Chapter 5 - Goods and Financial Markets: The IS-LM model Flashcards
Why is the LM horizontal?
CB chooses the interest rate i(bar). For different levels of Y money demand is different, but the CB adjusts the money supply so as to maintain the same interest rate
decrease in i:
expansionary monetary policy or monetary expansion
–> tends to boost demand for investment
increase in i:
contractionary monetary policy or monetary contraction
–> tends to reduce investment
fiscal contraction/ fiscal consolidation
Decrease in G-T
Fiscal expansion
Increase in G-T
What do you understand by austerity?
Austerity is a political-economic term referring to policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both.
deficit reduction in the short run
a) given private saving (S), a lower gov. deficit means higher 1
b) fiscal contraction lowers output and so S goes down by more than T-G increases
- -> so I decreases