ADASShortRun.pptVIP

AD-AS Short Run Building the short run AD-AS model from the IS-LM framework Theory of Short Run Fluctuations Fiscal Policy and the IS curve (government expenditure) Fiscal Policy and the IS curve (government expenditure) Fiscal Policy and the IS curve (tax changes) Note that government expenditure has a larger effect than does the same change in taxes. Monetary Policy and the LM curve Monetary and Fiscal Policy Interactions How the economy responds to a tax increase depends on the response of the money supply. Monetary and Fiscal Policy Interactions Monetary and Fiscal Policy Interactions IS-LM as a theory of Aggregate Demand We now allow price level to vary in the IS-LM model. This provides a theory for the position and slope of the AD curve. IS-LM as a theory of Aggregate Demand If we hold price constant we can see the effects of monetary and fiscal policy on AD via IS-LM. IS-LM as a theory of Aggregate Demand IS-LM and AD-AS the Short Run and the Long Run Now let’s add short-run and long-run AS to our IS-LM and AD models. Assume the economy is operating below full employment output. The Algebra of the IS-LM theory of AD The algebra behind the system is a bit tedious. But, by solving the LM curve for “r” and plugging into the IS curve which contains “r” on the right hand side you obtain the IS-LM equilibrium condition or AD curve. The Algebra of the IS-LM theory of AD Conclusions In this section we derived the AD curve via the IS-LM equilibrium condition. We looked at fiscal and monetary policy effects on the IS-LM model. We looked at the shifting effects that monetary and fiscal policies have on the AD curve and used the IS-LM model with the AD-AS model to explain short run and long run changes to the economy. Keynesian Cross Money Market IS Curve LM Curve IS-LM Model AS Curve AD Curve AD-AS Model Short-run Fluctuations Explanation The IS curve is generated from the Keynesian Cross and the LM curve is generated from the market for real money balances. Now