Lecture7TheIS-LMModel(宏观经济学(南开大学,龚刚).ppt

Macroeconomics,Lecture 7 The IS - LM Model,I. Introduction,The objective integrate the previously discussed two models: the models for product market, and the model for money market and discuss how output and interest rate are determined.,I. Introduction,Why IS-LM The model presented in this lecture is often called the IS-LM model IS: meaning saving and investment, representing the equilibrium in product market. LM: meaning liquidity and money, representing the equilibrium in the money market.,II. Investment Determination,Why Need Investment? In Lecture 5, we have assumed that investment is autonomous and is simply given. For a complete model of output determination, we need to discuss how investment is determined. It is also investment that connects the model of product and the model of money market.,II. Investment Determination,The investment determination This is one of the most complicated issue in macroeconomics. Empirically, the investment function is the most difficult one to be estimated.,II. Investment Determination,The investment determination (continued) You can list as many as possible factors that could affect investment: Technical progress Expected market condition in the future Financial resource Government policy Investment environment,II. Investment Determination,Investment and interest rate There is no doubt that investment should depend on interest rate. If interest rate increase, investment should decrease. This can be considered from the following figure regarding the rate of returns on the various investment projects,II. Investment Determination,Investment and interest rate (continued),II. Investment Determination,Investment function I = f(i,) where . See the figure in the next page.,II. Investment Determination,Investment function (continued),II. Investment Determination,Remarks on the interest rate It is better to understand the interest rate in the investment function here to be the loan interest rate. This is different from the interest rate as discussed in the last lecture, the bond interest rate.,II. Investment Determination,Remarks on the interest rate (continued) There can be many interest rates in the real world Bond interest rate Loan interest rate (prime rate) Discount factor Federal fund rate,II. Investment Determination,Remarks on the interest rate (continued) Basic assumption: same variation (or linearly related) though different in values Therefore, we could assume a single interest rate to simplify our analysis in macroeconomics.,III. The Equilibrium in the Product and Money Markets,The equilibrium condition in product market The IS curve The relation between Y and i is negative in the IS curve (see the figure in the next page),III. The Equilibrium in the Product and Money Markets,The equilibrium condition in product market (continued),III. The Equilibrium in the Product and Money Markets,The equilibrium condition in money market LM curve The relation between Y and i in the LM curve is positive.,The equilibrium condition in money market (continued),III. The Equilibrium in the Product and Money Markets,III. The Equilibrium in the Product and Money Markets,The Equilibrium in the Product and Money Markets The IS-LM Model The solution: (Y*, i*), see the figure.,III. The Equilibrium in the Product and Money Markets,The equilibrium in the product and money markets (continued),Y,IV. The Dynamical Analysis of IS-LM Model,Determination of Y and i in the IS-LM relations In the IS relation: Y is determined by i In the LM relation: i is determined by Y.,IV. The Dynamical Analysis of IS-LM Model,Dynamics 1,IV. The Dynamical Analysis of IS-LM Model,Dynamics 1 (continued),IV. The Dynamical Analysis of IS-LM Model,Dynamics 2 indicating only one variable to be allowed to change within one period.,IV. The Dynamical Analysis of IS-LM Model,Dynamics 2 (continued),IV. The Dynamical Analysis of IS-LM Model,Dynamics 3,IV. The Dynamical Analysis of IS-LM Model,Dynamics 3 (continued),IV. The Dynamical Analysis of IS-LM Model,Dynamics 3 (continued),IV. The Dynamical Analysis of IS-LM Model,Dynamics 3 (continued),IV. The Dynamical Analysis of IS-LM Model,Why Important? All these different dynamics seems to express one of the stylist factors of an economy: the business cycles phenomena.,V. Change in Equilibrium,The Equilibrium could be changed due to the changes in the parameters: c, , h and k the exogenous variables, A, G and the functional form of f(.).,V. Change in Equilibrium,Change in government expenditure Consider a change (increase) in G, denoted as G. Shift the IS curve to the right Is the change in GDP, denoted as Y still satisfy the multiplier relation ?,IV. Change in Equilibrium,Change in government expenditure (continued),IV. Change in Equilibrium,Change in government expenditure (continued) Of course the answer is no, though Y still increases. The overall consequence: Interest rate increase Investment decrease (crowding out effect) Output Y increase.,IV. Change in Equilibrium,Change in money supply Consider a change (increase) in money supply. Shift LM curve to the right,IV. Change in Equilibrium,Change in money supply (continued),IV. Change in Equilibrium,Change in money supply (continued) The overall consequence Int