By “short-run”, we imply the time frame during which demand-side policies (i.e., government’s monetary and fiscal policies) could have an effect on output and income in an economy.
Macroeconomıc Theory (ENG) — Ünite 4 Soru-Cevap
Macroeconomıc Theory (ENG) (IKT214U) soru-cevapları.
What is short-run?
In a Keynesian analysis, what is the main assumption about the state of the economy?
In a Keynesian analysis it is assumed that the economy is always running under unemployment (or, below full employment).
In a Keynesian analysis, what do you mean by the demand-side policies?
The demand-side policies are meant to stimulate the income and output in the economy without raising the production cost and prices.
Who is the first inventor of the IS-LM analysis?
Sir John Hicks is the first introducing the IS-LM analysis in the late 1930’s.
What is formalized in IS-LM model?
The IS-LM model formalized the interaction of goods and money markets, which was the main contribution by John Maynard Keynes in his groundbreaking book The Theory of Employment, Interest, and Money.
What does IS curve characterize?
It characterizes the locus of alternative equilibria in the goods market.
What does LM curve characterize?
It characterizes the locus of alternative equilibria in the money market.
What does the intersection point of IS-LM curves give us?
The intersection points of IS-LM curves give us the interest rate and output pair where both markets are in equilibrium simultaneously.
What does the simultaneous (general) equilibrium in the goods and money markets tell us?
It tells us that at the equilibrium, the interest rate is such that people hold the available real money stock for transactions purposes to purchase final goods, and the demand for final goods is equal to the supply of final goods (or, the GDP).
What is it called the intersection point of IS-LM curves?
It is called the general equilibrium in both goods and money markets.
At any point on LM curve, is there a general equilibrium?
No, because at any point on LM curve the money market is in equilibrium, but the goods market is not in equilibrium.
At any point on IS curve, is there a general equilibrium?
No, because at any point on IS curve the goods market is in equilibrium, but the money market is not in equilibrium.
At any point on LM curve, which is located right of general equilibrium point, and a given interest rate of i', which is below the equilibrium interest rate, is there excess supply of goods?
Yes, there is, because the goods market reaches equilibrium at Y' < Y''.
Yes, there is, because the goods market reaches equilibrium at Y' < Y''.
At any point on IS curve, which is located left of general equilibrium point, and a given the output level, Y', which is below the equilibrium output level, is there excess supply of money?
Yes, there is. At that point, given the output level, Y', the money market reaches equilibrium at interest rate at i' < i'', hence there is an excess supply of money.
At any point on LM curve, which is located below the general equilibrium point, and a given interest rate of i', which is below the equilibrium interest rate, is there excess supply of goods?
No, there isn’t, because the goods market reaches equilibrium at Y"> Y', thus there is an excess demand for goods.
At any point on IS curve, which is located right of general equilibrium point, and a given the output level, Y'', which is beyond the equilibrium output level, is there excess supply of money?
No, there isn’t. At that point, given the output level, Y'‘, money market reaches equilibrium at i'' > i', hence there is an excess demand for money.
On the points in Zone I (to the right of IS-curve and the left of LM-curve) in general equlibrium graph, whar are the conditions in goods and money market?
On the points in Zone I (to the right of IS-curve and the left of LM-curve) in general equlibrium graph, there is an excess supply of goods in the goods market and an excess supply of money in the money market.
On the points in Zone II (to the right of IS-curve and the right of LM-curve) in general equlibrium graph, whar are the conditions in goods and money market?
On the points in Zone II (to the right of IS-curve and the right of LM-curve), there is an excess supply of goods in the goods market and an excess demand for money in the money market.
On the points in Zone III (to the left of IS-curve and the right of LMcurve) in general equlibrium graph, whar are the conditions in goods and money market?
On the points in Zone III (to the left of IS-curve and the right of LMcurve), there is an excess demand for goods in the goods market and an excess demandfor money in the money market.
On the points in Zone IV (to the left of IS-curve and the left of LM-curve) in general equlibrium graph, whar are the conditions in goods and money market?
On the points in Zone IV (to the left of IS-curve and the left of LM-curve), there is an excess demand for goods in the goods market and an excess supply of money in the money market.