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16 Cards in this Set
- Front
- Back
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What are the IS/LM Model Assumptions?
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1) Investment will now be endogenous
2) Investment is determined by: -Interest rate -Level of Sales/ Level of Increase in Y 3) I = I(Y,i) |
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What is our formula for the IS/LM model?
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Y=C(Y-T)+I(Y,i)+G
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What is arbitrage?
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Taking advantage of a price difference between two or more markets
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What is leverage?
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Using borrowed capital to finance investments
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What is Collateralized loan?
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A loan secured by an asset
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What are the endogenous/exogenous variables?
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Endogenous:
Y, i Exogenous: M/P, G, and T |
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What is Fiscal Policy?
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The government's choice of G and T
(enacted by congress) |
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What is monetary policy?
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The use of the money supply by the central bank to affect interest rates and by implication economic activity and inflation
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What is Fiscal contraction?
What is Fiscal expansion? |
CONTRACTION
Fiscal policy that reduces the deficit (e.g. increase in T or decrease in G) EXPANSION: Fiscal policy that increases the deficit (e.g. increase in G or decrease in T) |
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What is Monetary contraction?
What is Monetary expansion? |
CONTRACTION:
Monetary policy that reduces Ms EXPANSION: Monetary policy that increases Ms |
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What caused to the 2001 recession?
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Investment fell.
The "dot com" bubble burst after people realized the web start-ups were not worth the investment. People were throwing money at almost any website or site idea. |
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What is true about the slope for demand (ZZ) in the IS model with ENDOGENOUS INVESTMENT?
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The slope depends on Marginal Propensity to Consume and I (Investment)
Slope can now be greater than 1 |
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What happens when taxes increase in the IS/LM model? (In Words)
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0) Start at equilibrium
1) Taxes increase 2) In the Goods Market, consumption decreases, which decreases demand, which decreases production (income), which decreases C and I, which decreases demand and the cycle repeats itself 3) As income decreases, money demand decreases, which decreases interest rates (i) 4) As interest rates fall, investment (I) rises. which leads to an increase in demand (ZZ), which leads to a production (income) increase, which leads to an increase of C and I, which leads to demand increases and the cycle repeats itself. (partially offsets step 2) |
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What happens when MONEY SUPPLY decreases in the IS/LM model? (In Words)
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0) Start at equilibrium
1) Decrease money supply (fed) 2) In the financial market, fed sells bonds, which leads to price decrease and interest rate increase 3) As i increase and I decreases in the goods market. This decreases demand, which leads to to a decrease in Y production (income), which leads to a decrease in both C and I and demand decreases and the cycle repeats itself 4) As income decrease, Md (money demand) decreases, which leads to lower interest rates, partially offsetting step 2 |
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What is nominal money supply?
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(M)
Money in terms of physical currency or checkable deposits |
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What is real money supply?
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(M/P)
Money supply in terms of Purchasing power. |
