IS –LM and Aggregate Demand Chapter 10. 2 ©1999 South-Western College Publishing Figure 10.1...

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


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)


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


Figure 10.4A

i (N

omin

al in

tere

st r

ate)


i2*

i1*

Taxes and the IS CurvePanel A

S2*

S1*

I + D(T1)I + D(T2)

8


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


Figure 10.5A

i (N

omin

al in

tere

st r

ate)


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


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


Figure 10.7A

P2

Deriving the Aggregate Demand Curve

Y2Y1

Y (Income)

P1

Panel AP

(P

rice

Lev

el)

Y*

B

A

13


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


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


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


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


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


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

+


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

+++

+++ +

+ ++

+ ++

+ ++

+++

IS –LM and Aggregate Demand Chapter 10. 2 ©1999 South-Western College Publishing Figure 10.1...

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Transcript of IS –LM and Aggregate Demand Chapter 10. 2 ©1999 South-Western College Publishing Figure 10.1...