宏观经济学 教案Chapter11.docx

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1、CHAPTER 11MONEY, INTEREST, AND INCOMEChapter Outline Equilibrium in the goods sector: the IS-curve Equilibrium in the money sector: the LM-curve Determination of a short-run macro-equilibrium in the IS-LM model Real money balances The fiscal policy multiplier The monetary policy multiplier The forma

2、l derivation of the AD-curveChanges from the Previous EditionThe material in this chapter remains essentially the same; Figures 11-1 and 11-2 have been updated.Introduction of the MaterialChapter 11 deals with the IS-LM model, a static, short-run macro-model, in which it is assumed that the interest

3、 rate can vary while the price level is still fixed. This model is used to analyze the interaction of the goods and money sectors, and it serves to give students an understanding of the role of interest rates as an additional determinant of aggregate demand. As a result, students will be better able

4、 to assess how the composition of aggregate demand changes as interest rates fluctuate. This, in turn, allows for a more comprehensive analysis of the short-run effects of fiscal and monetary policy changes on the level of output demanded.First, the IS-curve is derived as a logical extension of the

5、Keynesian cross diagram. In the Keynesian cross diagram, the interest rate is assumed to be constant; but now it is allowed to fluctuate. When the interest rate falls, it becomes more profitable to increase the existing capital stock, so planned investment spending increases. In other words, the C+I

6、+G+NX-line of the Keynesian diagram shifts up. Intended spending now exceeds actual output, and firms will respond to the unintended inventories decrease by increasing production. The level of output will continue to increase up to the point where actual output is again equal to intended spending. T

7、hus we see why the IS-curve is downward sloping: lower interest rates lead to more investment spending and therefore a higher level of output. When the IS-curve is derived graphically in Figure 11-5, it becomes obvious that the IS-curve shows all combinations of output levels and interest rates at w

8、hich the goods sector is in equilibrium.The slope of the IS-curve is determined by two factors: the interest sensitivity of investment spending and the size of the expenditure multiplier. As investment spending becomes more interest sensitive, any change in the interest rate leads to a larger shift

9、in the C+I+G+NX-line, which leads to a higher level of equilibrium output and thus a flatter IS-curve. If the value of the expenditure multiplier becomes larger, any shift in the C+I+G+NXJ -line caused by a specificIf aggregate demand becomes more sensitive to interest rates, any change in the inter

10、est rate will cause the C+I+G+NX-line to shift up by a larger amount and, given a certain size of the expenditure multiplier a, this will increase the level of equilibrium income by a larger amount. As a result, the IS-curve will become flatter.2 .b. Monetary policy changes affect interest rates. Th

11、is leads to a change in intended spending, which is reflected in a change in income. In 2.a. it was noted that a steep IS-curve means either that the expenditure multiplier a is small or that intended spending is not very interest sensitive. Assume now that the central bank undertakes expansionary m

12、onetary policy, which will reduce interest rates. If intended spending is not very interest sensitive, this will result in only a small increase in aggregate demand. Similarly, if the expenditure multiplier is small, a change in spending will not significantly affect output. With a steeper IS-curve,

13、 monetary policy changes have a weaker effect on equilibrium output.3 . Assume for simplicity that money supply always remains fixed. Any increase in income will increase money demand and the resulting excess demand for money will drive the interest rate up. This, in turn, will reduce the quantity o

14、f money balances demanded to the point where the money sector is back in equilibrium. But if money demand is not very interest sensitive, a larger increase in the interest rate is needed to reach a new equilibrium in the money sector. As a result, the LM-curve becomes steeper.Along the LM-curve, an

15、increase in the interest rate is always associated with an increase in income. This means that an increase in money demand (a shift of the money demand curve to the right due to an increase in income) has to be offset by a decrease in the quantity of money demanded (a movement along the money demand

16、 curve from right to left caused by an increase in the interest rate) to keep the money sector in equilibrium. But if money demand becomes more income sensitive, the shift in the money demand curve associated with a specific change in income will be larger and a larger increase in the interest rate

17、is required to bring the money sector back into equilibrium. Therefore the LM-curve becomes steeper as money demand becomes more income sensitive.4a A horizontal LM-curve implies that the public is willing to hold whatever money is supplied at any given interest rate. In such a case, changes in inco

18、me will not affect the equilibrium interest rate in the money sector. But if the interest rate remains constant, we are back to the analysis of the simple Keynesian model used in Chapter 10. In other words, there is no offsetting effect (or crowding-out effect) to fiscal policy.4 .b. A horizontal LM

