This is a very substantial chapter, and among the most challenging in the text. I encourage you to go over this chapter a little more slowly than average, or at least recommend to your students that they study it extra carefully. I have included a number of in-class exercises to give students immediate reinforcement of concepts as they are covered, and also to break up the lecture. If you need to get through the material more quickly, you can omit some or all of these exercises (perhaps assigning them as homeworks, instead). A graph unfolds on slides 27-31. If you create handouts of this file for your students (or create a PDF version for them to download from the web), you might consider omitting slides 28 and 30 to save paper, as they contain intermediate animations.

Context Chapter 9 총수요 총공급 개념의 소개. Chapter 10 the IS-LM model 설명 (총수요곡선도출의 배경). In Chapter 11, we will use the IS-LM model to 정책과 경제충격의 영향 총수요곡선 도출 대공황 (Great Depression)의 원인

Equilibrium in the IS-LM Model The IS curve는 재화시장의 균형을 나타내고 Y r LM IS r1 The LM curve 금융시장의 균형을 나타냄. Y1 두 곡선의 교차점이 두 시장을 동시에 만족하는 균형점.

재정정책과 IS-LM모형 정책입안자는 재정정책: G and/or T 금융정책: M Y r LM IS 정책입안자는 재정정책: G and/or T 금융정책: M 을 통해 거시경제 변수에 영향을 줄 수 있다. r1 Y1

정부지출의 확대 1. IS 의 이동 Y r LM 생산과 소득의 증가. IS2 IS1 r2 Y2 r1 Y1 2. r1 Y1 2. 이는 실질화폐수요의 증가.. 이자율 상승… 1. Chapter 10 showed that an increase in G causes the IS curve to shift to the right by (G)/(1-MPC). 3. …투자의 감소, 결과적으로 Y의 증가는 3.

조세 감면 소비자는 조세감면에 따른 소득증가분 중 (1MPC)를 저축하므로 세금감면에 따른 지출의 증가 (T) 는 정부지출의 증가 (G )보다 작다. and the IS curve shifts by Y r LM IS2 IS1 r2 2. Y2 r1 Y1 1. 1. Chapter 10 used the Keynesian Cross to show that a decrease in T causes the IS curve to shift to the right by (-MPCT)/(1-MPC). If your students ask why the IS curve shifts to the right when there’s a negative sign in the expression for the shift, remind them that T < 0 for a tax cut, so the expression actually is positive. The term showing the distance of the shift in the IS curve is almost the same as in the case of a government spending increase, where the numerator of the fraction equals (1) for government spending rather than (-MPC) for the tax cut. Here’s the intuition: Every dollar of a government spending increase adds to aggregate spending. However, for tax cuts, the fraction (1-MPC) of the tax cut leaks into saving, so aggregate spending only rises by MPC times the tax cut. …so the effects on r and Y are smaller for a T than for an equal G. 2. 2.

금융정책: 통화량 증가 M r LM1 LM2 r1 2. …이자율 하락 r2 IS 3. …투자의 증가.. 생산과 소득의 증가 Y 1. M > 0 는 LM curve를 아래로 혹은 오른쪽으로 이동 LM1 LM2 IS r1 Y1 2. …이자율 하락 r2 Y2 3. …투자의 증가.. 생산과 소득의 증가 Chapter 10 showed that an increase in M shifts the LM curve to the right. Here is a richer explanation for the LM shift: The increase in M causes the interest rate to fall. [People like to keep optimal proportions of money and bonds in their portfolios; if money is increased, then people try to re-attain their optimal proportions by “exchanging” some of the money for bonds: they use some of the extra money to buy bonds. This increase in the demand for bonds drives up the price of bonds -- and causes interest rates to fall (since interest rates are inversely related to bond prices). The fall in the interest rate induces an increase in investment demand, which causes output and income to increase. The increase in income causes money demand to increase, which increases the interest rate (though doesn’t increase it all the way back to its initial value; instead, this effect simply reduces the total decrease in the interest rate).

금융 및 재정정책의 상호작용 Model: 금융 및 재정정책 변수는 외생적 (M, G and T ) Real world: 금융정책 입안자는 재정정책 변수의 변화에 따른 대응으로 통화량을 조절 할 수도 있다. 또한 그 반대의 경우도 가능하다.

