Curve IS reflects all the relationships between Y And r, at which the commodity market is in equilibrium. Curve L.M.– all combinations Y And r, which ensure equilibrium in the money market. Intersection of curves IS And L.M. gives the only values ​​for the interest rate r*(equilibrium interest rate) and income level Y*(equilibrium level of income), ensuring simultaneous equilibrium in the commodity and money markets. Equilibrium in the economy is achieved at the point E(Fig. 20).

Rice. 20.Equilibrium in the IS – LM model

In Fig. 20 (for example, at point A, which lies on the curve IS, but outside the curve L.M.) there is equilibrium in the goods market (i.e., total output equals total demand). At this point, the interest rate is higher than the equilibrium rate, so the demand for money is less than its supply. Since people have extra money, they will try to get rid of it by buying bonds. As a result, bond prices will increase, which will lead to a fall in interest rates, which in turn will lead to an increase in planned investment spending. Thus, aggregate demand will increase. The point describing the state of the economy moves down the curve IS until the interest rate falls and aggregate output rises to the equilibrium level.

If the economic situation is described by a point lying on the curve L.M., but outside the curve IS(dots IN And D), market mechanisms will still lead it to equilibrium. At the point IN despite the fact that the demand for money is equal to its supply, aggregate output turns out to be higher than the equilibrium level, greater than aggregate demand. Firms are unable to sell their products and accumulate unplanned inventories, which forces them to reduce production and reduce output. A decrease in output means that the demand for money will fall, all of which will lead to lower interest rates. The point describing the state of the economy will move down the curve L.M. until it reaches a point of general equilibrium.

4. IS-LM model and construction of the aggregate demand curve

Graphical model tools IS-LM allows you to analyze the impact of different macroeconomic policy options on aggregate demand and consider how each planned policy change affects the equilibrium level of income.

Curves IS And L.M. can change their position under the influence of various factors, of which the most interesting are changes in government spending, taxes and money supply, since they are instruments of fiscal and monetary policy. In the model IS-LM the impact of fiscal policy will be reflected in shifts in the curve IS, and monetary – in curve shifts L.M.

Impact of Fiscal Policy

Consider the shift of the curve IS caused by increased government spending. Let us assume that initially equilibrium in the goods and money markets was achieved at the point E 1 with interest rate r 1 and national income Y 1(Fig. 21).

Let's say the economic situation in the country requires an increase in government spending. They lead to an increase in total spending, which causes an increase in national output, the curve IS 1 moves to position IS 2.

Rice. 21. Expansionary fiscal policy in the IS–LM model

But the growing aggregate output increases the demand for money, which begins to exceed the supply of money, which, accordingly, leads to an increase in the interest rate to r 2. In the product market, an increase in aggregate spending encourages entrepreneurs to increase investment. In turn, an increase in the interest rate begins to restrain this process, forcing entrepreneurs to reduce the investment growth planned at the interest rate r 1. In this case, a new equilibrium position in the goods and money markets will be achieved at the point E 2, and total output will increase to Y2.

An increase in government spending partially crowds out planned investments, i.e. has a repression effect. This effect reduces the effectiveness of expansionary fiscal policy. It is to this that monetarists refer, arguing that fiscal policy is not effective enough and priority in macroeconomic regulation should be given to monetary policy.

Cutting taxes while holding government spending constant has the same impact as increasing government spending. It leads to the fact that at any given interest rate, total output will be greater due to an increase in disposable income, consumption and aggregate demand. The magnitude of this impact is determined by the tax multiplier. However, the equilibrium level of income is also less than in the Keynesian cross model due to the increase in the interest rate.

Thus, the influence of the money market reduces the multiplier effect, but to what extent this occurs depends on which of the three sections of the curve L.M. the curve shifts IS(Fig. 22).

Rice. 22. Multiplier effect on different parts of the LM curve

If the initial joint equilibrium in the goods and money markets is represented on the Keynesian segment, then the multiplier effect of additional government spending is fully manifested (the increase in income is almost equal to the distance of the curve shift IS). This is explained by the fact that in the initial state, equilibrium was established at a low level of national income and close to the minimum interest rate. In such a situation, people have little demand for money for transactions and a large demand for it from assets. If, in this state of the economy, aggregate output begins to grow, then the additional need for money for transactions will be satisfied from the money in assets, without causing a significant increase in the interest rate, and the planned volume of investment will not be reduced.

Consequences of a line shift IS on the intermediate section of the curve L.M. analyzed in Fig. 21.

If the joint equilibrium in the goods and money markets falls on the classical segment of the curve L.M., line shift IS will not change the aggregate demand for goods at all in the current period. The reason is that at an interest rate above the maximum, there is no longer any money in household assets, so new investments can only be made by redistributing the existing volume of credit funds to more efficient options. As a result, the total investment demand will not change, and, consequently, the total output of the current period will remain the same.

Thus, expansionary fiscal policy (increasing government spending and cutting taxes) shifts the curve IS to the right (up), which increases the level of income and the interest rate. On the contrary, contractionary fiscal policy (cutting government spending and increasing taxes) shifts the curve IS to the left, which reduces income and reduces the interest rate.

