Response 3: hold y constant If Congress raises G L the s curve shifts LM right 3 o keep y constant Fed reduces t shift LM curve left Results △y=0 △F=-f1 CHAPTER 11 Aggregate Demand Il slide 10
CHAPTER 11 Aggregate Demand II slide 10 If Congress raises G, the IS curve shifts right IS1 Response 3: hold Y constant Y r LM1 r1 IS2 Y2 To keep Y constant, r2 Fed reduces M to shift LM curve left. = Y 0 3 1 = − r r r LM2 Results: Y1 r3
Estimates of fiscal policy multipliers from the dri macroeconometric model Estimated Estimated Assumption about value of value of monetary policy △yG △y7 Fed holds money supply constant 0.60 0.26 Fed holds nominal interest rate constant 193 1.19 CHAPTER 11 Aggregate Demand Il slide 11
CHAPTER 11 Aggregate Demand II slide 11 Estimates of fiscal policy multipliers from the DRI macroeconometric model Assumption about monetary policy Estimated value of Y/G Fed holds nominal interest rate constant Fed holds money supply constant 1.93 0.60 Estimated value of Y/T −1.19 −0.26
Shocks in the / s-M Model Is shocks: exogenous changes in the demand for goods services Examples: stock market boom or crash o change in households wealth →△C change in business or consumer confidence or expectations →△rand/or△C CHAPTER 11 Aggregate Demand Il slide 12
CHAPTER 11 Aggregate Demand II slide 12 Shocks in the IS-LM Model IS shocks: exogenous changes in the demand for goods & services. Examples: • stock market boom or crash change in households’ wealth C • change in business or consumer confidence or expectations I and/or C
Shocks in the / s-M Model LM shocks: exogenous changes in the demand for money Examples: a wave of credit card fraud increases demand for money more atMs or the internet reduce money demand CHAPTER 11 Aggregate Demand Il slide 13
CHAPTER 11 Aggregate Demand II slide 13 Shocks in the IS-LM Model LM shocks: exogenous changes in the demand for money. Examples: • a wave of credit card fraud increases demand for money • more ATMs or the Internet reduce money demand
EXERCISE Analyze shocks with the Is-LM model Use the Is-LM model to analyze the effects of 1 a boom in the stock market makes consumers wealthier. 2. After a wave of credit card fraud consumers use cash more frequently in transactions For each shock a. use the Is-LM diagram to show the effects of the shock on y and r b. determine what happens to C I and the unemployment rate CHAPTER 11 Aggregate Demand Il slide 14
CHAPTER 11 Aggregate Demand II slide 14 EXERCISE: Analyze shocks with the IS-LM model Use the IS-LM model to analyze the effects of 1. A boom in the stock market makes consumers wealthier. 2. After a wave of credit card fraud, consumers use cash more frequently in transactions. For each shock, a. use the IS-LM diagram to show the effects of the shock on Y and r . b. determine what happens to C, I, and the unemployment rate