Team Teaching Dept. Islamic Economics Faculty of Economics and Business Airlangga University In this session, you will learn… • how to derive the aggregate demand curve from the IS-LM model Equilibrium in the IS -LM model The IS curve represents r equilibrium in the goods LM market. Y C (Y T ) I (r ) G r1 The LM curve represents money market equilibrium. M P L (r ,Y ) IS Y Y1 The intersection determines the unique combination of Y and r that satisfies equilibrium in both markets. IS-LM and aggregate demand • So far, we’ve been using the IS-LM model to analyze the short run, when the price level is assumed fixed. • However, a change in P would shift LM and therefore affect Y. • The aggregate demand curve captures this relationship between P and Y. Deriving the AD curve r LM(P2) Intuition for slope LM(P1) r2 of AD curve: r1 P (M/P ) IS LM shifts left Y2 Y1 Y P r P2 I P1 Y AD Y2 Y1 Y Monetary policy and the AD curve r LM(M1/P1) The Fed can increase LM(M2/P1) aggregate demand: r1 r2 M LM shifts right IS r Y1 Y2 Y P I Y at each P1 value of P AD2 AD1 Y1 Y2 Y Fiscal policy and the AD curve r LM Expansionary fiscal policy (G and/or T ) increases r2 agg. demand: r1 IS2 T C IS1 Y1 Y2 Y IS shifts right P Y at each P1 value of P AD2 AD1 Y1 Y2 Y IS-LM and AD-AS in the short run & long run The force that moves the economy from the short run to the long run is the gradual adjustment of prices.
In the short-run then over time, the
equilibrium, if price level will Y Y rise Y Y fall
Y Y remain constant The SR and LR effects of an IS shock r LRAS LM(P1) A A negative negative ISIS shock shock shifts shifts IS IS and and AD AD left, left, causing causing Y Y to to fall. fall. IS1 IS2 Y Y P LRAS
P1 SRAS1
AD1 AD2 Y Y The SR and LR effects of an IS shock r LRAS LM(P1)
In In the the new new short-run short-run equilibrium, Y Y equilibrium, IS1 IS2 Y Y P LRAS
P1 SRAS1
AD1 AD2 Y Y The SR and LR effects of an IS shock r LRAS LM(P1)
In In the the new new short-run short-run equilibrium, Y Y equilibrium, IS1 IS2 Y Y Over Over time, time, PP gradually gradually falls, falls, which which causes causes P LRAS
•• SRAS P1 SRAS1 SRAS toto move move down. down. •• M/P M/P to to increase, increase, which which causes causes LM LM AD1 to AD2 to move move down. down. Y Y The SR and LR effects of an IS shock r LRAS LM(P1) LM(P2)
IS1 IS2 Y Y Over Over time, time, PP gradually gradually falls, falls, which which causes causes P LRAS
•• SRAS P1 SRAS1 SRAS toto move move down. down. •• M/P P2 SRAS2 M/P to to increase, increase, which which causes causes LM LM AD1 to AD2 to move move down. down. Y Y EXERCISE: Analyze SR & LR effects of M a. Draw the IS-LM and AD- r LRAS LM(M1/P1) AS diagrams as shown here. b. Suppose Fed increases M. Show the short-run IS effects on your graphs. Y Y c. Show what happens in the transition from the P LRAS short run to the long run. P1 SRAS1
AD1
Y Y The Great Depression 240 30 Unemployment 220 (right scale) 25 billions of 1958 dollars
percent of labor force
200 20
180 15
160 10
140 Real GNP 5
(left scale) 120 0 1929 1931 1933 1935 1937 1939 THE SPENDING HYPOTHESIS: Shocks to the IS curve • asserts that the Depression was largely due to an exogenous fall in the demand for goods & services – a leftward shift of the IS curve. • evidence: output and interest rates both fell, which is what a leftward IS shift would cause. THE SPENDING HYPOTHESIS: Reasons for the IS shift
• Stock market crash exogenous C
• Oct-Dec 1929: S&P 500 fell 17% • Oct 1929-Dec 1933: S&P 500 fell 71% • Drop in investment • “correction” after overbuilding in the 1920s • widespread bank failures made it harder to obtain financing for investment • Contractionary fiscal policy • Politicians raised tax rates and cut spending to combat increasing deficits. THE MONEY HYPOTHESIS: A shock to the LM curve • asserts that the Depression was largely due to huge fall in the money supply. • evidence: M1 fell 25% during 1929-33. • But, two problems with this hypothesis: • P fell even more, so M/P actually rose slightly during 1929-31. • nominal interest rates fell, which is the opposite of what a leftward LM shift would cause. THE MONEY HYPOTHESIS AGAIN: The effects of falling prices • asserts that the severity of the Depression was due to a huge deflation: P fell 25% during 1929-33. • This deflation was probably caused by the fall in M, so perhaps money played an important role after all. THE MONEY HYPOTHESIS AGAIN: The effects of falling prices
• The stabilizing effects of deflation:
P (M/P ) LM shifts right Y • Pigou effect: P (M/P ) consumers’ wealth C IS shifts right Y THE MONEY HYPOTHESIS AGAIN: The effects of falling prices • The destabilizing effects of expected deflation: e r for each value of i I because I = I (r ) planned expenditure & agg. demand income & output THE MONEY HYPOTHESIS AGAIN: The effects of falling prices
• The destabilizing effects of unexpected
deflation: debt-deflation theory P (if unexpected) transfers purchasing power from borrowers to lenders borrowers spend less, lenders spend more if borrowers’ propensity to spend is larger than lenders’, then aggregate spending falls, the IS curve shifts left, and Y falls Why another Depression is unlikely
• Policymakers (or their advisors) now know
much more about macroeconomics: • The Fed knows better than to let M fall so much, especially during a contraction. • Fiscal policymakers know better than to raise taxes or cut spending during a contraction.