Impact of Monetary Policy

Let the economy initially be in equilibrium at the point E 1(Fig. 23). Suppose the government decides to reduce the unemployment rate and increase aggregate output by increasing the money supply. An increase in the money supply shifts the curve L.M. to the right (down), as a result, the interest rate falls from r 1 to r 2, the amount of income increases from Y 1 before Y2.

Increase in money supply (curve shift L.M. to position LM 2) creates excess supply in the money market, as a result of which the interest rate decreases. Its fall causes an increase in investment spending, leading to an increase in demand for goods and services and an increase in total output.

Rice. 23. Expansionary monetary policy in the IS–LM model

The joint equilibrium of the goods and money markets moves to the point E 2, since an increase in income and a decrease in the interest rate entail an increase in the demand for money, which will continue until it equals the new, higher level of money supply.

A decrease in the money supply implies the opposite process: a shift in the curve L.M. to the left, an increase in the interest rate, a decrease in output.

The degree of influence of monetary policy on the economy also depends on the slope of the curves IS And L.M.. When the money supply changes by the same amount, the effect of reducing the interest rate will be greater, the steeper the curve L.M., i.e. The interest rate will decrease the more, the less sensitive the demand for money is to changes in the interest rate. If the curve IS more flat, which means high sensitivity of expenses to changes in the interest rate and a large value of the government spending multiplier, then a very slight decrease in the interest rate is enough for expenses to increase significantly, multiplying income. The effectiveness of monetary policy is greater, the greater the curve L.M. steeper, and the curve IS more flat.

Thus, an expansionary monetary policy, the instrument of which is an increase in the supply of money (a shift to the right (down) of the curve LM), leads to an increase in income and a decrease in interest rates. The result of contractionary monetary policy (shift to the left (up) of the LM), based on a reduction in the supply of money, there is a decrease in income and an increase in interest rates.

Interaction between fiscal and monetary policy

When analyzing any change in monetary or fiscal policy, it is important to keep in mind that the instruments of one policy may influence the outcome of another.

Let's assume that the government is concerned about the budget deficit and decides to increase taxes. Let's consider what impact this policy will have on the economy as a whole. According to the model IS-LM, the results will depend on what policies the Central Bank will pursue in response to tax increases. Several options are possible.

1. The Central Bank maintains the money supply at a constant level (Fig. 24a). Tax increases shift the curve IS left (down) to position IS 2. The result is a reduction in aggregate output (higher taxes reduce consumption and investment spending) and the interest rate (lower income reduces the demand for money).

2. The Central Bank maintains the interest rate at a constant level (Fig. 24, b). In this case, an increase in taxes also shifts the curve IS left (down) to position IS 2, while the central bank reduces the money supply so that the interest rate remains at the original level, the curve L.M. moves to position LM 2. Income is reduced by an amount greater than in Figure 24, a. In the first case, a lower interest rate stimulates investment and partially offsets the effect of tax increases. In this case, the central bank, by maintaining the interest rate at a high level, deepens the recession in the economy.

Rice. 24. Interaction of fiscal and monetary policy in the IS-LM model

3. The central bank increases the money supply to keep the level of income constant (Figure 24, c). An increase in taxes will not entail a fall in aggregate output, since the curve L.M. moves down to position LM 2 to compensate for the curve shift IS(higher taxes reduce consumption, while lower interest rates stimulate investment). In this case, an increase in taxes contributes to a fall in interest rates.

This example illustrates that the results of fiscal policy depend on the policy of the Central Bank, i.e. whether it maintains the money supply, the interest rate, or the level of income at a constant level.

By combining fiscal and monetary policies, it is possible to achieve solutions to more complex problems than simply regulating the volume of output (for example, without changing the volume of output, change its structure). Such a task may be very relevant if the economy is in a situation of full employment and, therefore, a change in output is undesirable, but its structure may require changes.

In the model IS-LM highlight special cases when one type of policy does not have any impact on the economy. This happens when the curve L.M. horizontal, which corresponds to the situation of a “liquid trap”; curve IS vertical, which corresponds to the situation of an “investment trap”.

liquid trap

The economy is in trouble liquid trap When interest rates are so low that any change in the money supply is absorbed by the demand for money from assets, the level of income falls to its lowest point. This situation is typical for an economy in a state of depression.

Graphically, this is interpreted as the intersection of the IS and LM curves in the Keynesian region of the LM curve (Figure 6.15).

In a liquidity trap situation, the interest rate is minimal, i.e. The opportunity cost of holding cash is close to zero, and therefore people are willing to hold any amount of money that is offered to them. As a result, even with a normal negative slope of the IS curve, an increase in the money supply by the Central Bank is not able to ensure income growth. Typically, an increase in the money supply lowers the interest rate as people try to get rid of excess money by buying bonds. But if the interest rate is at a minimum level, then asset prices are at a maximum and people tend to sell them, fearing that their prices will fall and their owners will lose out. As a result, people show unlimited demand for money, refusing to buy securities, and the demand curve for money takes on a horizontal shape. This means that in the money demand function coefficient f, characterizing the sensitivity of changes in the demand for money when the interest rate changes, tends to infinity. The LM curve is therefore also horizontal, and a change in the money supply will not cause it to shift. An increase in the quantity of money cannot force anyone to purchase securities; the entire amount of the increase in the supply of money is stored in the form of cash. The amount of income remains unchanged at the level Y 0 . An expansionary monetary policy will have no impact on the interest rate, the volume of investment, or the level of income, i.e. completely ineffective.

