Mishkin PPT Ch21
Mishkin PPT Ch21
Mishkin PPT Ch21
Monetary and
Fiscal Policy in
the ISLM Model
21-2
21-3
21-4
21-5
21-6
Response to a Change in
Monetary Policy
An increase in the money supply creates an
excess supply of money
The interest rate declines
Investment spending and net exports rise
Aggregate demand rises
Aggregate output rises
The excess supply of money is eliminated
Aggregate output is positively related to the
money supply
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21-7
21-8
Response to a Change in
Fiscal Policy
An increase in government spending raises
aggregate demand directly; a decrease in
taxes makes more income available for
spending
The increase in aggregate demand cause
aggregate output to rise
A higher level of aggregate output increases
the demand for money
21-9
Response to a Change in
Fiscal Policy (contd)
The excess demand for money pushes the
interest rate higher
The rise in the interest rate eliminates the
excess demand for money
Aggregate output and the interest rate are
positively related to government spending
and negatively related to taxes
21-10
21-11
21-12
21-13
21-14
21-15
21-16
21-17
21-18
21-19
21-20
21-21
21-22
21-23
21-24