중앙은행의 대응: G > 0 국회가 정부지출 증가를 승인: G. 중앙은행의 대응: 1. 통화량 불변 M 2. 이자율 불변 r 3. 총소득 불변 Y In each case, the effects of the G are different:

Response 1: 통화량 불변 M If Congress raises G, the IS curve shifts right Y r LM1 IS2 IS1 If Fed holds M constant, then LM curve doesn’t shift. Results: r2 Y2 r1 Y1

Response 2: 이자율 불변 r If Congress raises G, the IS curve shifts right Y r LM1 IS2 LM2 IS1 이자율을 고정(r) 중앙은행은 통화량 증가(M ) LM 이동 r2 Y2 r1 Y1 Y3 Results:

Response 3: 소득 불변 Y If Congress raises G, the IS curve shifts right LM2 If Congress raises G, the IS curve shifts right Y r LM1 Y1 IS2 r3 IS1 Y를 고정하기 위해 중앙은행은 통화긴축 LM curve 이동. r2 Y2 r1 Results:

재정정책 승수의 측정 Estimated value of Y / G Estimated value of Y / T from the DRI macroeconometric model Estimated value of Y / G Estimated value of Y / T Assumption about monetary policy 통화량 불변 0.60 0.26 The preceding slides show that the impact of fiscal policy on GDP depends on the Fed’s response (or lack thereof). This slide shows estimates of the fiscal policy multipliers under different assumptions about monetary policy; these estimates are consistent with the theoretical results on the preceding slides. First, the slide shows estimates of the government spending multiplier for the two different monetary policy scenarios. Then, the slide reveals the tax multiplier estimates. (If you wish, you can turn off the animation so that everything appearing on the slide appears at one time. Just click on the “Slide Show” pull-down menu, then on “Custom animation…”, then uncheck all of the boxes next to the elements of the screen that you do not wish to be animated. Regarding the estimates: First, note that the estimates of the fiscal policy multipliers are smaller (in absolute value) when the money supply is held constant than when the interest rate is held constant. This is consistent with the results from the IS-LM model presented in the preceding few slides. Second, notice that the tax multiplier is smaller than the government spending multiplier in each of the monetary policy scenarios. This should make sense from material presented earlier in this chapter: the government spending multiplier (for a constant money supply) is 1/(1-MPC), while the tax multiplier is only (-MPC)/(1-MPC). 이자율 불변 1.93 1.19

IS-LM Model과 충격 IS shocks: 재화와 용역시장에서의 외생적 수요충격 Examples: 기업과 소비자의 향후 전망치의 변화  I and/or C

Shocks in the IS-LM Model LM shocks: 화폐수요에 대한 외생적 변화. Examples: 신용카드 사기 증가에 따른 화폐수요 증가 자동화 기기보급 및 인터넷 뱅킹으로 인한 화폐수요 감소

연습 Use the IS-LM model to analyze the effects of 주식시장 활황으로 가계의 부 증가. 카드사기 증가로 소비자의 결재를 위한 화폐수요 증가. For each shock, IS-LM diagram 으로 Y와 r 변화를 . C, I, and the unemployment rate를 . Earlier slides showed how to use the IS-LM model to analyze fiscal and monetary policy. Now is a good time for students to get some hands-on practice with the model. Also, note that part (b) helps students learn that shocks and policies can potentially affect all of the model’s endogenous variables, not just the ones that are measured on the axes. After working this exercise, your students will better understand the following case study on the 2001 U.S. economic slowdown that immediately follows. Suggestion: Instead of having students work on these exercises individually, get them into pairs. One student of each pair works on the first shock, the other student works on the second shock. Give them 5 minutes to work individually on the analysis of the shock. Then, allow 10 minutes (5 for each student) for students to present their results to their partners. This activity gives students immediate application and reinforcement of the concepts, so students learn them better and will then better understand and appreciate the remainder of your lecture on Chapter 11. Answers: 1a. The IS curve shifts to the right, because consumers feel they can afford to spend more given this exogenous increase in their wealth. This causes Y and r to rise. 1b. C rises for two reasons: the stock market boom, and the increase in income. I falls, because r is higher. u falls, because firms hire more workers to produce the extra output that is demanded. 2a. (This is a continuation of the in-class exercise at the end of the PowerPoint presentation of Chapter 10.) The increase in money demand shifts the LM curve to the left: We are assuming that all other exogenous variables, including M and P, remain unchanged, so an increase in money demand causes an increase in the value of r associated with each value of Y (this can be seen easily using the Liquidity Preference diagram). This translates to an upward (i.e. leftward) shift in the LM curve. This shift causes Y to fall and r to rise. 2b. The fall in income causes a fall in C. The increase in r causes a fall in I. The fall in Y causes an increase in u.

미 연방은행의 금융정책 뉴스에서: “the Fed 가 이자율을 0.5포인트 낮추었다” The Fed targets the Federal Funds rate: it announces a target value, and uses monetary policy to shift the LM curve as needed to attain its target rate. In case your students aren’t familiar with the Fed Funds rate, you might briefly explain that it’s the rate banks charge each other on overnight loans. Since most short-term interest rates move closely together, the changes in the Fed Funds rate caused by monetary policy end up causing similar changes in most other short-term rates. Long term rates may well also move in the same direction, but they are also affected by other factors beyond the scope of this chapter. Chapter 18 discusses monetary policy in detail.

