Chapter 5: Goods and Financial Market ithe s-LMModel .5-1 The Goods market and the is relation 5-2: Financial Market and the lM relation e5-3: The Is-LM Model Exercise 54 Using a Policy Mⅸ 95-5: Adding Dynamics 5-6: Does the IS-LM Model Actually Capture What Happens in the Economy?
Chapter 5: Goods and Financial Market :The IS-LM Model 5-1:The Goods Market and the IS Relation 5-2:Financial Market and the LM Relation 5-3:The IS-LM Model :Exercise 5-4:Using a Policy Mix 5-5: Adding Dynamics 5-6:Does the IS-LM Model Actually Capture What Happens in the Economy?
5-1The Goods Market and the S Relation e Summarize what we learned in chapter 3 e Investment. Sales and the interest rate ●The| S curve e Shifts in the s curve e Summarize
5-1:The Goods Market and the IS Relation Summarize what we learned in chapter 3 Investment, Sales, and the interest rate The IS curve Shifts in the IS Curve Summarize
Summarize what we learned in chapter 3 e We characterized equilibrium in the goods market as the condition that production, Y, be equal to the demand for goods, Z We called this condition the is relation because it can be reinterpreted as the condition that investment be equal to saving
Summarize what we learned in chapter 3 We characterized equilibrium in the goods market as the condition that production,Y,be equal to the demand for goods, Z. We called this condition the IS relation, because it can be reinterpreted as the condition that investment be equal to saving
Summarize what we earned in chapter 3 e We defined demand as the sum of consumption, investment, and government spending. We assumed that consumption was a function of disposable income (income minus taxes), and took investment spending government spending, and taxes as given The equilibrium condition was given by Y=C(Y-D+l+G
Summarize what we learned in chapter 3 We defined demand as the sum of consumption,investment,and government spending. We assumed that consumption was a function of disposable income(income minus taxes), and took investment spending, government spending, and taxes as given. The equilibrium condition was given by Y=c(Y-T)+I+G
Summarize what we learned in chapter 3 Using this equilibrium condition, we then looked at the factors that changed equilibrium output. We looked at particular at the effects of changes in government spending and of shifts in consumption demand
Summarize what we learned in chapter 3 Using this equilibrium condition, we then looked at the factors that changed equilibrium output. We looked at particular at the effects of changes in government spending and of shifts in consumption demand
Investment sales and the interest rate e In our first model of output determination, investment was left unexplained--we assumed it was constant even when output changed Investment is in fact far from constant, and it depends primarily on two factors ● The level of sales ● The interest rate To capture these two effects we write the investment relation as follows =(XY,) 5.1 Equation(5. 1)states that investment depends on production, Y, and the interest rate, i
Investment, Sales, and the interest rate In our first model of output determination, investment was left unexplained—we assumed it was constant, even when output changed. Investment is in fact far from constant, and it depends primarily on two factors: ●The level of sales ●The interest rate To capture these two effects, we write the investment relation as follows: I=I(Y,i) (5.1) (+,-) Equation (5.1) states that investment depends on production, Y, and the interest rate,i
The s curve Taking into account the investment relation (5.1), the equilibrium condition in the goods market becomes Y=C(Y-D+l(Yi+G 5.2) The supply of goods(the left side)must be equal to the demand for goods(the right side) Equation (5.2)is our expanded is relation We can now look at what happens to output when the interest rate changes
The IS Curve Taking into account the investment relation (5.1), the equilibrium condition in the goods market becomes Y=c(Y-T)+I(Y,i)+G (5.2) The supply of goods (the left side) must be equal to the demand for goods (the right side) Equation (5.2) is our expanded IS relation. We can now look at what happens to output when the interest rate changes
Demand.z 45 Line ZZ (for interest 1 ZZ (for interest i'>i) OutputY Interest rate1 IS curve Y Output
Demand,Z 450Line ZZ A (for interest i) ZZ' (a) (for interest i'>i) A' Y' Y Output,Y interest rate i (b) i' A' i A IS curve Y' Y Output,Y
Shifts in thes curve Interest. 1 IS(for taxes T) s(for T'>T) OutputY
Shifts in the IS Curve Interest,i i IS(for taxes T) IS'(for T'>T) Y' Y Output,Y
Summarize e Equilibrium in the goods market implies that output is a decreasing function of the interest rate e This relation is represented by the downward- sloping is curve e Changed in factors that decrease or increase the demand for goods given the interest rate shift the is curve to the left or to the right
Summarize Equilibrium in the goods market implies that output is a decreasing function of the interest rate. This relation is represented by the downwardsloping IS curve. Changed in factors that decrease or increase the demand for goods given the interest rate shift the IS curve to the left or to the right