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ISLM Framework And Aggregate Demand-Macroeconomics-Lecture Notes, Study notes of Macroeconomics

Indian Institute of Tourism and Travel Management Macroeconomics

This course includes scope of macroeconomics, national income, economic growth, unemployment, inflation, open economy, economic fluctuations, aggregate demand, aggregate supply and foundation of microeconomics. This lecture includes: Framework, Aggregate, Demand, Monetary, Policy, Curve, Increase Shift, Right, Shock, Value

Typology: Study notes

2011/2012

Uploaded on 08/04/2012

divakar 🇮🇳

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(25)

72 documents

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Lesson 29

IS-LM FRAMEWORK AND AGGREGATE DEMAND

So far, we’ve been using the IS-LM model to analyze the short run, when the price level is

assumed fixed. However, a change in P would shift the LM curve and therefore affect Y. The

aggregate demand curve captures this relationship between P and Y.

DERIVING THE AD CURVE

Intuition for slope of AD curve:

P  p(M/P)  LM shifts left  r  pI  pY

MONETARY POLICY AND THE AD CURVE

The central bank can increase aggregate demand:

M  LM shifts right  pr  I



Y at each value of P.

LM (P1)

LM (P2)

LM (M2/P1)

LM (M1/P1)

docsity.com

Partial preview of the text

Download ISLM Framework And Aggregate Demand-Macroeconomics-Lecture Notes and more Study notes Macroeconomics in PDF only on Docsity!

So far, we’ve been using the^ IS-LM FRAMEWORK AND AGGREGATE DEMAND IS-LM model to analyze the short run, when the price level is Lesson 29

assumed fixed.aggregate demand curve captures this relationship between P and Y. DERIVING THE However, a change in P would shift the AD CURVE LM curve and therefore affect Y. The

Intuition for slope of AD curve: P (M/P ) LM shifts left r I Y

MONETARY POLICY AND THE The central bank can increase aggregate demand:M LM shifts right r I AD Y at each value of P. CURVE

Y 2 Y 1 Y

Y

P

IS

LM ( P 2 ) LM ( P 1 )

P 1 AD

P 2

Y 1

r r (^21)

Y

P

IS

LM ( M 1 / P LM 1 ) ( M 2 / P 1 )

AD 1

P 1

Y 1

Y 2

r r 12

AD 2

Y

r

Y 2

docsity.com

FISCAL POLICY AND THE Expansionary fiscal policy (G and/or T C IS shifts right AD Y at each value of P. CURVE T) increases aggregate demand:

IS-LM AND AD-AS IN THE SHORT RUN & LONG RUN Recall: adjustment of prices. The force that moves the economy from the short run to the long run is the gradual

In the short-run equilibrium,Y > Yif Then over time, the pricelevel willRise

Y < YY = Y Remain constantFall

THE SR AND LR EFFECTS OF AN A negative IS shock shifts IS and AD left, causing Y to fall. IS SHOCK

Y 2

r 2 Y 1 Y 1

r 1 Y

P^ IS^1

AD 1

P 1 AD 2

IS 2

P LRAS

LRAS IS 1 P 1^ SRAS^1

LM ( P 1 )

IS 2

AD^ A 2 D^1

Y docsity.com

LONG RUN IMPACTS YP 0, because rising P shifts LM to left, returning Y to Y* as required by long-run LRAS.+, in order to eliminate the excess demand at P 0.

rCI +, reflecting the leftward shift in LM due to0, since both Y and T are back to their initial levels (C=C(Y-T)).– –, since r has risen even more due to the + + P.P.

ANALYZE SR & LR EFFECTS OF We have IS-LM and AD-AS diagrams as shown here. Suppose central bank increases M. M

The Graph below shows the Short run effects of the change in M and what happens in thetransition from the short run to the long run.

AD 1

Y

P LRAS

LRAS

IS 1

P 1^ SRAS^1

LM ( M 1 / P 1 )

AD 2

LM ( M 2 / P 1 )

AD 1

Y

P LRAS

LRAS

IS 1

P 1 SRAS 1

LM (M 1 /P 1 )

AD 2

LM (M 2 /P 1 )

IS 2

SRAS 2

docsity.com

The new long-run equilibrium values of the endogenous variables as compared to their initialvalues

SHORT RUN IMPACTS YP +, because Y moved.0, because prices are sticky in the SR.

rCI -, because a ++, because a ++, since r decreased, the level of investment increased. Y leads to a decrease in r as LM slides along the IS curve.Y increases the level of consumption (C=C(Y-T)).