In this case, the effectiveness of fiscal policy is maximum. For example, an increase in government purchases increases equilibrium income by , i.e. There is no crowding out effect, income increases by the entire value of the multiplier.

Another situation is called investment trap, corresponding to a situation in which the demand for investment is completely inelastic to the interest rate, therefore the graph of the investment function takes on a vertical form, and the vertical curve of investment corresponds to the vertical curve IS (Fig. 6.16).

As a result, any changes in the money market, although they will lead to a change in the interest rate, will not cause a change in investment demand. In this case, the sensitivity of aggregate spending to changes in the interest rate is 0, and only fiscal policy will be effective. At the same time, the effectiveness of fiscal policy is maximum, since there is no crowding out effect and only the multiplier effect operates. An increase in government spending, causing an increase in aggregate spending, leads to an increase in the demand for money, which increases the interest rate, but a higher rate does not crowd out private sector spending because it is independent of the interest rate. As a result of the fiscal impulse, there is a full multiplier increase in income. Monetary policy is completely ineffective, since a decrease in the interest rate (from r 0 to r 1) as a result of an increase in the money supply (a shift of the LM curve to the right from LM 0 to LM 1) will not affect the amount of investment expenditures, since they are completely insensitive to its change.

This situation can arise for a variety of reasons (for example, it is typical for an inflationary economy, when interest rates are excessively high).

It should be kept in mind that liquidity and investment traps only occur in the Keynesian model. If we assume that the behavior of economic entities is described by monetarist functions, then the property effect arises.

The property effect lies in the fact that economic entities perceive an increase in the share of money as a violation of the optimal structure of the asset portfolio, and as an increase in their property. Therefore, they try to exchange excess money not only for financial assets, but also for real capital and real goods, which, in turn, causes an increase in aggregate demand. An increase in total spending shifts the IS curve to the right, eliminating traps (Figure 6.17).

Examining the impact of expansionary monetary or fiscal policy on the model IS-LM allows us to conclude: monetary and fiscal policies affect output in the short run, but neither of them affects output in the long run .

When analyzing the IS-LM model, it was assumed that the price level is fixed, but this assumption is only acceptable for the short term. Let's consider what happens to the IS-LM model in the long run when the price level changes, and we will abandon the assumption that nominal and real values ​​coincide.

Let the economy initially be in equilibrium at point E 1, at which the actual volume of output is equal to its natural level (Fig. 6.18).

Rice. 6.18.IS-LM model in the long run

In Fig. 6.18, and an increase in the supply of money leads to a shift of the LM curve to the right to the position LM 2 and a shift in the equilibrium to point E 2, where the interest rate decreases and aggregate output increases to Y 2. Since it exceeds natural output, the price level increases, the money supply in real terms decreases, and the LM curve shifts again. The economy returns to its initial equilibrium.

In Fig. 6.18, b an increase in government spending shifts the IS curve to position IS 2, and the equilibrium point of the economy shifts to position E 2, in which the rate increases to r 2 and aggregate output increases to Y 2, which exceeds its natural level. The price level begins to rise, and real money balances decrease, while the LM curve shifts to the left - to the position LM 2. Long-run equilibrium at point E 3 is established at an even higher interest rate, and output returns to its natural level.

Thus, studying the impact of expansionary monetary or fiscal policy on the IS-LM model allows us to conclude: Monetary and fiscal policies may affect aggregate output in the short run, but neither affects output in the long run. An important point in assessing the effectiveness of these policies in increasing aggregate output is how quickly the long run occurs.

The macroeconomic equilibrium models discussed earlier described markets for goods and services, or the “real” sector of the economy, without taking into account monetary factors. Inclusion in the analysis of the general equilibrium of the money market is possible using the model IS-LM , which, although it somewhat complicates the analysis, at the same time provides great opportunities for studying the interaction of markets for goods and money.

Joint equilibrium model IS-LM (investment - savings, liquidity preference - money) includes elements of the "Keynesian cross" and Keynes' theory of liquidity preference. The model was first presented by the English economist, Nobel Prize winner J. Hicks in the article “Mr. Keynes and the Classics” (1937), and became more widespread after the publication of A. Hansen’s book “Monetary Theory and Fiscal Policy” (1949). That's why it sometimes sounds like the Hicks-Hansen model. Modern economists include the financial market as a whole in the model, i.e. money and securities markets.

Model IS-LM describes the functioning of the economy in the short term. It can be considered as a model for determining the equilibrium level of income at fixed prices, as well as an aggregate demand model, in which case it is part of the more general AD-AS model.

In the model IS-LM short-run equilibrium is understood as equilibrium in the markets for goods and services and the money market. The connecting link is the interest rate, the equilibrium size of which reflects the dynamics of economic processes occurring in these markets.

The condition for equilibrium in the commodity market is the equality of investments and savings: I = S. The simplest curve graph IS associated with the use of savings and investment functions (Fig. 18.4). Since investment is a function of interest, and savings is a function of income, then, equating I to S, we can get the function IS [I (R) = S (Y )]. The IS curve is the equilibrium curve in the goods market.

