Chapter 5: The Analysis of IS- LM Model Gang Gong March 14. 2002 Copyright Notes: This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author
Chapter 5: The Analysis of ISLM Model Gang Gong March 14, 2002 Copyright Notes:This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author
Introduction The objective of this chapter is to put the 2o previously discussed two models-the models of product market and money market --together and discuss how output and interest rate is determined The model presented in this chapter is often called the IS-LM model (Is: the product o market model, LM the money market model)
Introduction • The objective of this chapter is to put the previously discussed two models -- the models of product market and money market --together and discuss how output and interest rate is determined • The model presented in this chapter is often called the IS-LM model (IS: the product market model; LM the money market model)
p Investment Determination 5 In chapter 3, we have assumed that y 2 investment is autonomous and thus it is simply given. This is certainly not satisfying For a complete model of output determination, we need to discuss how investment is determined
Investment Determination • In chapter 3, we have assumed that investment is autonomous and thus it is simply given. This is certainly not satisfying. For a complete model of output determination, we need to discuss how investment is determined
p Investment Determination 5 The determination of investment is one ofy the most complicated issue in 02 macroeconomics. You can list as many as possible factors that could affect investment Empirically, the investment function is the y most difficult one to be estimated . y
Investment Determination • The determination of investment is one of the most complicated issue in macroeconomics. You can list as many as possible factors that could affect investment. Empirically, the investment function is the most difficult one to be estimated
p Investment Determination 5 Yet there is no doubt that investment 2o2 Should depend on interest rate. Ifinterest 5 rate increase. investment should decrease Why?(to be expressed in the class)
Investment Determination • Yet, there is no doubt that investment should depend on interest rate. If interest rate increase, investment should decrease. Why? (to be expressed in the class)