1.2 Response 2:hold r constant If Congress raises G, the IS curve shifts right LM1 M2 To keep r constant, Fed increases M to r2 shift LM curve right. Results: IS2 △Y=y3-Y IS △r=0 YiY2Y3 CHAPTER 11 Aggregate Demand ll slide 10
CHAPTER 11 Aggregate Demand II slide 10 If Congress raises G, the IS curve shifts right IS1 Response 2: hold r constant Y r LM1 r1 Y1 IS2 Y2 r2 To keep r constant, Fed increases M to shift LM curve right. = − Y Y Y 3 1 = r 0 LM2 Y3 Results: 1.2
1.2 Response 3:hold Y constant If Congress raises G, LM2 the IS curve shifts right LM1 To keep Y constant, Fed reduces M to shift LM curve left. r Results: IS2 △Y=0 51 △r=3-1 CHAPTER 11 Aggregate Demand ll slide 11
CHAPTER 11 Aggregate Demand II slide 11 If Congress raises G, the IS curve shifts right IS1 Response 3: hold Y constant Y r LM1 r1 IS2 Y2 r2 To keep Y constant, Fed reduces M to shift LM curve left. = Y 0 3 1 = − r r r LM2 Results: Y1 r3 1.2
1.2 Estimate of fiscal policy multiplier 1.IS curve shifts right 1 by △G LM 1-MPC causing output income to rise. 2.This raises money demand,causing the IS2 interest rate to rise. IS 3.which reduces investment, Y1 Y so the final increase in y 3 is smaller than 1 △G 1-MPC CHAPTER 11 Aggregate Demand ll slide 12
CHAPTER 11 Aggregate Demand II slide 12 causing output & income to rise. IS1 Estimate of fiscal policy multiplier 1. IS curve shifts right Y r LM r1 Y1 1 by 1 MPC G − IS2 Y2 r2 1. 2. This raises money demand, causing the interest rate to rise. 2. 3. .which reduces investment, so the final increase in Y 1 is smaller than 1 MPC G − 3. 1.2
1.2 Estimates of fiscal policy multipliers from the DRI macroeconometric model Estimated Estimated Assumption about value of value of monetary policy △YH△G △YH△T Fed holds money -0.26 supply constant 0.60 Fed holds nominal interest rate constant 1.93 -1.19 Return CHAPTER 11 Aggregate Demand ll slide 13
CHAPTER 11 Aggregate Demand II slide 13 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 1.2 Return