In Fig. 18.4, and the savings function is depicted, which shows that as income from Y 1 before Y2 savings increase with S 1 to S 2 .

In Fig. 18.4, b shows the investment function: an increase in savings reduces the interest rate from R 1 to R 2 and increases investment from I 1 before I 2 . Wherein I 1 = S 1 , A I 2 = S 2 .

In Fig. 18.4, the curve is shown IS: The higher the real interest rate, the lower the equilibrium level of income.

Rice. 18.4. Curve graph IS with savings and interest rate functions

Similar conclusions can be obtained using the Keynesian cross model (Fig. 18.5), which describes equilibrium in the market for goods and services. Curve IS is derived from the Keynesian cross model under the assumption that the interest rate (R) can change. A change in the interest rate leads to a change in planned investment by I , therefore, the equilibrium level of income changes by Y.

Rice. 18.5. Curve graph IS with the Keynesian cross model

In Fig. 18.5, and the investment function is depicted. Since the interest rate is the cost of obtaining a loan to finance investment projects, an increase in the interest rate from R 1 to R 2 reduces planned investments from I (R 1) to I (R 2) .

In Fig. 18.5, b shows the “Keynesian cross”: a decrease in planned investments from I (R 1) before I (R 2) reduces income from Y 1 before Y2.

In Fig. 18.5, the curve is shown IS as a result of the interaction between interest rates and income.

Moving along a curve IS shows how the level of income must change when the level of interest rates changes in order for the market of goods and services to maintain equilibrium. IS curve

has a negative slope, illustrating the fact that an increase in the interest rate from R 1 up to R 2 leads to a decrease in planned investments and, as a result, income from Y 1 to Y 2 . At all points above the curve IS the volume of planned expenses is less than income, i.e. there is an overproduction of goods and services. At all points below the curve IS There is a shortage in the markets for goods and services. That is, only points located directly on the IS curve correspond to equilibrium in commodity markets.

In the money market, equilibrium occurs when the demand for money (L) coincides with its supply ( M ). The last value is taken as given. As for the demand for money, according to Keynesian theory, it is determined mainly by two motives.

First - transactional - caused by the need for money to implement commercial transactions. It is primarily a function of income: L1 = L1(Y). The higher the income level, the more transactions are concluded in the economy, the more intense the need for money at current prices.

The second motive is speculative. Operating in the financial market, economic entities are constantly faced with a choice in what form to hold funds - in money or in securities. Ownership of securities, on the one hand, is associated with great risk, and on the other hand, it gives the right to receive interest. The higher the interest rate, the greater the preference for securities, the weaker the speculative motive for the demand for money. Therefore, speculative demand for money is a decreasing function of the interest rate: L 2 = L 2 (R).

Thus, the aggregate demand for money, determined by transactional and speculative motives, is directly dependent on the level of income and inversely dependent on the market interest rate: L = L 1 (Y) + L2(R), or L = L(Y, R).

Equating L To M. you can get the function L.M. [L (Y, R) = M ]. Curve graph L.M. shown in Fig. 18.6.

Curve LM- equilibrium curve in the money market. It records all income combinations (Y) and interest rates ( R ), which satisfy the demand function for money given the money supply specified by the central bank ( MS ). At all points of the curve L.M. The demand for money is equal to its supply: the relationship is positive.

Figure 18.6a shows the money market. An increase in income from Y 1 to leads to an increase in the demand for money and, therefore, increases the interest rate from R 1 before R2.

Figure 18.6b shows the curve L.M. (has a positive slope and is upward): the higher the level of income, the higher the interest rate.

Rice. 18.6. Curve graph L.M.

Points below and above the curve L.M. characterize the disequilibrium state of the money market. At points to the left of the LM curve, the interest rate is too high, so the supply of money exceeds the demand for it (L< М). At points to the right of the curve L.M. the interest rate is too low, so the demand for money exceeds the supply (L > M). Consequently, equilibrium in the money market corresponds only to points located directly on the curve L.M.

Joint equilibrium in the markets of goods and money is achieved at the point of intersection of the curves IS And L.M.

In Fig. Figure 18.7 shows a joint equilibrium in the market for goods and services and in the money market. The point at which the curves intersect IS And L.M. fixes such a relationship between the interest rate (R) and the level of income ( Y ), at which equilibrium is achieved both in the commodity sector of the economy and in the monetary sector. In other words, with such a relationship between the interest rate and income, there is no surplus or deficit in either the goods or money markets. The aggregate demand corresponding to this situation is called effective demand.

Rice. 18.7. Equilibrium in the markets for goods and money

Curve shifts IS And L.M. reflect the current economic policy. Towards a curve shift IS cite fiscal policy measures, i.e. changes in government spending and taxes. Curve L.M. shifts due to changes in monetary policy.

The consequences of the state's fiscal policy are presented in Fig. 18.8, 18.9. There are two possible situations here.

Rice. 18.8. Consequences of fiscal policy: tax cuts

1. Let's assume that the government cuts taxes by ΔT (Fig. 18.8). In this case the curve IS shifts to the right by a distance equal to

Where AT - the amount by which taxes will be reduced;

Tax multiplier.