19、-curve implies that changes in income do not affect interest rates in the money sector. Therefore, if expansionary fiscal policy is implemented, the IS-curve shifts to the right, but the interest rate remains constant. Tn this case, the level of investment spending is not negatively affected and the

20、re is no crowding-out effect. In terms of Figure 11-3, the interest rate no longer serves as the link between the goods and asset markets.5 .c. A horizontal LM-curve results if the public is willing to hold whatever money balances are supplied at a given interest rate. This situation is called the l

21、iquidity trap. Similarly, if the Fed is prepared to peg the interest rate at a certain level, then any change in income will always be accompanied by an appropriate change in money supply. This will lead to continuous shifts in the LM-curve, which is equivalent to having a horizontal LM-curve, since

22、 the interest rate is never allowed to change.6 . From the material presented in the text we know that when intended spending becomes more interest sensitive, the IS-curve becomes flatter. Now assume that an increase in the interest rate stimulates saving and thus reduces consumption. But even if sa

23、ving is not affected by a change in the interest rates, most likely consumption on durable goods will be reduced if interest rates rise. This means that now not only investment spending but also consumption is negatively affected by an increase in the interest rate. In other words, the C+I+G+NX-line

24、 in the Keynesian cross diagram now shifts down further than previously and the level of equilibrium income decreases more than before. In other words, the IS-curve becomes flatter.This can also be shown algebraically, since we can now write the consumption function in the following way:C = Co + cYD

25、 - giIn a simple model of the expenditure sector without income taxes, the equation for aggregate demand will now beAD = Ao + cY - (b + g)i.From Y = AD = Y = 1/(1 - c)Ao - (b + g)i = i = l/(b + g)A0 - (1 - c)/(b + g)YTherefore, the IS-curve now becomes flatter as its slope has been reduced from (1 -

26、 c)/b to(l - c)/(b + g).7 . In the IS-LM model, a simultaneous decline in the interest rate and the level of output can only be caused by a shift of the IS-curve to the left. This shift could easily have been caused by a decrease in private spending due to negative business expectations or a decline

27、 in consumer confidence. In 1991, the economy was in a recession and firms did not want to invest in new machinery since they did not want to be left holding unwanted inventory. Since consumer confidence was very low and people feared lay-offs, consumer spending decreased also. In the IS-LM diagram

28、below, the adjustment process can be described as follows:Io J = Y J (the IS-curve shifts left) ma J = i J I T = Y T.Effect: Y J and i 1 .0丫2 Y1YTechnical Problems.a. Each point on the IS-curve represents an equilibrium in the expenditure sector. (Note that this is a closed economy, that is, NX = 0)

29、. The IS-curve can be derived by setting actual income equal to intended spending, orY = C + I + G =(0.8)l - (0.25)Y + 900 - 50i + 800 = 1,700 + (0.6)Y - 50i =(0.4)Y = 1,700 - 50i = Y = (2.5)(1,700 - 50i)= Y = 4,250 - 125i. IS-curve.b. The IS-curve shows all combinations of the interest rate and the

30、 output level such that the expenditure sector (the goods market) is in equilibrium, that is, actual output equals intended spending. A decrease in the interest rate stimulates investment spending, making intended spending greater than actual output. The resulting unintended inventory decrease leads

31、 firms to increase their production until actual output is again equal to intended spending. This means that the IS-curve is downward sloping.lc Each point on the LM-curve represents an equilibrium in the money sector. Therefore the LM-curve can be derived by setting real money supply equal to real

32、money demand, that is,M/P = L = 500 =(0.25)Y - 62.5i =Y = 4(500 + 62.5i)= Y = 2,000 + 250i. LM-curve.d. The LM-curve shows all combinations of the interest rate and level of output such that the money sector is in equilibrium, that is, the demand for real money balances is equal to the supply of rea

33、l money balances. An increase in income will increase the demand for real money balances. Given a fixed real money supply, this will lead to an increase in interest rates, which will then reduce the quantity of real money balances demanded until the money sector is again in equilibrium. In other wor

34、ds, the LM-curve is upward sloping.1 .e. The equilibrium levels of income and the interest rate are determined by the intersection of the IS-curve with the LM-curve. At this point, the expenditure sector and the money sector are both in equilibrium simultaneously.From IS = LM = 4,250 - 125i = 2,000

