Outline of Text Material
I. Introduction
A. The goods market and the money market, discusd in previous chapters, do not operate independently. Events in one affect the other, and vice versa.
B. Looking at both simultaneously we can determine the values of aggregate output (income) and the interest rate that are consistent with the existence of equilibrium in both a
nd can analyze how policy (fiscal and monetary) affect both.
TEACHING TIP: All of the theoretical “pieces” of the IS–LM model are developed in the body of this chapter. You may be tempted, therefore, to go one step further and prent the IS–LM diagram as well, which is covered in the brief appendix to the chapter. Don’t. This diagram is too difficult for most introductory students. If your class has been struggling with the material already, prenting this diagram can cau a great deal of frustration. The very next chapter prents some challenging material on the aggregate demand and supply curves, and you may risk exhausting your students prematurely. On the other hand, for graphically sophisticated students, the IS–LM diagram pulls together the material and actually simplifies their understanding. You can assign the appendix as optional material and recommend it highly for tho who think they can handle it, but do not cover it in class. The text is designed so that this material can be safely skipped with no loss of continuity. (A numerical example of the IS–LM model is included below as a Teaching Tip.)
II. The Links Between the Goods Market and the Money Market
A. There are two key links.
1. Link 1: Income and the Demand for Money: Income, determined in the goods market, has considerable influence on the demand for money.
2. Link 2: Planned Investment Spending and the Interest Rate: The interest rate, which is determined in the money market, has effects on planned investment in the goods market.
B. Investment, the Interest Rate, and the Goods Market
1. When the interest rate falls, planned investment ris and vice versa.
a. The interest rate is the opportunity cost of investment.
b. The interest rate may also be an accounting cost if all or part of the investment is financed by borrowing.
2. A change in the interest rate will therefore also lead to a change in planned investme
燃气灶牌子
nt, causing total planned spending to change and changing equilibrium income.
TEACHING TIP: The assumption of autonomous investment from previous chapters is relaxed here. Be sure the causal lines are clear. The equilibrium interest rate is determined in the money market and in turn determines a particular level of planned investment in the goods market.
The shorthand notation ud in the text—reprinted following—is a uful teaching device. Be sure that students understand the full economic content of the words 对虾怎么做好吃又简单implies, leads to, and resulting in so that they do not just memorize the shorthand without the underlying understanding.
飞扬跋扈
r I AE Y
名字符号
In words: A ri in interest rates implies a decrea in investment, which leads to a decrea in planned aggregate expenditure 新年快乐贺卡图片resulting in a decrea in aggregate output.
宫内出血Also r I AE Y
In words: A fall in interest rates implies an increa in investment, which leads to an increa in planned aggregate expenditure resulting in an increa in aggregate output.
奉献的事例
C. Money Demand, Aggregate Output (Income), and the Money Market
1. The demand for money depends on the interest rate and on the level of income.
2. Changes in Y therefore shift the money demand curve and cau changes in the interest rate.
3. With a fixed money supply, an increa in Y will lead to higher levels of r and vice versa.
TEACHING TIP: From the perspective of the money market, income is determined exogenously. An increa in income means that at the original interest rate people don’t have enough money to finance their incread spending. The interest rate must ri to choke off money demand and encourage people to hold bonds.
The equilibrium interest rate is not determined exclusively in the money market. Changes in aggregate output (income) (Y), which take place in the goods market, shift the money demand curve, and cau changes in the interest rate. Symbolically:
Y r
In words: An increa in output (income) 仔姜leads to an increa in the demand for money resulting in an increa in the interest rate.
Also Y r
In words: A decrea in output (income) leads to a decrea in the demand for money resulting in a decrea in the interest rate.
TEACHING TIP: If you are planning to prent the IS–LM model, consider introducing it here. Becau each point on the IS curve reprents an equilibrium in the market for goods and rvices, and each point on the LM curve reprents an equilibrium in the money market, IS–LM analysis makes it easier to answer questions like: “But won’t the in
crea in Y that resulted from an increa in I caud by the drop in r have a feedback effect on Md, thereby causing r to ri and I to fall, and where does it all stop?” The answer lies at the interction of the IS and LM curves.
