Presentation is loading. Please wait.

Presentation is loading. Please wait.

IS - LM Model By Wong Chuen-Ping 2 markets Goods Market Equilibrium: E = Y C + I = C + S I = S Money Market Equilibrium: Md = Ms.

Similar presentations


Presentation on theme: "IS - LM Model By Wong Chuen-Ping 2 markets Goods Market Equilibrium: E = Y C + I = C + S I = S Money Market Equilibrium: Md = Ms."— Presentation transcript:

1

2 IS - LM Model By Wong Chuen-Ping

3 2 markets Goods Market Equilibrium: E = Y C + I = C + S I = S Money Market Equilibrium: Md = Ms

4 S = 0.2Y - 40 I = 260 - 2000r In equilibrium : S = I 0.2Y - 40 = 260 - 2000r Y = 1500 - 10000r The Goods Market 1500 YSIr 60 0.10 700100 0.08 900140 1100180 0.04 1300220 0.02 260 0 500 0.06 IS equation

5 The Goods Market Y = 1500 - 10000r

6 IS curve IS curve shows all the combinations of real national income (Y) and real interest rate (r) at which the goods market is in equilibrium.

7 How to derive IS curve? r Y S I 45 0 IS I r1r1 S r2r2 I2I2 I1I1 S1S1 S2S2 Y1Y1 Y2Y2

8 ED & ES in product market r Y IS I=S E=Y A(Y, S )C (Y. S ) B S>I Y>E ES S { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/11/3269389/slides/slide_8.jpg", "name": "ED & ES in product market r Y IS I=S E=Y A(Y, S )C (Y. S ) B S>I Y>E ES SI Y>E ES S

9 Disequilibrium in product market r Y IS ED ES I>S E>Y I { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/11/3269389/slides/slide_9.jpg", "name": "Disequilibrium in product market r Y IS ED ES I>S E>Y IS E>Y I

10 rr I I Y Y SS 45 I S r1r1 I1I1 S1S1 Y1Y1 IS r2r2 Y2Y2 I2I2 S2S2 The IS Curve

11 IS Curve S, I YY r Y1Y1 Y2Y2 I1I1 S Y1Y1 I2I2 Y2Y2 r1r1 r2r2 IS at r 1, investment = I 1 at r 2, investment = I 2 Lower r, higher I

12 Ms =400 Mt = 0.25Y Ma = 250 – 2000r In equilibrium : Ms = Mt + Ma 400 = 0.25Y + 250 - 2000r Y = 600 + 8000r The Money Market 0.125 600 0.05 LM equation YMsMtMar 4001502500 1000400250150 1600400 0

13 The Money Market Y = 600 + 8000r YR 6000 100005 14000.1

14 LM curve LM curve shows all the combinations of real national income (Y) and real interest rate (r) at which the money market is in equilibrium.

15 How to derive LM curve? r Y Mt Ma LM Ma r1r1 Mt r2r2 A2A2 A1A1 T1T1 T2T2 Y1Y1 Y2Y2 K O H Ms=OH=OK

16 ED & ES in Money market r Y LM Md=Ms A(Y, Mt )C (Y. Mt ) B Md>Ms ES Md { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/11/3269389/slides/slide_16.jpg", "name": "ED & ES in Money market r Y LM Md=Ms A(Y, Mt )C (Y. Mt ) B Md>Ms ES MdMs ES Md

17 Disequilibrium in Money market r Y LM ED ES Md>Ms Md { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/11/3269389/slides/slide_17.jpg", "name": "Disequilibrium in Money market r Y LM ED ES Md>Ms MdMs Md

18 rr Ma Y Y Mt Ma Mt r1r1 A1A1 T1T1 Y1Y1 LM r2r2 Y2Y2 A2A2 T2T2 The LM Curve O H K Ms=OH=OK

19 LM Curve r MY r Md 1 Ms Y1Y1 Md 2 Y2Y2 r1r1 r2r2 LM at Y 1, Md = Md1 at Y 2, Md = Md 2 Higher Y, higher Md r1r1 r2r2

20 Equilibrium in Product & Money Market r LM IS YY1 r1 A

21 Disquilibrium in Product & Money Market r LM IS Y F G H J Ms Md > > < < I S > > < <

22 IS-LM Equations Goods Market C = 100 + 0.8Y I = 200 - 400r In equilibrium: Y = E = C + I IS equation: Y = 1500 - 2000r Money Market Ms = 300 Mt = 0.2Y Ma = 50 - 100r In equilibrium: Ms = Md =Mt + Ma LM equation: Y = 1250 + 500r R = 0.1 i.e. 10% Y = 1300

