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Froyen08
This document contains lecture slides on the Keynesian system and policy effects in the IS-LM model. It discusses how increasing the money supply shifts the LM curve to the right, increasing output. It also examines how an increase in government spending shifts the IS curve to the right, raising output. The document analyzes the effects of increasing taxes or falling investment, which shift the IS curve left, reducing output. The slides explore the effectiveness of monetary and fiscal policy depending on the responsiveness of investment and money demand. Finally, it introduces the Keynesian theory of inflation.
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Froyen08
- 1. TThhee KKeeyynneessiiaann SSyysstteemmIIIIII:: PPoolliiccyy EEffffeeccttss iinn tthhee IISS--LLMM MMooddeell CChhaapptteerr 88 Professor Steve Cunningham Intermediate Macroeconomics ECON 219
- 2. IInnccrreeaassiinngg tthhee MMoonneeyySSuuppppllyy 0 Ms r 1 2 LM(M1) IS LM(Mr 0) r0 r1 Md Ms r0 r1 Y0 Y1 M
- 3. IInnccrreeaassee iinn GGoovv’’ttSSppeennddiinngg 3 IS(G1) IS(G0) LM r r1 r0 Y0 Y1 Recall that: Y = C + I + G + NX. When G¯ then Y¯.
- 4. 4 AS AD2 Y Nd Y=F(N,K) w0 P w/p N AD0 AD1 N Y AD NOTES: 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)¯
- 5. 5 IInnccrreeaassee iinnTTaaxxeess r IS(T0) LM IS(T1) LM r0 r1 Y1 Y0 Recall that: Y = C + I + G + NX. When T then Yd¯, and so must C¯ and Y¯.
- 6. 6 IInnvveessttmmeenntt FFaallllss IS(I0) IS(I1) LM r r0 r1 Y1 Y0 Recall that: Y = C + I + G + NX. When I¯ then Y¯.
- 7. 7 AS AD0 Y Nd Y=F(N,K) w0 P w/p N AD2 AD1 N¯ Y¯ AD¯ NOTES: 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)
- 8. Monetary PPoolliiccyy EEffffeeccttiivveenneessss 8 r r Investment not responsive to interest rate changes LM1 Investment is responsive to interest rate changes IS LM IS 1 LM2 LM2 ? Y Y
- 9. IS1 IS2 9 FFiissccaall PPoolliiccyy EEffffeeccttiivveenneessss IS1 r r Money demand is responsive to interest rate changes LM LM Y ? Y IS2 Money demand not responsive to interest rate changes
- 10. KKeeyynneessiiaann TThheeoorryy ooffIInnffllaattiioonn 10 P AS Y Keynesian or Depression Region Classical Region Bottleneck Region AD1 AD2 AD3 AD4 AD5 AD6 Y P DP=0 Y P DY=0