lecture 3 Flashcards
(17 cards)
investment
depends on the level of sales and the interest rate (I = I(Y,i))
IS relation taking into account investment relation
shows the relation between interest rate and output.
fiscal policy as IS curve
means by which the government adjusts its spending levels and tax rates to influence economy. As T and G are in the IS formula changes to T and G will shift the curve.
rightwards shift in IS curve
expansionary policy, for example decreasing taxes or increasing government spending
leftwards shift in IS curve
contractionary policy
interest rate determination
M = £YL(i) where m = nominal money stock, £YL(i) = demand for money, £Y = nominal income, i = nominal interest rate
LM relation
in equilibrium real money supply = real money demand so M/P = YL(i)
monetary policy
policy in which central bank attempts to stimulate economy by changing the supply of money. Changes in money supply shift LM curve.
rightwards shift in LM curve
expansionary policy, increasing money supply.
leftwards shift in LM curve
contractionary policy
crowding out effect
occurs when expansionary fiscal policy causes interest rates to rise and decreases private spending and investment
flat LM curve
large effect on output, small change in interest rate
flat IS curve
little effect on output or interest rate
policy mix
the combination of monetary and fiscal policies.
fiscal policy in history
has not been used effectively. Too slow to enact
liquidity trap
if i = 0 and people have enough money for transaction purposes they become indifferent to holding money and bonds. The demand for money becomes horizontal. Implies that if i = 0, further increases in Ms will have no effect on i.
monetary policy in history
used effectively, quick to enact, less predictable effect especially in liquidity trap