• Federal deposit insurance makes
widespread bank failures very unlikely. • Automatic stabilizers make fiscal policy expansionary during an economic downturn. Summary
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
slide 23 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.
slide 24 Kurva Permintaan Agregat dalam Islam • Perubahan tingkat harga akan mempengaruhi keseimbangan melalui pengaruhnya terhadap penawaran uang riil. Jumlah penawaran uang riil adalah : M’s = Ms P dimana : Ms adalah penawaran uang nominal dan P adalah tingkat harga. • Kenaikan tingkat harga akan menurunkan penawarab uang riil, dan sebaliknya penurunan tingkat harga akan meningkatnkan penawaran uang riil • Pada ekonomi Islam, peningkatan penawaran uang riil karena penurunan tingkat harga akan meningkatkan jumlah uang tunai yang dipegang oleh perorangan maupun oleh perusahaan. • Kemudian mereka mengurangi jumlah uang tunai dengan melakukan investasi agar zakat dan biaya lainnya dibayar dari keuntungan usaha. • Dengan demikian, investasi berhubungan dengan tingkat keuntungan yang diharapkan, dan melalui efek multiplier akan meningkatkan pendapatan nasional. • Sebagian uang yang diaktifkan diarahkan kepada peningkatan konsumsi dan pendapatan nasional. • Perubahan tingkat harga akan menimbulkan efek Pigou terhadap perilaku perorangan, terutama pada pengeluaran-pengeluaran konsumtif. • Uang tunai merupakan bagian kekayaan seseorang, tetapi berbeda dengan kekayaan fisik lain yang niali nominalnya dapat naik atau turun sesuai tingkat harga umum. Nilai nominal uang adalah tetap sementara nilai riilnya bergerak berlawanan arah dengan tingkat harga. Jika tingkat harga akan turun maka jumlah uang tunai riil akan meningkat, kekayaan meningkat, keinginan konsumsi meningkat.(Asumsi kekayaan mempengaruhi tingkat konsumsi) • Penurunan harga umum akan meningkatkan upah riil , dan ini akan meningkatkan konsumsi. Peningkatan konsumsi selanjutnya meningkatkan pendapatan nasional. • Penurunan tingkat harga umum yang menyebabkan kenaikan konsumsi mengakibatkan kurva IS bergeser ke bawah dan mengakibatkan kenaikan Y pada tingkat keuntungan yang diharapkan tertentu (r0). Jadi penurunan tingkat harga mengakibatkan kenaikan pendapatan nasional, dan sebaliknya. Terdapat hubungan terbalik antara tingkat harga dan pendapatan nasional.Hubungan ini ditunjukkan oleh fungsi permintaan agregat (D). (a) (b) C C
45˚ D Y Y Y1 • Gambar di atas menunjukkan penurunan harga dari Po ke P1 berakibat pada peningkatan C dari Co ke C1. • Gambar b merupakan rancangan geometrik yang memungkinkan memutar sumbu. • Peningkatan konsumsi menggeser IS ke kanan. • Melalui menggabungkan gbr a dan b dapat ditarik kurva permintaan agregrat D. Kurva ini menunjukkan jika tingkat harga umum turun Po ke P1 maka permintaan produksi nasional meningkat dari Yo ke Y1. • Jazakallah khoiron katsiro.
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