Lecture 6: ISLM 2

1
Lecture 6 IS-LM (2)

• Review Find equilibrium in goods and financial
  markets (Y,i). Monetary and fiscal policy
• Episodes
• Some dynamics
• Facts

2
Monetary Policy
s
s
M
M
i
d
M
M
Money
3
Equilibrium in M rather than Central Bank M
Ms H c ?(1-c)
Ms Md gt
H 1 P
Y L(i) c ?(1-c)
Examples a) Y2k b) Prudence c) OMO with
multiplier
4
LM
LM
i
i
i1

i0

Md(Y1)
Md(Y0)
Y1
Y0
Y
M
A) Expansionary Monetary Policy B) Y2k
5
IS
OLD Y C(Y-T) I G
I I(Y,i)

-
IS Y C(Y-T) I(Y,i) G
Why IS?
6
IS
Z(i0)
Z(i1)
i0
A) Fiscal Policy B) Optimism
i1
IS
Y
Y0
Y1
7
IS-LM Model
i
LM
IS
Y
A) Fiscal policy B) Monetary policy C) Mix
8
Episodes

• The Clinton-Greenspan policy mix
• German unification

9
Dynamics
i
LM
LM
IS
Y
Monetary
Contraction
SLOW GOODS MARKET / FAST FINANCIAL
MARKETS
10
Facts

• Insert Figure 5.11
• Insert Table 5.1