Equilibrium moves from a point A to point B. Tax cuts increase income from K, and the interest rate also increases from R 1 before R 2 .

2. Suppose the government increases government spending by Δ G (Fig. 18.9). In this case, the IS curve shifts to the right by a distance equal to

where A G - increase in government spending;

Government expenditure multiplier.

Rice. 18.9. Consequences of fiscal policy: increasing government spending

Expansionary fiscal policy—increasing government spending or cutting taxes—shifts the IS curve upward to the right. As a result, the interest rate and income level increase. Increased government spending and tax cuts lead to a crowding-out effect on private investment, which significantly reduces the effectiveness of expansionary fiscal policy.

Contractionary fiscal policy shifts the IS curve downward to the left, lowering the interest rate and income level.

Expansionary monetary policy increases the supply of money, which allows for short-term economic growth without crowding out effects. An increase in the money supply is accompanied by a decrease in the interest rate from R 1 before R 2 , which leads to a decrease in the loan price. This promotes investment growth (I). As a result, total expenses and income ( Y) increase, causing an increase in consumption. This process is called the monetary transmission mechanism. Curve L.M. moves down to the right. Equilibrium moves from a point A to point B, i.e. income level increases with Y 1 before Y2 (Fig. 18.10).

Rice. 18.10. Consequences of monetary policy

Contractionary monetary policy shifts the LM curve upward to the left, increasing the interest rate and decreasing the income level.

Fiscal and monetary policies are not conducted in isolation. The effect of fiscal policy depends on how the central bank reacts to it and what policies it adheres to.

Let’s say there is an increase in the amount of taxes collected by ΔT . In this case, if the central bank maintains the money supply at a constant level, this will lead to a fall in output and interest rates in the short term (Fig. 18.11, a). If the central bank keeps the interest rate constant, then it must reduce the money supply. The result of this will be a stronger decrease in output (Fig. 18.11, b). If the central bank maintains income at a constant level, then it will increase the money supply, which will cause a stronger drop in the interest rate (Fig. 18.11, c).

Rice. 18.11. Consequences of tax cuts in the case of a policy of controlling money supply (a), interest rates (b) and income level (c)

The equilibrium level of output (income) in the short term is determined in the model IS-LM at fixed prices. Increase in price level from P 1 before R 2 reduces the real money supply, which graphically corresponds to a shift of the LM curve to the left (Fig. 18.12, a). Consequently, the equilibrium level of income also changes, i.e. the equilibrium income (output) depends on the price level, which is generalized by the aggregate demand curve (AD). A decrease in the money supply increases the interest rate (R), which leads to a decrease in investment ( I ). As a result, production volume decreases from Y 1 to Y 2 (Fig. 18.12, b).

Rice. 12.18. Graphical display of the curve AD from the model IS-LM

A tax cut, an increase in government spending, or an increase in the money supply shifts the aggregate demand curve (AD) to the right. Same curve shift AD accompanies completely different shifts of curves IS And L.M. corresponding to measures of stimulating fiscal and stimulating monetary policy.

An increase in the money supply shifts the curve L.M. | right to position LM 2, AD 1 before AD 2 (Fig. 18.13). An increase in the supply of money will lead to a decrease in the interest rate and an increase in output.

With an increase in government spending (or a decrease in taxes T), the curve shifts IS 1 right to position IS 2 which reflects the increase in aggregate demand from AD 1 before AD 2. One of the consequences of increased fiscal spending is a rise in interest rates, leading to a reduction in investment (crowding out effect) and private consumption. However, the crowding out effect works only partially and aggregate demand increases, despite a decrease in private spending due to increased interest rates. Therefore, at any given price level, the level of aggregate demand will be higher as a result of fiscal expansion, so the effect of increased government spending can be graphed as a rightward shift in the aggregate demand curve (Figure 18.14).

In the model IS-LM meet three very important special cases which have had a major influence on discussions about the basic concepts of macroeconomics. The first case corresponds to monetarist views and is based on the quantity theory of money, in which the demand for money depends on the level of income and does not depend at all on the level of the interest rate. If the demand for money is insensitive to changes in the interest rate, the curve L.M. vertical and fiscal expansion has no effect on aggregate demand, while monetary policy is extremely effective in influencing aggregate demand.

Horizontal curve L.M. proposed by Keynes and widely discussed in the 40-50s of the 20th century, is typical for the second case, when the demand for money is infinitely elastic relative to the interest rate, i.e. Equilibrium in the money market is achieved at a low interest rate. In this case, called a "liquidity trap", monetary policy has no effect on output, since an increase in the money supply has no effect on the interest rate, fiscal policy has a strong effect on aggregate demand.

The third case occurs when consumption and investment demand are inelastic with respect to the interest rate, the curve IS vertical; Fiscal policy has a significant impact on aggregate demand, while monetary policy has no effect on it. This case is consistent with the views of post-war Keynesians.

