Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 11 Aggregate Demand II Applying the IS-LM Model (Effects and…
Chapter 11
Aggregate Demand II
Applying the IS-LM Model
Effects and Fluctuation with IS-LM Model
Fiscal Policy effect is on IS curve
Monetary Policy effect is on LM curve
Interaction between monetary and fiscal policy
M, G, T are exogenous
BoC may or may not change M in response to changes in fiscal policy
Shocks in IS-LM model
IS Shocks
: exogenous changes in the demand for good and service.
Stock market boom/crash ∆C
Change in business or consumer confidence or expectations ∆I and/or ∆C
LM Shocks
: exogenous changes in the demand for money
Wave of credit card fraud increases demand for money
More ATMs or the internet reduce money demand
IS-LM as a Theory of Aggregate Demand
Aggregate Demand curve
Aggregate demand curve capture relationship between P and Y
Both fiscal and monetary policy affects AD curve
IS-LM just for short run - with aggregate demand, look beyond short run, to where price level can change
IS-LM in short run and long run
The thing that moves economy from short to long run is gradual adjustment of prices
Y goes back to natural rate of output in long run
Movements in IS-LM are along IS curve because firms increase/decrease production in the goods market
Movements in AD-AS are along AD curve