the slope of IS curve and its policy implications

r

I Y

S

IS curvethe smaller the elasticity of investment

the steeper the IS curve

r

I Y

S

IS curvethe greater the elasticity of investment

the flatter the IS curve

r

I Y

S

IS curvethe larger the marginal propensity to save

the steeper the IS curve

r

I Y

S

IS curve

the flatter the IS curve

the smaller the marginal propensity to save

Policy Implications

Policy Implication: a steeper IS curve(expansionary monetary policy)

r

Y

IS

LM

LM’

Y1 Y2

r

Y

IS

LM

LM’

Y1 Y2

Policy Implication: a flatter IS curve(expansionary monetary policy)

r

YIS1

LM

Y1 Y2

Policy Implication: a steeper IS curve(expansionary fiscal policy)

IS2

r

Y

IS1

LM

Y1 Y2

Policy Implication: a steeper IS curve(expansionary fiscal policy)

IS2

the slope of LM curve and its policy implications

r

Ma Y

Mt

LM curve

450

the smaller the interest elasticity of money demand

the steeper the LM curve

r

Ma Y

Mt

LM curve

450

the larger the interest elasticity of money demand

the flatter the LM curve

r

Ma Y

Mt

LM curve

450

the larger the income elasticity of money demand

the steeper the LM curve

r

Ma Y

Mt

LM curve

450

the smaller the income elasticity of money demand

the flatter the LM curve

Policy Implications

Policy Implication: a steeper LM curve(expansionary monetary policy)

r

Y

IS

LM

LM’

Y1 Y2

Policy Implication: a flatter LM curve(expansionary monetary policy)

r

Y

IS

LM

LM’

Y1 Y2

Policy Implication: a steeper LM curve(expansionary fiscal policy)

r

Y

IS

LM

Y1 Y2

IS’

Policy Implication: a steeper LM curve(expansionary fiscal policy)

r

Y

IS’

LM

Y1 Y2

IS

Extreme Cases

A vertical IS curve

r

Y

IS LM

LM’

monetary policy

A vertical IS curve

r

Y

IS

LM

IS’

Y1 Y2

no crowding out effect

fiscal policy

A vertical LM curve

r

Y

LM

Y1 Y2

LM

IS

monetary policy

A vertical LM curve

r

Y

LM

IS’

fiscal policy

IS

A horizontal IS curve

r

Y

LM

monetary policy

IS

LM’

Y1 Y2

A horizontal LM curve

r

Y

LM

fiscal policy

IS

Y1 Y2

IS’

AL 96/7

Y

IS1

LM1

Y*

IS2

IS3

LM2