chapter 12 Flashcards
what is the equilibrium in the IS-LM model?
it is the level of income and interest rate that results in equilibrium in the goods market
are the multipliers (tax, investment and government spending) accurate in the IS-LM model?
no the over predict the change in T,I or G will have on Y, in the IS-LM model it changes y by less
how is the aggregate demand curve derived from the IS-LM model?
holding M,G and T constant, we find Y for a given price level (P), as price changes Y also does, we relationship between P and Y is the aggregate demand curve
how will fiscal policy impact the IS-LM model?
it will cause an increase in government spending, the IS curve will shift right by change in G times government multiplier. this causes an increase in r and Y
why does the IS LM model Y not increase by the full amount of change in G times government multiplier?
because the LM causes r to increase, I to decrease and Y to pull back a little from the estimation of the government spending multiplier
how will monetary policy impact the IS-LM curve?
it will shift the LM curve to the right, causing an increase in Y and decrease in r, the increase in Y is caused by an increase in C, I decrease from increase in r
how will an increase in money supply impact the IS-LM curve?
M increases causing r to decrease and Y to increase, shifting the Lm curve to the right, the lower interest rate causes higher investment and higher income, causing a movement along the IS curve
if there is an increase in monetary policy, but also an increase in fiscal policy, how will that affect the IS-LM curve?
the government boosts (increase G, decrease T) income (Y) causing IS curve to shift to the right and increasing Y, BoC has a counter policy (decrease M, increase P) causing the LM curve to shift to original Y but changing r
how does the IS-LM curve get impacted when there are shocks?
you have to go to the curve that derives the IS or Lm curve too see how it is impacted
when there are increases (decreases) in income how does that affect employment?
income increases that causes employment to increase
income decreases that causes employment to decrease
what is the paradox of thrift?
people changing their behaviour due to the speculation of a recession coming
if price levels (P) increases, how will that impact the IS-LM curve?
it shifts the curve to the left because real money balances decreases (same effect of BoC decreasing M)
what space is the aggregate demand (AD) curve plotted in?
price on vertical and income (Y) on horizontal
how does a price increase impact the real money balances and LM curve?
it decrease the real money balances shifts the LM curve to the left
how does a price increase impact Y and R?
y decrease and r increases
how does a price decrease impact the supply of real money balances, LM curve, r and Y?
supply of real money balances increases
LM curve shifts to the right
r decreases
y increases
what is held constant on the demand curve (causes shifts in AD curve)?
fiscal policy (G and T)
money supply
what does the aggregate demand curve show?
a set of equilibrium points in IS-LM model as price level varies
what shifts the aggregate demand (AD) curve?
changes in government spending (G), taxes (T) and money supply (M)
how will an increase in money supply from the bank of Canada impact the AD curve?
it will shift the AD curve to the right, increasing Y for the same price level
how will an increase in government spending impact the AD curve?
it will shift the AD curve to the right, increasing Y for the same price level
how does a change in price level impact the aggregate demand curve (AD)?
it will cause a shift along the AD curve, changing price level and changing y
how does an increase in income while holding price level constant impact the AD curve?
it will shift it