Fiscal policy is fully working, i.e. there is no displacement effect, and when the curve IS vertical, and then when the curve L.M. horizontal. However, the reasons for this are different in each case. If there is a “liquidity trap” (horizontal LM) the interest rate does not change, since equilibrium in the money market is achieved at its only level. Thus, fiscal expansion does not lead to an increase in the interest rate and the crowding out effect does not occur. On the contrary, when the curve IS vertical, interest rates rise (provided that L.M. has the usual form), but private spending - consumption and investment - does not decrease in response to an increase in the interest rate.

Model IS-LM allows us to determine the conditions under which changes in fiscal and monetary policy affect aggregate output in the economy. However, both fiscal and monetary expansion cause only a short-term effect of increasing employment and output, without contributing to the growth of economic potential. Ensuring long-term economic growth cannot be achieved only by regulating aggregate demand. Economic growth incentives are also linked to aggregate supply policies.

Money is a country's stock (value as of a certain date), not a flow. The volume of real output is a flow (value over a certain period of time). One of the central problems of macroeconomics is the effect of changes in stocks on flows. In this case, this problem comes down to studying the impact of changes in the volume of money supply on the real volume of national production.

If the quantity of money in a country increases, but no money enters circulation, then this change does not affect the real flow of income. However, in most cases, money comes into circulation. Then the degree of their influence on changes in real income (and through it on the level of employment) depends on price flexibility.

If macroeconomic prices in all markets of the country are absolutely flexible and change in the same proportion as the money supply, an increase in the quantity of money does not lead to an increase in real income. In this case they say that money is neutral. If a change in the money supply affects changes in real indicators, then they say that money is not neutral.

To analyze the problem of the neutrality of money, we will use the “quantitative exchange formula”.

Where M- money supply of the country, V – velocity of money circulation, P – price level in the country, Y – real production volume.

Let's transform this formula for the growth rate of indicators.

Money supply growth rate;

The rate of increase in the velocity of money circulation;

Growth rate of real output (real GDP);

The rate of increase in the price level (inflation rate).

Let us write the “quantitative equation of exchange” in terms of growth rates:

If the growth rate of money is stable, then the growth rate of the velocity of money circulation is also stable. That's why:

where is the growth rate of nominal GDP.

In reality, the velocity of money circulation is not a stable value. However, it is influenced by the following factors:

Interest rate. As interest rates rise, households increasingly choose to go to the bank, reducing the amount of cash on hand. As a result, the velocity of money circulation increases.

Real national income. As real national income increases, the demand for money increases, followed by the velocity of money.

Institutional factors. The velocity of money is a decreasing function of the level of real transaction costs associated with converting money into income-generating financial assets. In reality, this indicator is influenced by technological innovations (the introduction of credit cards, electronic systems and automatic banking machines), as well as financial regulation (banking legislation determines the conditions for converting income-generating assets into checking accounts and cash).

It should be borne in mind that for different aggregates the degree of stability of the velocity of money circulation is different. The rate of circulation of money for the aggregate has the greatest stability M2. Therefore, it is the unit M2 is the unit that is regulated by the Central Bank.

1) If prices are absolutely flexible, then the inflation rate coincides with the growth rate of the money supply: , therefore

2) If prices are absolutely inflexible (stable), then the growth rate of the money supply coincides with the growth rate of real GDP. In other words, when

3) If prices change, but in a smaller proportion than the money supply (), then the growth rate of real GDP is equal to the difference between the growth of the money supply and the inflation rate:

In the first case, money is neutral, because . In the second and third cases, money is not neutral because

In macroeconomic theory, as well as in microeconomics, the concept of long-term and short-term periods is used, but their conceptual interpretation is different. In macroeconomics under long term refers to the period during which all prices in commodity and resource markets are flexible and change in equal proportions. In other words, during this period, prices for resources and, above all, wages, manage to adapt to changes in the level of prices for goods. The average duration of this period is six years.

The period during which prices in commodity and resource markets are relatively inflexible or during which the dynamics of wages lag behind the dynamics of the price level is called short term . At the same time, both in the long-term and short-term periods, the volume of capital used remains unchanged.

Taking into account the concept of long-term and short-term periods, we can conclude that money is neutral in the long term and does not have this property in the short term. It follows from the above that monetary policy associated with changes in the money supply can affect real production in the short term. In the long run, when money is neutral, the most important task of monetary policy remains stabilization of the price level, i.e. in the long run (for ), the Central Bank must increase the money supply at a rate equal to the growth rate of real GNP (). The need to increase the money supply at a rate equal to the growth rate of real output in order to stabilize the price level in the long run is called monetary rule . This rule was first formulated by M. Friedman and occupies an important place in the theory of monetarists.

The neoclassical direction analyzes the functioning of the economy in the long term, subject to price flexibility. This direction views money as neutral. Keynesianism analyzes the functioning of the economy in the short term, so in this concept money is not neutral. The “new classical school” that emerged in the 70s of the twentieth century, based on the theory of rational expectations, proves that money is neutral even in the short term if the expectations of economic entities are rational and they do not make systematic errors in the forecast. Thus, in this concept, money has the property super neutrality .

Commodity markets will mean not only markets for consumer goods and services, but also the market for investment goods, which are not fundamentally different from consumer goods. Although there are some differences between these categories of goods, they are determined only by the demand for them. The demand for consumer goods is associated primarily with income, while for investment goods it is primarily with the interest rate. Money market is a mechanism for buying and selling short-term credit instruments such as Treasury bills and commercial paper. This market should be distinguished from bond market. The relative price of money expressed in terms of bonds is the interest rate on the bonds.

