Post on 18-Jan-2016
IS –LM and Aggregate Demand
Chapter 10
2
©1999 South-Western College Publishing
Figure 10.1 Saving and Investment
i (N
omin
al in
tere
st r
ate)
i1*
i2* ( PE/P2 - PE/P1)
S2
S1
3
©1999 South-Western College PublishingFigure 10.1A
Saving and Investment
i (N
omin
al in
tere
st r
ate)
i2
i1
i*
Investment, Saving, and the IS CurvePanel A
I
S2
S*S1
4
©1999 South-Western College Publishing
Figure 10.1BY (Income)
i (N
omin
al in
tere
st r
ate)
i2
i1
i*
Investment, Saving, and the IS CurvePanel B
ISY* Y2Y1
5©1999 South-Western College Publishing
Figure 10.3A
i2*
i1*
i (N
omin
al in
tere
st r
ate)
Saving and Investment
S*
Government Purchases and the IS CurvePanel A
I + D(G1) I + D(G2)
6
©1999 South-Western College PublishingFigure 10.3B
Government Purchases and the IS Curve
i2*
i1*
i (N
omin
al in
tere
st r
ate)
Panel B
Y (Income)
IS(G2)IS (G1)
Y*
7
©1999 South-Western College Publishing
Figure 10.4A
i (N
omin
al in
tere
st r
ate)
Saving and Investment
i2*
i1*
Taxes and the IS CurvePanel A
S2*
S1*
I + D(T1)I + D(T2)
8
©1999 South-Western College Publishing
Figure 10.4B
Taxes and the IS Curve
IS(T1)IS(T2)i (
Nom
inal
inte
rest
rat
e)
i2*
i1*
Panel B
Y (Income)Y*
9
©1999 South-Western College Publishing
Figure 10.5A
i (N
omin
al in
tere
st r
ate)
Saving and Investment
i2*
i1*
S*
I1 + D I2 + D
Panel AShifts in Investment and the IS Curve
10©1999 South-Western College Publishing
Figure 10.5B
i2*
i1*
i (N
omin
al in
tere
st r
ate)
Panel B
Y (Income)
IS(I2)IS(I1)
Y*
Shifts in Investment and the IS Curve
11
©1999 South-Western College Publishing
Figure 10.6
i (N
omin
al in
tere
st r
ate)
Y (Income)Y*
The Complete IS–LM Model
LM
IS(G,T - TR, PE/P)
AC
B
M P
12
©1999 South-Western College Publishing
Figure 10.7A
P2
Deriving the Aggregate Demand Curve
Y2Y1
Y (Income)
P1
Panel AP
(P
rice
Lev
el)
Y*
B
A
13
©1999 South-Western College Publishing
Figure 10.7B
i2*
i1*
i (N
omin
al in
tere
st r
ate) Panel B
Y (Income)
Shifts in Investment and the IS Curve
Y*
LM(M/P1)
LM(M/P2)
IS
C
DY2Y1
14
©1999 South-Western College Publishing
Figure 10.8A
P1
P (
Pri
ce L
evel
)
How Fiscal Policy Shifts the Aggregate Demand Curve
Y2Y1
Y (Income)
Panel A
AD(G2)AD(G1)Y*
A B
15
©1999 South-Western College PublishingFigure 10.8B
How Fiscal Policy Shifts the Aggregate Demand Curve
Panel B
Y2Y1
Y (Income)
Y*i (N
omin
al in
tere
st r
ate)
i1
i2 D
C
LM(M/P1)
IS(G2)
IS(G2)
16
©1999 South-Western College Publishing
Figure 10.9A
P1
P (
Pri
ce L
evel
)
How Monetary Policy Shifts the Aggregate Demand Curve
Y2Y1
Y (Income)
Panel A
Y*
AD(M2)AD(M1)
A B
17
©1999 South-Western College PublishingFigure 10.9B
Y2
Y (Income)
i (N
omin
al in
tere
st r
ate)
i2
i1
How Monetary Policy Shifts the Aggregate Demand Curve
Y1
C
D
IS
LM(M2/P1)
LM(M1/P1)Panel B
Y*
18
©1999 South-Western College Publishing
Table 10.1
Taxes
Factors That Shift the Aggregate Demand Curve
Variables Direction of Shift
Expected inflation Right
Government expenditure
Investment (productivity)
Right
Right
Transfers Right
LeftTaxes
Money supply Right
PE/PG
I
TR
T
M
19©1999 South-Western College PublishingFigure 10.10A
Y (Income)
Y*
P (
Pri
ce L
evel
)Panel A: Effect of Demand Shock
Demand and Supply Shocks
AD2
AD1
AD3
SRASLRAS
B
A
C
20
+
©1999 South-Western College PublishingFigure 10.10B
Demand and Supply ShocksPanel B: Pre-World War II Inflation and Growth
Infl
atio
n
GDP growth-0.1-0.2 0.0 0.1 0.2
0.0
0.1
0.2
-0.1
-0.2
-0.3
+
+
+
+ ++ ++ + +
++ +
+++++
21
©1999 South-Western College PublishingFigure 10.10C
Y (Income)
Y*
P (
Pri
ce L
evel
)Panel C: Effect of Supply Shock
Demand and Supply Shocks
SRAS1LRAS
SRAS2
SRAS3D A
EAD
22
+
©1999 South-Western College PublishingFigure 10.10D
Demand and Supply ShocksPanel D: Post-World War II Inflation and Growth
Infl
atio
n
GDP growth-0.1-0.2 0.0 0.1 0.2
0.0
0.1
0.2
-0.1
-0.2
-0.3
+++
+++ +
+ ++
+ ++
+ ++
+++
END