Textbook Notes (362,820)
United States (204,237)
Economics (274)
ECON 305 (9)
Dr.Neri (9)

Econ 11.docx

3 Pages
Unlock Document

University of Maryland
ECON 305

Econ 11  Explaining fluctuations with the IS-LM model  The intersection of the IS and LM curve determines the level of national income  How fiscal policy shifts the IS curve and change SR equilibrium  Changes in fiscal policy change planned expenditure (IS)  Changes in government purchases • An increase in G, raises income at any interest rate (Key cross) and therefore shifts the IS curve to the right. ♦ Increase G, increases purchase of goods and services, increases planned expenditure, and stimulates production of goods and services, income rises ♦ Raises income and interest rates • Higher income causes higher demand, causing higher interest rates at same supply • When IR rises firms cut back on investment ♦ Partially offsets the rise in G  Changes in taxes • Effect expenditure through consumption instead • Adecrease in taxes shifts the IS curve to the right • Consumers spend more, increases PE ♦ Increases income and interest rates ♦ Interest rates depress investment and the increase is smaller for the IS curve than for the Key cross  How monetary policy shifts the LM curve and changes SR equilibrium  Change in money supply alters IR  Increase in M (money supply) increases real money balances (M/P) because the price level (P) is fixed in SR. • Leads to lower interest rate (liquidity theory) ♦ So LM curve shifts down  Lowers IR and raises level of income  Increase in M, people have extra money and put in banks, until the IR falls • Alow IR stimulates planned investment, increases PE, production and income • Monetary transmission mechanism: an increase in the money supply lowers the IR, which stimulates investment and expands the demand for goods and services.  Interaction between monetary and Fiscal policy  See graphs page 316  Shocks in the IS-LM Model  Shocks to IS curve • Exogenous changes in demand for goods and services ♦ Investors “animal spirits” feeling of optimism and pessimism change your demand ♦ Change in demand for consumer goods (buy more)  Shocks to LM curve • Exogenous changes in demand for money ♦ Less credit cards (increase amount of money people hold) money demand rises, IR higher, and LM curve shifts upward  Raise IR and depress income  Fed’s policy Instrument – The money supply or IR?  They must increase / decrease the money supply to alter the IR • Says altering the IR though 
More Less

Related notes for ECON 305

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.