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variables which affect demand for money
NOMINAL income $Y, +
i, ()

why Interest rate has a negative effect on money demand
 as interest rate increase,
 return of bonds increase,
 people put more wealth on bonds instead of money

equilibrium condition in the financial market(LM relation) and explain
MS=$Y L(i)

What does M(money supply) depends on
monetary policy of the central bank

shifting variables of demand for money
$Y

effect of buying bonds on bond price and interest rate and implications
 decrease interest rate,
 increase bond price

effect of changing the RRR
increase M

a decision of the central bank to lower the interest rate is equivalent to...
increasing money supply

monetary policy instruments for the central bank to change the money supply
interest rate(federal funds rate, discount rate)
required reserve ratio
open market operations

shifting variables of LM curve
M

deriving the LM curve
 increase Y
 Md curve shifts right
 eqm interest rate increase
 (one point of LM)

investment depends on
level of sales(Y, +)
interest rate(i, )

why investment depends on Y
 as output changes,
 demand changes,
 firms change investment in order to keep up capacity with demand

why ↓M changes output
i↑, investment↓, demand↓, output↓

why interest rate has a negative effect on investment
 high interest rate,
 cost of borrowing money increase
 investment decrease

what are the measures of fiscal expansion
 cut tax
 increase government spending

why is Z an increasing function of Y?
 Y increase,
 C and I increase,
 demand for goods increase

why is ZZ flatter than 45deg line?
 increase in the output will not lead to an oneforone increase in demand
 (by a factor of MPC)

shifting variables of IS curve
ZZ(demand for goods)

Deriving the IS curve
 increase I
 ZZ curve shift down(through decrease in investment)
 eqm output decrease
 (obtain one point on IS curve)

exogenous variables in the ISLM model
fiscal policy and monetary policy

how fiscal expansion change ISLM model
increases the demand in goods market
shift IS curve to the right

how monetary expansion change ISLM model
increase the money supply
shift LM curve to the right

is monetary expansion more investment friendly than fiscal expansion?
Yes
fiscal expansion:Y&I increase
monetary expansion: Y increase and i decrease

changes in autonomous spending has what effect on I
ambiguous

if investment is independent of interest rate
 IS curve is a vertical line
 fixed ouput

Decrease in money demand has equivalent effect as
Increase in money supply

factors that shift money demand
Use of atm: left
Worry about bank failure: right
decrease in price level: right

Looking at the effect of deficit reduction on investment from investmentsaving relationship
I=S+(TG)
TG↑, I↑
S=YTC
Y&C↓, Y↓>C↓(MPC), S↓
ambiguous

If Y is a variable in C and I
Z is an increasing function of Y

Let M/P=d1Yd2i, slope of the LM curve…
D1/d2

direct effect(of output on demand) of the multiplier
captured by c1+b1
horizontal shift of the IS curve

indirect effect of the multiplier
captured by b2d1/d

what is crowding out and its implication
increase in output due to shift in IS curveeqm output
effect of fiscal policy on interest rate limits the ability of fiscal policy to influence output

larger multiplier mean the sensitivity of consumption and investment to output is
larger

Effectiveness of fiscal policy depends on
Multiplier

crowing out(con’t)why and how the slope of LM curve affect effectiveness of fiscal policy(interest rate)
 G increase,
 Y increase
 money demand increase
 interest rate increase
amount of increase in interest rate depends on slope of LM curve
 d1/d2 is smaller
 the flatter LM curve
 the less increase in interest rate
 less crowding out

Implication of balanced budget change
follow the direction of G because the effect of G is always greater than that of T

if there is fiscal contraction, what variables must change?
Y, C&i

if consumer confidence change, what variables must change?
C, Y, i

if money supply change, what variables must change?
 i, I, Y, C
 (no change if investment is independent on interest rate)

definition of real money supply
stock of money measured in terms of goods

dynamic assumption of ISLM model...
based on the assumption, changing M will lead to... and changing fiscal policy will lead to...
 economy always on LM, only moves slowly to IS
 immediate change in i and no initial change in Y
 gradual change in i and gradual change in Y

with IS↑ and LM↓, under what condition will I be ambiguous?
 i must ↑
 if output ↓, I is lower
 output↑, I is ambiguous

slope and intercept of the IS curve
 (1c1b1)/b2;
 c0c1T+b0+G

investment is very sensitive to interest rate
 a flatter IS slope
 a less effective fiscal policy(small multiplier)

increasing M in higher MPC countries leads to...
 since flatter IS
 larger increase in output and smaller decrease in i

eqm Y ISLM combined: multliplier
1c1b1+b2d1/d2

eqm Y ISLM combined: autonomous spending
c0c1T+b0+b2/d2(M/P)+G