Interaction between fiscal and monetary policies.

Important problems that both developing and developed countries often face are inflation, budget deficits and accumulated public debt. At the same time, for most developing countries and countries with economies in transition, researchers identify financing the budget deficit through seigniorage as the main reason for high inflation. This means that in most cases, it is the problem of the budget deficit that is behind high inflation. From time to time, problems accumulated in the fiscal sphere and miscalculations in monetary policy lead to consequences such as hyperinflation or a debt crisis. The government and the central bank are bound by the consolidated public sector budget constraint: the operating budget deficit is financed by new government borrowing and seigniorage. On the one hand, the central bank, which controls the issue of money, has an important goal - a low and stable level of inflation. On the other hand, the central bank should be concerned about the stability of the financial system, and in particular the stability of government debt. This means that even in conditions of formal independence from the government, the central bank is forced to take into account problems in the fiscal sphere, covering a certain part of the budget deficit through seigniorage. In other words, the policies of the government and the central bank must be coordinated. The purpose of the study is to develop general principles for building interaction between fiscal and monetary policies that prevent a public debt crisis and hyperinflation. The object of the study is the fiscal and monetary sphere of the economy. The paper analyzes the government's fiscal policy and the monetary policy of the central bank. The Central Bank is viewed as a formally independent state institution from the government. Monetary policy determines the growth rate of the monetary base by conducting open market transactions in government bonds. The government chooses budget expenditures and revenues, determining the trajectory of the budget deficit (surplus). The logic of interaction between fiscal and monetary policies is determined by the consolidated budget constraint of the government and the central bank, as well as their common goal of stabilizing public debt and inflation.

The relationship between the AD-AS model and the Keynesian model of income and expenditure.

Keynes associated stimulated demand with additional emission of money, which, in conditions of underemployment, leads not so much to an increase in prices, but to an increase in the supply of goods and services. In general, the Keynesian model boiled down to the so-called transmission mechanism - the amount of money, the interest rate and national income. According to Keynes, expansionary monetary policy not only has little effect on reducing the rate of interest and the demand for money, but also insignificantly stimulates investment. Through a multiplicative process, new investment and government spending cause an increase in national income. This policy increases aggregate demand, causing an increase in output. An increase in aggregate demand causes little change in output and does not change the price level. Thus, Keynes and the Keynesians view monetary policy as having minimal impact on the economy. Based on this approach, Keynes linked the process of stimulating investment with an increase in the supply of money, including its issue. Moreover, in a relatively closed economy (and at that time almost all countries had a low level of openness and, accordingly, the influence of the foreign economic sector on aggregate demand), the supply of money stimulates the growth of investment activity, but not inflation. However, in the 30s. These consequences were not yet visible, and Keynes argued that the state should intervene in the economy in order to ensure its recovery from the crisis situation. It must use monetary instruments of state regulation and fiscal instruments. Moreover, he believed that the influence of monetary policy in this situation has a weaker impact on the economy’s recovery from the crisis. Fiscal policy is stronger.

Business cycles: concept, models.

Business cycles is called a consistent and regular change of depressions and upswings in the economy. The business cycle mechanism might look like this.

In conditions of recovery, many firms increase or update the stock of capital goods at times of general recovery, thereby contributing to the development of this recovery. At the same time, they may overestimate the beginning increase in demand and expand production somewhat more than necessary. After some time, it turns out that the expansion is unprofitable and must be curtailed - the demand for investment falls, the rise stops and depression begins to develop.

In a depression, many firms stop investing, contributing to the depression. Meanwhile, the opportunity to acquire new capital goods gradually accumulates (old equipment wears out, new equipment is invented, the population gradually grows). But this opportunity has not been realized for some time due to poor expectations. When the rise begins, they immediately begin to use it.

But this is a mechanism for the periodic change of recessions and depressions, which says nothing about how they can begin. There are two possible explanations for this onset.

1. The existence of a “primary shock”. Business cycles can begin if an external factor causes fluctuations in the economy that will continue for some time.

If such first shocks can appear constantly, then the existence of business cycles will also be constantly supported. 2. Coincidence of phases of independent processes. Theoretically, it is possible for business cycles to emerge from many small shocks that can continually maintain cyclical fluctuations.

Money multiplier.

Money multiplier- this is the coefficient of self-expansion of money. It is defined as the ratio of money supply M to the monetary base N: t = M/N(for the case when the money supply in the economy consists of cash and deposits); in the case when money exists only in bank accounts, the money multiplier is the inverse of the required reserve rate. In general, the total amount of money created by the banking system is proportional to excess reserves multiplied by the money multiplier. The central bank can control the money supply by influencing, first of all, the monetary base. By changing the required reserve ratio, it changes the monetary base and thus has a multiplier effect on the money supply. He also has tools at his disposal such as discount rate(refinancing rate), a change in which leads to a change in CB lending rates, and open market operations(purchase and sale of government bonds). These operations affect the amount of bank reserves, and therefore the total money supply.

