Chapter 24 Monetary and Fiscal Policy in the ISLM Model © 2005 Pearson Education Canada Inc 1 C : at given iA, Yad , Y IS shifts right Same reasoning when I , G , NX , T Shift in the IS Curve © 2005 Pearson Education Canada Inc 24-2 Shift in the LM Curve from a Rise in Ms M : at given Y , i in panel (b) and (a) LM shifts to the right © 2005 Pearson Education Canada Inc s A 24-3 Shift in the LM Curve from a Rise in M M : at given Y , i in panel (b) and (a) LM shifts to the left © 2005 Pearson Education Canada Inc d A 24-4 d Response to an Increase in M s M s : i , LM shifts right Y i © 2005 Pearson Education Canada Inc 24-5 Response to Expansionary Fiscal Policy G or T : Yad , IS shifts right Y i © 2005 Pearson Education Canada Inc 24-6 Summary: Factors that Shift IS and LM Curves © 2005 Pearson Education Canada Inc 24-7 Effectiveness of Monetary and Fiscal Policy M d is unrelated to i i , M d = M s at same Y LM vertical Panel (a): G , IS shifts right i , Y stays same (complete crowding out) Panel (b): M s , Y so M d , LM shifts right i Y Conclusion: Less interest sensitive is M d, more effective is monetary policy relative to fiscal policy © 2005 Pearson Education Canada Inc 24-8 s M vs i Targets When IS Unstable IS unstable: fluctuates from IS' to IS'' i target at i*: Y fluctuates from YI' to YI'' M target, LM = LM*: Y fluctuates from YM' to YM'' Y fluctuation is less with M target Conclusion: If IS curve is more unstable than LM curve, M target is preferred © 2005 Pearson Education Canada Inc 24-9 s M vs i Targets When LM Unstable LM unstable: fluctuates from LM' to LM'' i target at i*: Y = Y* M target: Y fluctuates from YM' to YM'' Y fluctuation is less with i target Conclusion: If LM curve is more unstable than IS curve, i target is preferred © 2005 Pearson Education Canada Inc 24-10 The ISLM Model in the Long Run Panel (a) Ms , LM right to LM2, go to point 2, i to i2, Y to Y2 Because Y2 > Yn, P , M/P , LM back to LM1, go back to point 1 Panel (b) G , IS right to IS2, go to point 2 where i = i2 and Y = Y2 © 2005 Pearson Education Because Y 2 > Yn, P , M/P , LM left to LM2, go to point 2', i = i2` and Y = Yn Canada Inc 24-11 Deriving AD Curve P , M/P , LM shifts in, Y Points 1, 2, 3 © 2005 Pearson Education Canada Inc 24-12 Shift in AD from Shift in IS , IS shifts right: Y in panel (b) AD shifts right in panel (a) ©At given P 2005 Pearson Education Canada Inc A 24-13 Shift in AD from Shift in LM At given P , LM shifts right: Y in panel (b) AD shifts right in panel (a) © 2005 Pearson Education Canada Inc A 24-14 ... G , NX , T Shift in the IS Curve © 2005 Pearson Education Canada Inc 24-2 Shift in the LM Curve from a Rise in Ms M : at given Y , i in panel (b) and (a) LM shifts to the right © 2005 Pearson... 2005 Pearson Education Canada Inc s A 24-3 Shift in the LM Curve from a Rise in M M : at given Y , i in panel (b) and (a) LM shifts to the left © 2005 Pearson Education Canada Inc d A 24-4... Education Canada Inc 24-6 Summary: Factors that Shift IS and LM Curves © 2005 Pearson Education Canada Inc 24-7 Effectiveness of Monetary and Fiscal Policy M d is unrelated to i i , M d = M s at same