Lecture 7 The IS-LM Model(宏观经济学(南开大学,龚刚).pptVIP

Macroeconomics Lecture 7 The IS - LM Model I. Introduction The objective integrate the previously discussed two models: the models for product market, and the model for money market and discuss how output and interest rate are determined. I. Introduction Why IS-LM The model presented in this lecture is often called the IS-LM model IS: meaning saving and investment, representing the equilibrium in product market. LM: meaning liquidity and money, representing the equilibrium in the money market. II. Investment Determination Why Need Investment? In Lecture 5, we have assumed that investment is autonomous and is simply given. For a complete model of output determination, we need to discuss how investment is determined. It is also investment that connects the model of product and the model of money market. II. Investment Determination The investment determination This is one of the most complicated issue in macroeconomics. Empirically, the investment function is the most difficult one to be estimated. II. Investment Determination The investment determination (continued) You can list as many as possible factors that could affect investment: Technical progress Expected market condition in the future Financial resource Government policy Investment environment II. Investment Determination Investment and interest rate There is no doubt that investment should depend on interest rate. If interest rate increase, investment should decrease. This can be considered from the following figure regarding the rate of returns on the various investment projects II. Investment Determination Investment and interest rate (continued) II. Investment Determination Investment function I = f(i,…) where . See the figure in the next page. II. Investment Determination Investment function (continued) II. Investment Determination Remarks on the interest rate It is better to understand the interest rate in the investment function h