

Transfers pirchasing power from borrowers to lenders

Borrowers spend less, lenders spend more

Aggregate spending falls —> IS curve to left, Y down

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12
Q

Liquidity trap

A

Situation where interest rates have fallen to 0, and it is possible that (conventional) monetary policy is no longer effective

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13
Q

Unconventional monetary policies

A
  1. Forward guidance - policy of announcing furure monetary actions
  2. Quantitative easing (QE) - buying of long term gov debt, mortage-backed securities, corporate/state debt, etc
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Macroeconomics (8 decks)

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