The Keynesian System III: Policy Effects in the IS-LM ModelIncreasing the Money SupplyIncrease in Gov’t SpendingPowerPoint PresentationIncrease in TaxesInvestment FallsSlide 7Monetary Policy EffectivenessFiscal Policy EffectivenessKeynesian Theory of InflationThe Keynesian System III:The Keynesian System III:Policy Effects in the IS-LM ModelPolicy Effects in the IS-LM ModelProfessor Steve CunninghamGraduate Macroeconomics IECON 3092Increasing the Money SupplyIncreasing the Money SupplyISLM(M1)LM(M0)rr0r1Y0Y1MMdMs0Ms1rr0r13Increase in Gov’t SpendingIncrease in Gov’t SpendingIS(G0)LMrr1r0Y0Y1IS(G1)Recall that:Y = C + I + G + NX.When G then Y.4ASYY=F(N,K)Ndw0Pw/pNAD0AD1AD2NYADNOTES:1. G rises, increasing AD. 2. Employment and output result from AD increases. 3. Prices (P) also rise.4. As prices rise, the real wages fall, making labor more attractive.5. As more workers are employed, and unemployment falls.(w/p)5Increase in TaxesIncrease in TaxesLMIS(T1)LMrr0r1Y1Y0IS(T0)Recall that:Y = C + I + G + NX.When T then Yd,and so must C and Y.6Investment FallsInvestment FallsIS(I1)LMrr0r1Y1Y0IS(I0)Recall that:Y = C + I + G + NX.When I then Y.7ASYY=F(N,K)Ndw0Pw/pNAD2AD1AD0NYADNOTES:1. Rising taxes or falling investment reduces AD.2. Final sales and output (Y) fall. 3. As prices fall, the real wages rise, making labor more expensive to firms.4. Firms require fewer workers to build products and find workers more expensive, so they lay off workers.5. Unemployment rises.(w/p)8Monetary Policy EffectivenessMonetary Policy EffectivenessInvestment not responsive to interest rate changesInvestment is responsive to interest rate changesISISLM1LM2?Y YrrLM1LM29Fiscal Policy EffectivenessFiscal Policy EffectivenessMoney demand is responsive to interest rate changesIS1LMLM?Y YrrIS2Money demand not responsive to interest rate changesIS1IS210Keynesian Theory of Inflation Keynesian Theory of Inflation ASPYKeynesian or Depression RegionClassical RegionBottleneck
View Full Document
Unlocking...