IS-LM 과 총수요 이제껏 가격이 고정되어 있다고 가정하고 이자율과 소득과의 관계를 나타내는 IS- LM을 살펴보았다 그러나, P의 변화는 the LM 에 영향을 주고 Y에도 그러하다. 총수요곡선은 aggregate demand curve (introduced in chap. 9 ) P 와 Y의 관계이다

총수요 곡선  Y 총수요 곡선의 기울기: P  (M/P )  LM shifts left  r  I LM(P2) 총수요 곡선의 기울기: P  (M/P )  LM shifts left  r  I  Y IS LM(P1) r2 r1 Y2 Y1 Y P P2 It might be useful to explain to students the reason why we draw P1 before drawing the LM curve: The position of the LM curve depends on the value of M/P. M is an exogenous policy variable. So, if P is low (like P1 in the lower panel of the diagram), then M/P is relatively high, so the LM curve is over toward the right in the upper diagram. If P is high, like P2, then M/P is relatively low, so the LM curve is more toward the left. Because the value of P affects the position of the LM curve, we label the LM curves in the upper panel as LM(P1) and LM(P2). P1 AD Y2 Y1

금융정책과 총수요곡선 중앙은행의 정책: M  LM shifts right  r  I Y r LM(M1/P1) 중앙은행의 정책: M  LM shifts right IS LM(M2/P1) r1 Y1 r2 Y2  r  I  Y at each value of P Y P AD2 AD1 It’s worth taking a moment to explain why we are holding P fixed at P1: To find out whether the AD curve shifts to the left or right, we need to find out what happens to the value of Y associated with any given value of P. This is not to say that the equilibrium value of P will remain fixed after the policy change (though, in fact, we are assuming P is fixed in the short run). We just want to see what happens to the AD curve. Once we know how the AD curve shifts, we can then add the AS curves (short- or long-run) to find out what, if anything, happens to P (in the short- or long-run). P1

재정정책과 총수요곡선 재정확장 정책 (G and/or T ) 총수요 증가 agg. demand: T  C Y r 재정확장 정책 (G and/or T ) 총수요 증가 agg. demand: T  C  IS shifts right  Y at each value of P LM IS2 Y2 r2 IS1 Y1 r1 Y P AD2 AD1 P1

IS-LM 과 AD-AS 장단기 분석 9장: 단기적 변화가 장기 균형으로 가도록 하는 것은 가격의 점진적 변화이다. 9장: 단기적 변화가 장기 균형으로 가도록 하는 것은 가격의 점진적 변화이다. In the short-run equilibrium, if then over time, the price level will rise The next few slides put our IS-LM-AD in the context of the bigger picture - the AD-AS model in the short-run and long-run, which was introduced in Chapter 9. fall remain constant

IS 충격과 장단기 경제 Negative IS 충격 IS 와 AD 좌측이동, Y 감소. LM(P1) IS1 IS2 AD1 r LRAS LM(P1) IS1 IS2 AD2 Negative IS 충격 IS 와 AD 좌측이동, Y 감소. AD1 Y P LRAS SRAS1 P1 Abbreviation: SR = short run, LR = long run

The SR and LR effects of an IS shock Y r LRAS LM(P1) 단기 새로운 균형은, IS2 IS1 Y P LRAS AD2 SRAS1 P1 AD1

The SR and LR effects of an IS shock Y r LRAS LM(P1) In the new short-run equilibrium, IS2 IS1 시간이 지남에 따라, P 가격의 점진적 하락, SRAS 아래로 이동 M/P 증가, LM 아래로 이동 Y P LRAS AD2 SRAS1 P1 AD1

The SR and LR effects of an IS shock Y r LRAS LM(P1) SRAS2 P2 LM(P2) IS2 IS1 Over time, P gradually falls, which causes SRAS to move down M/P to increase, which causes LM to move down Y P LRAS AD2 SRAS1 P1 AD1

The SR and LR effects of an IS shock Y r LRAS LM(P1) SRAS2 P2 LM(P2) IS2 이는 장기 균형점에 도달 할때까지 IS1 Y P LRAS AD2 SRAS1 A good thing to do: Go back through this experiment again, and see if your students can figure out what is happening to the other endogenous variables (C, I, u) in the short run and long run. P1 AD1

EXERCISE: Analyze SR & LR effects of M Draw the IS-LM and AD-AS diagrams as shown here. Suppose Fed increases M. Show the short-run effects on your graphs. Show what happens in the transition from the short run to the long run. How do the new long-run equilibrium values of the endogenous variables compare to their initial values? Y r LRAS LM(M1/P1) IS Y P AD1 LRAS This exercise has two objectives: 1. To give students immediate reinforcement of the preceding concepts. 2. To show them that money is neutral in the long run, just like in chapter 4. You might have your students try other exercises using this framework: * the short-run and long-run effects of expansionary fiscal policy. Have them compare the long-run results in this framework with the results they obtained when doing the same experiment in Chapter 3 (the loanable funds model). * Immediately after a negative shock pushes output below its natural rate, show how monetary or fiscal policy can be used to restore full-employment immediately (i.e., without waiting for prices to adjust). SRAS1 P1

Unemployment (right scale) 대공황 Unemployment (right scale) Real GNP (left scale) This chart presents data from Table 11-2 on p.296 of the text. For data sources, see notes accompanying that table. Note the very strong negative correlation between output and unemployment.