35、+ 250i = 2,250 = 375i = i = 6二Y = 4,250 - 125*6 = 4,250 - 750 = Y = 3,500Check: Y = 2,000 + 250*6 = 2,000 + 1,500 = 3,500.a. As we have seen in La，the value of the expenditure multiplier is oc = 2.5. This multiplier is derived in the same way as in Chapter 10. But now intended spending also depends

36、on the interest rate, so we no longer have Y = aA0, but ratherY = a(A0 - bi)=(1/1 -c + ct)(A0 - bi) = Y = (2.5)(1,700 - 50i) = 4,250 - 125i.2 .b. In the IS-LM model, an increase in government purchases (G) will have a smaller effect on output than in the model of the expenditure sector used in Chapt

37、er 10, in which interest rates are assumed to be fixed. This can be demonstrated most easily with a numerical example. If government purchases are increased by AG = 300, the IS-curve shifts parallel to the right byAIS = (2.5)(300) = 750.Therefore, the equation of the new IS-curve is: Y = 5,000 - 125

38、i.From IS= LM = 5,000 - 125i = 2,000 + 250i =375i = 3,000 = i = 8= Y = 2,000 + 250*8 = Y = 4,000 = AY = 500When interest rates are assumed to be fixed, the size of the expenditure multiplier is a = 2.5, that is, (AY)/(AG)= 750/300 = 2.5. However, when interest rates are allowed to vary, the size of

39、the multiplier is reduced to ai = (AY)/(AG) = 500/300 = 5/3 = 1.67.3 .c. An increase in government purchases by AG = 300 causes a change in the interest rate from i0 = 6 to ii = 8, that is, by 2 percentage points. Therefore government spending has to change by AG = 150 to increase the interest rate

40、by one percentage point.4 d The simple multiplier a = 2.5 in 2.a. shows the magnitude of the horizontal shift in the IS- curve, given a change in autonomous spending by one unit. But an increase in income increases money demand and this leads to an increase in the interest rate. The higher interest

41、rate crowds out some investment spending and this has a dampening effect on the level of output. The multiplier effect in 2b is therefore smaller than the multiplier effect in 2.a., and has been reduced to ai = 1.67.5 a. An increase in the income tax rate (t) will reduce the size of the expenditure

42、multiplier (a). But as the expenditure multiplier becomes smaller, the IS-curve becomes steeper. As we can see from the equation for the IS-curve, a change in the income tax rate (t) will cause a rotation around its vertical intercept, as is shown below:Y = a(A0 - bi) = 1/(1 -c + ct)(A0 - bi) = i =

43、(l/b)A0 - (a/b)Y = (l/b)A0 -(1 - c + ct)/bY.In other words, as the income tax rate (t) gets larger, the slope of the IS-curve gets steeper, while the vertical intercept remains unaffected.6 b. If the IS-curve shifts to the left and becomes steeper, the equilibrium income level will decrease. A highe

44、r tax rate will reduce private spending and this will lead to a lower level of national income.3.c.0Y2 Y1Effect: Y J and i JAs we can see from the diagram below, the equilibrium level of income and the interest rate both decrease when the income tax rate is increased. The adjustment to the new equil

45、ibrium can be expressed as follows:t T = C J = Y = ma I = i = I T = Y .4a. If money demand is less interest sensitive, then the LM-curve is steeper and monetary policy changes have a stronger effect on equilibrium income. If money supply is changed to a new fixed level, the adjustment to a new equil

46、ibrium in the money sector has to come solely through changes in money demand. If money demand is less interest sensitive, any increase in money supply requires a larger increase in income and a larger decrease in the interest rate in order to bring the money sector into a new equilibrium.The adjust

47、ment process in each of the two diagrams is the same, but in the case of a more interest-sensitive money demand (a flatter LM-curve), the change in Y and i will be smaller.(M/P) T = i I = I T = Y 1 = ma = i T Effect: Y T and i JSection 11-5 derives the equation for the LM-curve asi = (l/h)kY - (M/P)

48、and the equation for the monetary policy multiplier as(AY)/A(M/P) = (b/h)y.If money demand becomes more interest sensitive, the value of h becomes larger and the slope of the LM-curve becomes flatter, while the size of the monetary policy multiplier becomes smaller.7 b. An increase in money supply d

49、rives the interest rate down and the more interest rate sensitive money demand is, the less the interest rate has to change to achieve a new equilibrium in the money sector. But the decrease in the interest rate stimulates intended spending and therefore the level of output. If money demand is more interest sensitive, a smaller increase in incom