Download IS(I 2 )

Chapter 10
IS –LM and
Aggregate Demand
i (Nominal interest rate)
©1999 South-Western College Publishing
S2
i2*
S1
(D PE/P2 - D PE/P1)
i1*
Figure 10.1
Saving and Investment
2
i (Nominal interest rate)
Investment, Saving, and the IS Curve
Panel A
S1
S*
i1
S2
i*
i2
I
Saving and Investment
Figure 10.1A
3
©1999 South-Western College Publishing
i (Nominal interest rate)
Investment, Saving, and the IS Curve
Panel B
i1
i*
i2
Figure 10.1B
IS
Y1
Y*
Y (Income)
Y2
4
©1999 South-Western College Publishing
i (Nominal interest rate)
Government Purchases and the IS Curve
Panel A
*
S
i*2
i*1
Figure 10.3A
I + D(G1)
I + D(G2)
Saving and Investment
5
©1999 South-Western College Publishing
i (Nominal interest rate)
Government Purchases and the IS Curve
Panel B
i*2
i*1
IS (G1)
Y*
Figure 10.3B
IS(G2)
Y (Income)
6
©1999 South-Western College Publishing
i (Nominal interest rate)
Taxes and the IS Curve
Panel A
S2*
S*1
i1*
i*
2
Figure 10.4A
I + D(T2) I + D(T1)
Saving and Investment
7
©1999 South-Western College Publishing
i (Nominal interest rate)
Taxes and the IS Curve
Panel B
i1*
i2*
Figure 10.4B
IS(T1)
IS(T2)
Y*
Y (Income)
8
©1999 South-Western College Publishing
i (Nominal interest rate)
Shifts in Investment and the IS Curve
Panel A
S*
i*2
i*1
Figure 10.5A
I1 + D
I2 + D
Saving and Investment
9
©1999 South-Western College Publishing
i (Nominal interest rate)
Shifts in Investment and the IS Curve
Panel B
i*2
i*1
Figure 10.5B
IS(I
)
2
IS(I1)
Y*
Y (Income)
10
©1999 South-Western College Publishing
i (Nominal interest rate)
The Complete IS–LM Model
Figure 10.6
( )
M
LM P
A
B
C
IS(G,T - TR, D PE/P)
Y*
Y (Income)
11
©1999 South-Western College Publishing
P (Price Level)
Deriving the Aggregate Demand Curve
Panel A
P1
A
B
P2
Y1
Figure 10.7A
Y*
Y (Income)
Y2
12
©1999 South-Western College Publishing
i (Nominal interest rate)
Shifts in Investment and the IS Curve
Panel B
LM(M/P1)
IS
i*1
C
LM(M/P2)
i*2
D
Y1 Y* Y2
Y (Income)
Figure 10.7B
13
©1999 South-Western College Publishing
P (Price Level)
How Fiscal Policy Shifts the
Aggregate Demand Curve
Panel A
P1
A
B
Y1 Y*
Y2
AD(G2)
AD(G1)
Y (Income)
Figure 10.8A
14
©1999 South-Western College Publishing
i (Nominal interest rate)
How Fiscal Policy Shifts the
Aggregate Demand Curve
Panel B
LM(M/P1)
i2
D
IS(G2)
i1
C
Y1 Y*
Y2
IS(G2)
Y (Income)
Figure 10.8B
15
©1999 South-Western College Publishing
P (Price Level)
How Monetary Policy Shifts the
Aggregate Demand Curve
Panel A
A
P1
Y1
Figure 10.9A
B
Y*
Y2
Y (Income)
AD(M2)
AD(M1)
16
©1999 South-Western College Publishing
i (Nominal interest rate)
How Monetary Policy Shifts the
Aggregate Demand Curve
Panel B
LM(M1/P1)
C
LM(M2/P1)
i1
i2
D
Y1
Y*
Y (Income)
Figure 10.9B
Y2
IS
17
©1999 South-Western College Publishing
©1999 South-Western College Publishing
Factors That Shift the Aggregate Demand Curve
Variables
D PE/P
G
I
TR
T
M
Table 10.1
Expected inflation
Government expenditure
Investment (productivity)
Taxes
Transfers
Taxes
Money supply
Direction of Shift
Right
Right
Right
Right
Left
Right
18
Demand and Supply Shocks
Panel A: Effect of Demand Shock
P (Price Level)
LRAS
SRAS
C
AD3
A
B
Y*
Y (Income)
Figure 10.10A
AD1
AD2
19
©1999 South-Western College Publishing
Demand and Supply Shocks
Panel B: Pre-World War II Inflation and Growth
Inflation
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.2
Figure 10.10B
+ +++
+
+
+
+
+
+
+
+
+ +
+
+
+ +
+
-0.1
0.0
0.1
GDP growth
0.2
20
©1999 South-Western College Publishing
Demand and Supply Shocks
Panel C: Effect of Supply Shock
P (Price Level)
LRAS
SRAS1
SRAS3
D
A
SRAS2
E
AD
Y*
Y (Income)
Figure 10.10C
21
©1999 South-Western College Publishing
Demand and Supply Shocks
Panel D: Post-World War II Inflation and Growth
Inflation
0.2
0.1
0.0
+ ++
+ + + +++
++++
+
++ ++
+
-0.1
-0.2
-0.3
-0.2
Figure 10.10D
-0.1
0.0
0.1
GDP growth
0.2
22
©1999 South-Western College Publishing
END