Makro chap 8-9

Chapter 8: IS-LM and Policy Analysis

1. What is the IS curve, and how is it derived?

   • The IS curve represents equilibrium in the goods market, derived from the equality of investment and savings.

2. What is the LM curve, and how is it derived?

   • The LM curve represents equilibrium in the money market, derived from the equality of money demand and supply.

3. How do fiscal and monetary policies affect the IS-LM framework?

   • Fiscal policies shift the IS curve (e.g., increased government spending).

   • Monetary policies shift the LM curve (e.g., changes in the money supply).

4. What is crowding out?

   • When increased government spending raises interest rates, reducing private investment.

5. How does the central bank set interest rates?

   • By adjusting the money supply to achieve desired output and inflation targets.

Chapter 9: The Phillips Curve and Inflation-Unemployment Tradeoff

1. What is the Phillips Curve?

   • It shows the inverse relationship between inflation and unemployment in the short run.

2. How do inflation expectations affect the Phillips Curve?

   • Adaptive or rational expectations shift the curve, influencing its trade-off.

3. What is the natural rate hypothesis?

   • Inflation is stable only at the natural rate of unemployment, with no long-term trade-off.

4. What causes shifts in the Phillips Curve?

   • Supply shocks, changes in inflation expectations, and structural changes.