23 IS-LM Equations Goods Market C = 100 + 0.75Yd I = 300 - 7000r G = 525 T = 20%(Y-100) IS equation ? Money Market Ms = 800 Mt = 120 + 0.4Y Ma = 240 - 3000r LM equation ? r = 0.05 i.e. 5% Y = 1475 Y = 2350 - 17500r Y = 1100 + 7500r

24 Shifts in the IS curve r Y S I 45 0 IS1 I1 r1r1 S r2r2 I2I2 I1I1 S1S1 S2S2 Y1Y1 Y2Y2 I2 IS2 I

25 Increase in Investment ( or↑G) r IS 1 YY1Y1 r1 A IS 2 Y2Y2 ↑I, at same r, Y↑, △ Y = △ I x B IS shifts to the right

26 Shifts in the IS curve r Y S I 45 0 IS 1 I1I1 r1r1 S1S1 I1I1 S1S1 Y1Y1 Y2Y2 IS 2 S2S2 S

27 Decrease in Saving ( or ↓ T) r IS 1 YY1 r1 A IS 2 Y2 ↓ S, at same r, E ↑, Y ↑, B IS shifts to the right

28 Shifts in the LM curve r Y Mt Ma LM1 Ma r1r1 Mt A1A1 T1T1 Y1Y1 Ms LM2

29 Increase in Money Supply r LM 1 YY1 r1 A LM 2 B at same Y, ↑Ms, Ms > Md, r ↓ LM shifts to the right

30 Increase in Money Supply r LM 1 YY1Y1 r1 A LM 2 B Y2Y2 ↑Ms, at same r, Y↑, LM shifts to the right △ Y = △ Ms x

31 Shifts in the LM curve r Y Mt Ma LM1 Ma r1r1 Mt 1 A1A1 T1T1 Y1Y1 O Mt LM2 Mt 2

32 Decrease in Mt r LM 1 YY1 r1 A LM 2 B at same Y, Mt ↓, Ms > Md, r ↓ LM shifts to the right

33 Shifts in the LM curve r Y Mt Ma LM1 Ma1 r1r1 Mt 1 A1A1 T1T1 Y1Y1 O LM2 Ma 2 Ma

34 Increase in Ma r LM 1 YY1 r1 A LM 2 B at same Y, Ma↑, Ms < Md, r↑ LM shifts to the left

35 Increase in Investment (↑G, ↑C) r LM IS 1 YY1 r1 A IS 2 B r2 Y2

36 Increase in Saving (↑Tax) r LM IS 1 YY1 r1 A IS 2 B r2 Y2

37 Increase in Money Supply (↓Md) r LM 1 IS YY1Y1 r1 A LM 2 B r2r2 Y2Y2

38 Increase in demand for Money (↓Ms) r LM 1 IS YY1Y1 r1 A LM 2 B r2r2 Y2Y2

39 Slope of the IS curve & MPS Smaller MPS, greater multiplier, flatter IS r ↓, I ↑→↑Y Y Y1 r1 Y2 r2 r IS 1 IS 2 larger MPS, steeper IS Smaller MPS, flatter IS Y3 (ΔY = ΔI x )

40 Slope of IS & Interest elasticity of I more interest elastic investment, flatter IS r ↓, I ↑, Y Y1 r1 Y2 r2 r IS 1 IS 2 Less interest elastic I, steeper IS Y3 flatter IS more interest elastic, larger ΔI, largerΔY More interest elastic I,

41 Slope of LM & Income elasticity of Mt more income elastic Mt, steeper LM Y ↑, Mt ↑, Y Y1 r1 Y2 r LM 1 LM 2 more income elastic Mt, steeper LM Less income elastic Mt, flatter LM more income elastic Mt, larger ↑in Mt, largerΔr

42 Slope of LM & Interest elasticity of Ma less interest elastic Ma, steeper LM Y ↑, Mt ↑, Y Y1 r1 Y2 r LM 1 LM 2 less interest elastic Ma, steeper LM more interest elastic Ma, flatter LM Md > Ms, r↑to ↓Ma, less r elastic Ma, largerΔr

