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Economics Applying the IS LM CURVE > Applying the IS LM Curve > Flashcards

Applying the IS LM Curve Flashcards

1
Q

Dr Tumisang

A

Loate-Ntsoko

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2
Q

1

A

Slides for External material

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3
Q

• How to derive the aggregate demand curve

A

from the

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4
Q

The intersection of the IS curve

A

and the LM curve

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5
Q

Y

A

=C Y

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6
Q

M

A

P =L r Y

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7
Q

Y

A

=C Y

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8
Q

curve

A

shifts right

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9
Q

fall in investment partially

A

offsets

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10
Q

1

A

r

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11
Q

1 − MPC

A

r

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12
Q

smaller for T

A

than for an equal G…

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13
Q

1

A

T

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14
Q

2

A

…so the effects on r

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15
Q

and Y

A

are smaller for T

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16
Q

Monetary policy:

A

An increase in M

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17
Q

1

A

M > 0 shifts the LM curve

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18
Q

•Monetary policymakers may adjustM

A

in response to changes in

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19
Q

1

A

hold M

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20
Q

2

A

hold r

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21
Q

3

A

hold Y

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22
Q

A

r

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23
Q

A

Y

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24
Q

A

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25
Q

IS

A

shocks:

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26
Q

•

A

For example, suppose

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27
Q

•

A

This reduction in the demand for investment goods causes a contractionary

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28
Q

•

A

The fall in investment reduces planned expenditure and shifts the IS curve

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29
Q

•

A

This fall in equilibrium income in part validates the firms’ initial pessimism.

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30
Q

Shocks in the IS-LM

A

model

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31
Q

LM

A

shocks:

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32
Q

Analyse

A

shocks with the IS-LM model

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33
Q

2

A

consumers using cash in transactions more frequently

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34
Q

a.

A

use the IS-LM diagram to determine the effects

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35
Q

b.

A

figure out what happens to

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36
Q

r

A

and Y

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37
Q

I

A

rises because r

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38
Q

u

A

rises because Y is lower

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39
Q

In fact, the Fed (SARB)

A

targets the federal funds rate (repo rate)—

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40
Q

the interest rate banks charge one another on overnight

A

loans.

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41
Q

These central banks change the money supply and shifts the

A

LM

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42
Q

curve

A

to achieve their target.

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43
Q

• Even

A

though

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44
Q

1)

A

They are easier to measure than the money supply.

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45
Q

2)

A

The Fed might believe that

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46
Q

We will extend our theory of short-run

A

fluctuations to include

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47
Q
  1. IS-LM
A

and aggregate demand

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48
Q

So far, we’ve been using the IS-LMmodel to analyze the short

A

run,

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49
Q

However, a change in P

A

would shift LM and therefore affect Y.

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50
Q

IS-LM

A

and aggregate demand

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51
Q

Previously, we derived the AD curve

A

from the quantity theory of

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52
Q

That analysis showed that for a given

A

money supply, a higher price

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53
Q

IS-LM

A

and aggregate demand

54
Q

the price level rises—that is, why the aggregate demand curve

A

is

55
Q

To explain why the aggregate demand (AD)

A

curve

56
Q

1

A

For any given money supply M, a higher price level P reduces

57
Q

2

A

A lower supply of real money balances shifts the LM curve

58
Q

3

A

The aggregate demand curve plots this negative relationship

59
Q

Intuition for slope of AD

A

curve:

60
Q

P

A

(M/P)

61
Q

The AD curve shows

A

the set of

62
Q

What causes the aggregate demand curve

A

to shift?

63
Q

• Because the AD curve

A

summarizes the results from the

64
Q

given price level) cause the aggregate demand curve

A

to shift.

65
Q

model for any given price level; it thus shifts the

A

AD curve to

66
Q

• An increase in government

A

purchases or a decrease in taxes

67
Q

also shifts the aggregate demand curve

A

to the right.

68
Q

Monetary policy and the AD

A

curve

69
Q

The Fed or SARB can increase

A

r

70
Q

aggregate demand:

A

r

71
Q

M  LM shifts right

A

r

72
Q

Y at each value of P

A

P

73
Q

Fiscal policy and the AD

A

curve

74
Q

Expansionary fiscal policy (G

A

r

75
Q

and/or T) increases aggregate

A

r

76
Q

demand:

A

r

77
Q

 IS shifts right

A

P

78
Q

Y at each value of P

A

P

79
Q

Summary of moving

A

and shifting the AD curve

80
Q

fiscal policy but also shocks to the goods market (the IS curve)

A

and

81
Q

A change in income in the IS–LM model for a given

A

price level

82
Q

The SR and LR effects of an IS

A

shock

83
Q

A negative IS shock

A

r

84
Q

causing Y

A

to fall.

85
Q

equilibrium,

A

Y

86
Q

The SR and LR effects of an IS

A

shock

87
Q

Over time, P gradually

A

falls,

88
Q

equilibrium with

A

Y

89
Q

1

A

Draw the IS-LM and AD-AS

90
Q

2

A

Suppose the SARB increases M.

91
Q

3

A

Show what happens in the transition

92
Q

4

A

How do the new long-run equilibrium

93
Q

r

A

falls, Y

94
Q

New long-run

A

equilibrium

95
Q

Money

A

is neutral

96
Q

billions of 1958 dollars

A

200

97
Q

Asserts that the Depression was largely

A

due to an exogenous fall in

98
Q

THE SPENDING HYPOTHESIS: Reasons for the IS

A

shift

99
Q

THE MONEY HYPOTHESIS: A shock to the LM

A

curve

100
Q

Asserts that the Depression was largely

A

due to huge fall in the

101
Q

•Pfell even more, so M/P

A

actually rose slightly

102
Q

leftward LM

A

shift would cause.

103
Q

P

A

(M/P)

104
Q

A channel through

A

which falling prices expand income is called the

105
Q

Arthur

A

Pigou, a prominent classical economist in the 1930s, pointed

106
Q

shift in the IS curve,

A

also leading to higher income.

107
Q

1

A

The first, called the debt-deflation theory, describes the effects

108
Q

2

A

The second explains the effects of expected

109
Q

The destabilizing effects of unexpected

A

deflation:

110
Q

aggregate spending falls, the IS

A

curve shifts left, and Y

111
Q

The destabilizing effects of unexpected

A

deflation:

112
Q

•

A

Unanticipated changes in the price level redistribute wealth

113
Q

•

A

If a debtor owes a creditor $1,000, then the real amount of this

114
Q

•

A

A fall in the price level raises the real amount of this debt—the

115
Q

•

A

Therefore, an unexpected deflation enriches creditors and

116
Q

The destabilizing effects of unexpected

A

deflation:

117
Q

The destabilizing effects of unexpected

A

deflation:

118
Q

I 

A

because I

119
Q

If i is the nominal interest rate and �� ��

A

is expected inflation, then

120
Q

Expected inflation enters as a variable in the IS curve.

A

Thus, changes

121
Q

2009:

A

Real GDP fell, unemployment rate approached 10%

122
Q

interest rate (%)

A

6

123
Q

Percent change in house prices

A

10%

124
Q

(from 4 quarters earlier)

A

8%

125
Q

Number of bank failures

A

120

126
Q

% change from 4 quarters earlier

A

8

127
Q

IS-LM

A

model

128
Q

•endogenous:r,

A

Y

129
Q

•IScurve:

A

goods market equilibrium

130
Q

•LMcurve:

A

money market equilibrium

131
Q

and shifts AD

A

curve

132
Q

•ISor LM

A

shocks shift the AD

Economics Applying the IS LM CURVE (1 decks)

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