지출가설: IS 곡선에 대한 충격 공황은 재화 및 용역에 대한 지출의 외생적 하락 - IS 곡선의 수축적 (좌향) 이동 증거: 생산과 이자율이 동시에 하락함.

지출가설: Reasons for the IS shift 주식시장 붕괴  외생적 C Oct-Dec 1929: S&P 500 17%하락 Oct 1929-Dec 1933: S&P 500 71%하락 주택투자의 대규모 감소 1920년대 과도한 주택투자의 여파 금융기관의 여신축소 및 부실화 그릇된 재정정책 조세 수입 감소에 따른 정부지출 축소와 균형예산을 위한 조세강화 In item 2, I’m using the term “correction” in the stock market sense.

통화공급의 과도한 축소가 원인 evidence: M1 25% 하락 ( 1929-1933년) But, 두가지 문제: 통화가설: LM곡선에 대한 충격 통화공급의 과도한 축소가 원인 evidence: M1 25% 하락 ( 1929-1933년) But, 두가지 문제: P 가격의 급격한 하락, so M/P 실재적으로 다소 상승 1929-31. 명목이자율의 하락,LM곡선의 좌향이동과는 상반된 결과 .

통화가설의 또 다른 설명: 디플레이션의 효과 대공황의 원인은 디플레이션: P 25%하락 during 1929-33. 통화가설의 또 다른 설명: 디플레이션의 효과 대공황의 원인은 디플레이션: P 25%하락 during 1929-33. 이러한 디플레이션은 M의 축소와 관계 있다 , so M이 주요한 요인 어떻게 디플레이션이 경제에 영향을 주었는가?

통화가설의 또 다른 설명: 가격하락의 효과 안정화 효과: P  (M/P )  LM shifts right  Y 통화가설의 또 다른 설명: 가격하락의 효과 안정화 효과: P  (M/P )  LM shifts right  Y Pigou effect: P  (M/P )  소비자 부   C  IS shifts right  Y

통화가설의 또 다른 설명: 가격하락의 효과 예상치 못한 디플레이션의 불안정화 효과: debt-deflation theory(부채-디플레이션효과) P (if 예상치 못했다면)  구매력이 채무자로부터 채권자로 이전됨  채무자 소비축소, 채권자 소비증대  if 채무자의 한계소비성향이 대체로 크다면 전체소비는 하락, the IS curve shifts left, and Y falls

통화가설의 또 다른 설명: 가격하락의 효과 예상된 디플레이션의 불안정화 효과: e  r  (명목이자율에 대한 i) 통화가설의 또 다른 설명: 가격하락의 효과 예상된 디플레이션의 불안정화 효과: e  r  (명목이자율에 대한 i)  I  because I = I (r )  계획된 지출과 총수요 하락   income & output  The textbook (from the bottom of p.299 through p.300) uses an “extended” IS-LM model, which includes both the nominal interest rate (measured on the vertical axis) and the real interest rate (which equals the nominal rate less expected inflation). Because money demand depends on the nominal rate, which is measured on the vertical axis, the change in expected inflation doesn’t shift the LM curve. However, investment depends on the real interest rate, so the fall in expected inflation shifts the IS curve: each value of i is now associated with a higher value of r, which reduces investment and shifts the IS curve to the left. Results: income falls, i falls, and r rises --- which is exactly what happened from 1929 to 1931 (see table 11-2 on pp.296-7). This slide gives the basic intuition, which students often can grasp more quickly and easily than the graphical analysis. After you cover this material in your lecture, it will be easier for your students to grasp the analysis on pp.299-300.

Chapter summary a theory of aggregate demand 1. IS-LM model a theory of aggregate demand exogenous: M, G, T, P exogenous in short run, Y in long run endogenous: r, Y endogenous in short run, P in long run IS curve: goods market equilibrium LM curve: money market equilibrium

Chapter summary 2. AD curve shows relation between P and the IS-LM model’s equilibrium Y. negative slope because P  (M/P )  r  I  Y expansionary fiscal policy shifts IS curve right, raises income, and shifts AD curve right expansionary monetary policy shifts LM curve right, raises income, and shifts AD curve right IS or LM shocks shift the AD curve