Determination of output

• Equilibrium in 1. GOODS and SERVICES Market and 2. MONEY Market

(Demand side of the economy)

What is in the model?

GOODS MARKET• The AEd= Y equality

• Other variables:Cd, Id, Gd, NXd, T, YD,

------------------------------IS Curve

MONEY MARKET• MD=MS equality

• Other variables:Y, i

--------------------------------LM Curve

IS – LM model

• Money Market• Goods marketi

Y

i

Y

IS LM

IS-LM equilibrium

• Equilibrium in both markets

i

Y

ISLM

IS-LM equilibrium

• Monetary Policy

i

Y

ISLM

IS-LM equilibrium

• Fiscal Policy:

i

Y

ISLM

Mathematical model of the IS-LM

• See class notes and homework assignment

• REVIEW ON THURSDAY LUNCH TIME

Fiscal Policy

1. Discretionary fiscal policy

2. Automatic stabilizers

Government Budget

• Maintaining a healty and sustainable government budget

• Primary Budget

• Consolidated Budget

Gov’t Budget= Taxes- Gov’t Expenditure- Transfer Payments

Gov’t Budget= Taxes- Gov’t Expenditure- Transfer Payments –interest Payments

Debt to GDP

ARGENTIN

A

AUSTRIA

BRAZILCHILE

COLOMBIA

DENMARK

EURO AREA

FRANCE

GREECE

INDIAIRAN

IRELAND

ITALY

MALAYS

IA

NETHER

LANDS

NORWAY

PHILIPPINES

PORTUGAL

SAUDI A

RABIA

SOUTH

AFRICA

SPAIN

SWITZ

ERLA

ND

THAILA

ND

UNITED ARAB EM

IRATES

UNITED ST

ATES

0

50

100

150

200

250

Debt to GDP

LAST

Country Risk Premium

Argentina

Brazil

Cypru

s

German

y

Greece

Irelan

dIta

lyJap

an

Mexico

Spain

Turke

y

United St

ates o

f Ameri

ca0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Country Risk Premium

Country Risk Premium