LONG RUN IMPACTS YP 0, because rising P shifts LM to left, returning Y to Y* as required by long-run LRAS.+, in order to eliminate the excess demand at P 0.

rCINotice that the only LR impact of an increase in the money supply was an increase in the price 0, reflecting the leftward shift in LM due to0, since both Y and T are back to their initial levels (C=C(Y-T)).0, since Y or r has not changed. + P restoring r to its original level.

ISLM Framework And Aggregate Demand-Macroeconomics-Lecture Notes, Study notes of Macroeconomics

Related documents

Partial preview of the text

Download ISLM Framework And Aggregate Demand-Macroeconomics-Lecture Notes and more Study notes Macroeconomics in PDF only on Docsity!

So far, we’ve been using the^ IS-LM FRAMEWORK AND AGGREGATE DEMAND IS-LM model to analyze the short run, when the price level is Lesson 29

assumed fixed.aggregate demand curve captures this relationship between P and Y. DERIVING THE However, a change in P would shift the AD CURVE LM curve and therefore affect Y. The

Intuition for slope of AD curve: P (M/P ) LM shifts left r I Y

MONETARY POLICY AND THE The central bank can increase aggregate demand:M LM shifts right r I AD Y at each value of P. CURVE

Y 2 Y 1 Y

Y

P

IS

LM ( P 2 ) LM ( P 1 )

P 1 AD

P 2

Y 1

Y

P

IS

LM ( M 1 / P LM 1 ) ( M 2 / P 1 )

AD 1

P 1

Y 1

Y 1

Y 2

Y 2

r r 12

AD 2

Y

r

Y 2

docsity.com

FISCAL POLICY AND THE Expansionary fiscal policy (G and/or T C IS shifts right AD Y at each value of P. CURVE T) increases aggregate demand:

IS-LM AND AD-AS IN THE SHORT RUN & LONG RUN Recall: adjustment of prices. The force that moves the economy from the short run to the long run is the gradual

In the short-run equilibrium,Y > Yif Then over time, the pricelevel willRise

Y < YY = Y Remain constantFall

THE SR AND LR EFFECTS OF AN A negative IS shock shifts IS and AD left, causing Y to fall. IS SHOCK

Y 2

Y 2

P^ IS^1

AD 1

P 1 AD 2

IS 2

P LRAS

LM ( P 1 )

IS 2

AD^ A 2 D^1

Y docsity.com

LONG RUN IMPACTS YP 0, because rising P shifts LM to left, returning Y to Y* as required by long-run LRAS.+, in order to eliminate the excess demand at P 0.

rCI +, reflecting the leftward shift in LM due to0, since both Y and T are back to their initial levels (C=C(Y-T)).– –, since r has risen even more due to the + + P.P.

ANALYZE SR & LR EFFECTS OF We have IS-LM and AD-AS diagrams as shown here. Suppose central bank increases M. M

The Graph below shows the Short run effects of the change in M and what happens in thetransition from the short run to the long run.

AD 1

Y

Y

P LRAS

LRAS

IS 1

P 1^ SRAS^1

LM ( M 1 / P 1 )

AD 2

LM ( M 2 / P 1 )

AD 1

Y

Y

P LRAS

LRAS

IS 1

P 1 SRAS 1

LM (M 1 /P 1 )

AD 2

LM (M 2 /P 1 )

IS 2

SRAS 2

docsity.com

The new long-run equilibrium values of the endogenous variables as compared to their initialvalues

SHORT RUN IMPACTS YP +, because Y moved.0, because prices are sticky in the SR.

rCI -, because a ++, because a ++, since r decreased, the level of investment increased. Y leads to a decrease in r as LM slides along the IS curve.Y increases the level of consumption (C=C(Y-T)).

LONG RUN IMPACTS YP 0, because rising P shifts LM to left, returning Y to Y* as required by long-run LRAS.+, in order to eliminate the excess demand at P 0.

rCINotice that the only LR impact of an increase in the money supply was an increase in the price 0, reflecting the leftward shift in LM due to0, since both Y and T are back to their initial levels (C=C(Y-T)).0, since Y or r has not changed. + P restoring r to its original level.