Keynesian Economics and IS-LM - topic 8

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30 Terms

1

multiplier effect formula

M= 1/(1-MPC)

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2

MPC

marginal propensity to consume

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3

marginal propensity to consume

the fraction of extra income that a household consumes rather than saves

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4

marginal propensity to save

the fraction of extra income that households saves rather than consumes

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5

multiplier effect - all withdrawals formula

M= 1/MPS + MPT + MPM

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6

the effect of a change is fiscal policy

an increase in government spending and a reduction in taxes would both push the IS curve out to the right

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7

the effect of a change in monetary policy

an increase in money supply shifts the LM curve to the right

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8

what causes the a new equilibrium to occur on the IS curve

a fall in the interest rate which raises the the expenditure line

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9

what causes the a new equilibrium to occur on the LM curve

a rise in national income which increases the demand for money

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10

what does the IS and LM curves describe

equilibrium in goods market and money market and together determines the general equilibrium in the economy

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11

IS

investment and saving

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12

LM

liquidity and money

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13

what links the goods and money markets

the rate of interest (i)

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14

when interest rates go down

the level of national income goes down, and investmnet increases because its cheaper to borrow money

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15

IS curve 2 axis

y axis - interest rate, x -axis - national income

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16

every single point on the IS curve

can be traced back to a point of equilibrium in the goods market (keynsian cross)

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17

slope of the IS curve depends on

how responsive consumption and investment expenditures are to changes in interest rates

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18

the more responsive C and I are….

the flatter the IS curve

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19

The IS curve represents

the combinations of interest rates and real GDP at which the goods market is in equilibrium

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20

the LM curve represents

the combinations of interest rates and real GDP at which the money market is in equilibrium

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21

in the IS-LM model a reduction in autonomous expenditure such as gov spending

leads to a leftward shift of the IS curve because lower government spending decreases aggregate demand, leading to a decrease in output at any given interest rate. The LM curve remains unchanged unless there is a corresponding change in monetary policy.

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22

shifts in IS curve

autonomous expenditure, exports, expectations

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23

shifts in IS curve direction

fall in any of the changes - left, rise in changes - right

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24

axis’s for the money market

y- interest rate, x - quantity of money

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25

what will cause the LM curve to shift

if the CB expands or contracts the money supply

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26

rise in money supply effect on LM curve

shift downwards to the right

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27

equilibrium in the economy is found where

the IS curve intersects the LM curve, interest rate Ie and national income level Ye

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28

effect of a change in fiscal policy

shifts the IS curve out to the right/ left

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29

effect of change in monetary policy

shifts LM curve to the right or left ( expansion shifs it to the right

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30

if CB’s want to maintain interest rates following a shift in the Is curve

they must increase the money supply and shift the LM curve to the right

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