1. IS –LM and Aggregate Demand Chapter 10

2. 2 ©1999 South-Western College Publishing Figure 10.1 Saving and Investment i (Nominal interest rate) i1i1 * i2i2 * (  P E /P 2 -  P E /P 1 ) S2S2 S1S1

3. 3 ©1999 South-Western College Publishing Figure 10.1A Saving and Investment i (Nominal interest rate) i2i2 i1i1 i*i* Investment, Saving, and the IS Curve Panel A I S2S2 S*S* S1S1

4. 4 ©1999 South-Western College Publishing Figure 10.1B Y (Income) i (Nominal interest rate) i2i2 i1i1 i*i* Investment, Saving, and the IS Curve Panel B IS Y*Y* Y2Y2 Y1Y1

5. 5 ©1999 South-Western College Publishing Figure 10.3A i2i2 * i1i1 * i (Nominal interest rate) Saving and Investment S*S* Government Purchases and the IS Curve Panel A I + D(G 1 ) I + D(G 2 )

6. 6 ©1999 South-Western College Publishing Figure 10.3B Government Purchases and the IS Curve i2i2 * i1i1 * i (Nominal interest rate) Panel B Y (Income) IS(G 2 ) IS (G 1 ) Y*Y*

7. 7 ©1999 South-Western College Publishing Figure 10.4A i (Nominal interest rate) Saving and Investment i2i2 * i1i1 * Taxes and the IS Curve Panel A S2S2 * S1S1 * I + D(T 1 )I + D(T 2 )

8. 8 ©1999 South-Western College Publishing Figure 10.4B Taxes and the IS Curve IS(T 1 ) IS(T 2 ) i (Nominal interest rate) i2i2 * i1i1 * Panel B Y (Income) Y*Y*

9. 9 ©1999 South-Western College Publishing Figure 10.5A i (Nominal interest rate) Saving and Investment i2i2 * i1i1 * S*S* I 1 + DI 2 + D Panel A Shifts in Investment and the IS Curve

10. 10 ©1999 South-Western College Publishing Figure 10.5B i2i2 * i1i1 * i (Nominal interest rate) Panel B Y (Income) IS(I 2 ) IS(I 1 ) Y*Y* Shifts in Investment and the IS Curve

11. 11 ©1999 South-Western College Publishing Figure 10.6 i (Nominal interest rate) Y (Income) Y*Y* The Complete IS–LM Model LM IS(G,T - TR,  P E /P) A C B  M P 

12. 12 ©1999 South-Western College Publishing Figure 10.7A P2P2 Deriving the Aggregate Demand Curve Y2Y2 Y1Y1 Y (Income) P1P1 Panel A P (Price Level) Y*Y* B A

13. 13 ©1999 South-Western College Publishing Figure 10.7B i2i2 * i1i1 * i (Nominal interest rate) Panel B Y (Income) Shifts in Investment and the IS Curve Y*Y* LM(M/P 1 ) LM(M/P 2 ) IS C D Y2Y2 Y1Y1

14. 14 ©1999 South-Western College Publishing Figure 10.8A P1P1 P (Price Level) How Fiscal Policy Shifts the Aggregate Demand Curve Y2Y2 Y1Y1 Y (Income) Panel A AD(G 2 ) AD(G 1 ) Y*Y* A B

15. 15 ©1999 South-Western College Publishing Figure 10.8B How Fiscal Policy Shifts the Aggregate Demand Curve Panel B Y2Y2 Y1Y1 Y (Income) Y*Y* i (Nominal interest rate) i1i1 i2i2 D C LM(M/P 1 ) IS(G 2 )

16. 16 ©1999 South-Western College Publishing Figure 10.9A P1P1 P (Price Level) How Monetary Policy Shifts the Aggregate Demand Curve Y2Y2 Y1Y1 Y (Income) Panel A Y*Y* AD(M 2 ) AD(M 1 ) A B

17. 17 ©1999 South-Western College Publishing Figure 10.9B Y2Y2 Y (Income) i (Nominal interest rate) i2i2 i1i1 How Monetary Policy Shifts the Aggregate Demand Curve Y1Y1 C D IS LM(M 2 /P 1 ) LM(M 1 /P 1 ) Panel B Y*Y*

18. 18 ©1999 South-Western College Publishing Table 10.1 Taxes Factors That Shift the Aggregate Demand Curve VariablesDirection of Shift Expected inflationRight Government expenditure Investment (productivity) Right TransfersRight LeftTaxes Money supplyRight  P E /P G I TR T M

19. 19 ©1999 South-Western College Publishing Figure 10.10A Y (Income) Y*Y* P (Price Level) Panel A: Effect of Demand Shock Demand and Supply Shocks AD 2 AD 1 AD 3 SRASLRAS B A C

20. 20 + ©1999 South-Western College Publishing Figure 10.10B Demand and Supply Shocks Panel B: Pre-World War II Inflation and Growth Inflation GDP growth -0.1-0.20.00.10.2 0.0 0.1 0.2 -0.1 -0.2 -0.3 + + + + + ++ ++ + + + + + + + + +

21. 21 ©1999 South-Western College Publishing Figure 10.10C Y (Income) Y*Y* P (Price Level) Panel C: Effect of Supply Shock Demand and Supply Shocks SRAS 1 LRAS SRAS 2 SRAS 3 D A E AD

22. 22 + ©1999 South-Western College Publishing Figure 10.10D Demand and Supply Shocks Panel D: Post-World War II Inflation and Growth Inflation GDP growth -0.1-0.20.00.10.2 0.0 0.1 0.2 -0.1 -0.2 -0.3 + + + + + + + + + + + + + ++ + + + +

23. END