ECON 402 Lecture 13: Chpater 12
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Document Summary
Overview: how to is-lm model analyze effects of shocks, fiscal policy and monetary policy, how to derive aggregate demand curve, causes for great depression. Y = c(y-t) + i(r) + g: lm curve. The intersection of both curve determines the unique combination of y and r that satisfies equilibrium in both market. An increase in government purchase: is curve shifts right and causing output and income to rise, raises money demand, interest rate rise, reduces investment. Tax cut: by tax cut of t, is curve shifts by, effect on r and y are smaller for effect of than for an equal of g. Interaction between monetary and fiscal policy: model, variables are exogenous, real world, monetary adjust m in response to change in fiscal policy, alter the impact of policy change. Fed"s response to g> 0: congress increase g, possible choices, hold m constant, hold r constant, hold y constant, in each case the effects on g is different.