43 Fiscal Policy - ↑G r LM IS 1 YY1 r1 A IS 2 B r2 Y2 F AF =ΔG x Crowding-out effect

44 The crowding-out effect refers to the reduction in income resulting from an increase in interest rate. G   E   E >Y  Y   Mt  Md > Ms  r  r   I   Y  (crowding-out effect) The crowding-out effect

45 r LM IS 1 YY1 r1 A IS 2 B r2 Y2 F AF =ΔG x Crowding-out effect

46 condition of employment (unemployment, ? crowding-out effect) (full employment, ? Crowding-out effect) interest elasticity of demand for money, more interest elastic, smaller change in r, crowding-out effect ?. interest elasticity of investment, less interest elastic, when r , smaller  in I, crowding-out effect ?. Factors affecting the crowding-out effect smaller larger smaller

47 Fiscal Policy - ↑Tax r LM IS 1 YY1 r1 A IS 2 B r2 Y2 r LM IS 1 YY1 r1 A IS 2 B r2 Y2 Lump sum tax ↑, IS shifts left Tax rate ↑, IS steeper

48 Fiscal Policy - Equal↑in G & T r LM IS 1 YY1 r1 A IS 2 B r2 Y2 F AF =ΔG = ΔT Crowding-out effect

49 Monetary Policy - ↑Ms r LM 1 IS YY1Y1 r1 A LM 2 B r2r2 Y2Y2

50 Fiscal & Monetary Policies - ↑Ms + ↑G r LM 1 IS1 YY1 r1 A LM 2 B Y2 IS2

51 Effectiveness of Monetary Policy & slope of IS r LM 1 IS 1 YY0Y0 r0 A LM 2 r1r1 Y1Y1 IS 2 Y2Y2 r2r2 C Ms ↑→r↓→I↑, LM →right, Monetary Policy is more effective if IS is flatter B more interest elastic (flatter IS), larger ↑I, larger↑Y smaller MPS (flatter Y), larger ↑Y

52 Effectiveness of Fiscal Policy & slope of LM r LM1 IS 1 YY1 r1 A IS 2 B r2 Y2 Crowding-out effect LM2 C r3 Y3 Fiscal Policy is more effective if LM is flatter G ↑, IS →right, Y ↑ → Mt↑, Mt less income elastic, Ma more interest elastic, r ↑smaller, crowding-out smaller

53 r r Ma Y Y Mt Ma Mt r1r1 T1T1 Y1Y1 LM The LM Curve with liquidity trap O H K Ma – perfectly interest elastic Horizontal LM Y2Y2

54 r r Ma Y Y Mt Ma Mt r1r1 Y1Y1 LM The LM Curve with Ma perfectly interest inelastic O H K Ma – perfectly interest inelastic r2r2 vertical LM

55 rr I I Y Y SS 45 I S r1r1 I1I1 S1S1 Y1Y1 IS r2r2 The IS Curve with perfectly interest inelastic I Investment perfectly interest elastic IS vertical

56 Horizontal LM r LM IS 1 YY1 r1 A IS 2 B Y2 r LM IS 1 YY1 r1 A Fiscal Policy effective Monetary Policy ineffective G↑G↑ Ms ↑

57 Vertical LM rLM IS 1 YY1 r1 A IS 2 B r LM 1 IS 1 YY1 r1 A Fiscal Policy ineffective Monetary Policy effective r2 G↑G↑ Ms ↑ LM 2 r2 Y2 B

58 Vertical IS r LM IS 1 YY1 r1 A IS 2 B r LM 1 IS YY1 r1 A Fiscal Policy effective Monetary Policy ineffective r2 G↑G↑ Ms ↑ LM 2 r2 B Y2

59 Horizontal IS r IS LM YY1 r1 A r LM 1 IS Y Y1 r1 A Fiscal Policy ineffective Monetary Policy effective G↑G↑ Ms ↑ LM 2 B Y2


Download ppt "IS - LM Model By Wong Chuen-Ping 2 markets Goods Market Equilibrium: E = Y C + I = C + S I = S Money Market Equilibrium: Md = Ms."

Similar presentations


Ads by Google