The IS-LM model is a joint equilibrium model of the commodity and money markets. It was developed by the English economist J. Hicks in 1937. in the article “Mr. Keynes and the Classics” and became widespread after its publication in 1949. books by the American economist E. Hansen “Monetary Theory and Fiscal Policy” (therefore the model is sometimes called the Hicks-Hansen model).

The main goal of economic analysis using the IS-LM model is to combine the commodity and money markets into a single system. The IS-LM model makes it possible to visualize the processes of interaction between individual markets not only during adaptation to a joint equilibrium, but also during the transition from one equilibrium state to another.

Methodology for building a model. To build the IS-LM model, it is necessary to determine the parameters connecting the commodity and money markets. The main parameter of the commodity market is the real volume of national production. It is known that it determines the demand for money for transactions and, therefore, the total demand for money and the interest rate at which equilibrium is achieved in the money market. In turn, the level of interest rates affects the volume of investments, which are an element of total expenses. Thus, the commodity and money markets are interconnected through national income Y, investment I and interest rate r. The IS-LM model preserves all the premises of the simple Keynesian model: · the price level is fixed (P = const) and is an exogenous value, therefore the nominal and real values ​​of all variables coincide; · aggregate supply (volume of output) is completely elastic and capable of satisfying any volume of aggregate demand; · income (Y), consumption (C), investment (I), net exports (Xn) are endogenous variables and are determined within the model; · government spending (G), money supply (M), taxes (T) are exogenous quantities and are specified outside the model. The exception is the assumption of a constant interest rate. If in the Keynesian cross model the interest rate is fixed and acts as an exogenous parameter, then in the IS-LM model it is endogenous and is formed within the model; its level changes and is determined by changes in the situation (equilibrium) in the money market. The main equations of the model are: - the main macroeconomic identity, - the consumption function, where a is the value of autonomous consumption, b is the marginal propensity to consume. - investment function, where c is the amount of autonomous investment, a certain level of investment that is always necessary, d is an indicator of the sensitivity of investment to the interest rate (elasticity of investment with respect to the interest rate) All other parameters affecting investment are considered fixed and are taken into account in the amount of autonomous investment . - function of the demand for money, where e is the monetization coefficient (sensitivity of the demand for money to the level of income), f is the sensitivity of the demand for money to the interest rate (in the Keynesian concept of liquidity preference, this is the marginal propensity to prefer money as property or, in other words, , coefficient characterizing the preferences of economic entities regarding the interest rate). We will consider the economy closed. In the short term, the economy is under conditions of underemployment, the price level is fixed, the interest rate and total income are flexible, and the nominal and real values ​​of all variables coincide. In the long run, when the economy is at full employment, the price level is flexible. In this case, the money supply is a nominal value, and all other variables in the model are real.

IS curve (“investment – ​​savings”) describes the equilibrium in the goods market and reflects the relationship between the market interest rate r and the level of income Y. The IS curve is derived from a simple Keynesian model (the equilibrium model of aggregate expenditures or the Keynesian cross model), but differs in that part of aggregate expenditures and, above all, investment costs now depend on the interest rate. The interest rate ceases to be an exogenous variable and becomes an endogenous value determined by the situation in the money market, i.e. inside the model itself. The dependence of part of total expenses on the interest rate results in the fact that for each interest rate there is an exact value of the equilibrium income and therefore an equilibrium income curve for the commodity market can be constructed - the IS curve. At all points of the IS curve, the equality of investments and savings is observed (IS: Investment = Savings).

The simplest graphical derivation of the IS curve involves the use of the saving and investment functions.

In Fig. 6.1. Quadrant II presents a graph of the savings function S(Y): with an increase in income Y 1 to Y 2, savings increase from S 1 to S 2. Quadrant III presents the I=S graph (a line at an angle of 45° to the coordinate axes I and S). I 1 =S 1, I 2 =S 2. Quadrant IV presents a graph of the investment function I=I(r), showing the growth of investment as a function inverse to the level of interest rate r. Based on these data, in quadrant I we find many equilibrium combinations of Y and r, i.e. IS curve: IS 1 (Y 1, r 1) and IS 2 (Y 2, r 2), the lower the interest rate, the higher the level of income.

Rice. 6.1. Graphical output of the IS curve

LM curve (“liquidity preference – money”) shows all possible ratios of Y and r at which the demand for money equals the supply of money. The term LM reflects this equation: L stands for liquidity preference, the Keynesian term for the demand for money, and M stands for the supply of money.

The LM curve is based on the Keynesian theory of liquidity preference, which explains how the relationship between supply and demand for real funds determines the interest rate. Real cash holdings are nominal holdings adjusted for changes in the price level and equal to M/P. According to liquidity preference theory, the supply of real funds is fixed and determined by the central bank. Let's consider the construction of the LM curve based on graphical analysis of the money market equilibrium.

The IS curve reflects all relationships between Y and r at which the goods market is in equilibrium. The LM curve is all combinations of Y and r that provide money market equilibrium. The intersection of the IS and LM curves gives the only values ​​of the interest rate r* (equilibrium interest rate) and the level of income Y* (equilibrium level of income), ensuring simultaneous equilibrium in the commodity and money markets. Equilibrium in the economy is achieved at point E (Fig. 6.10).

Fig.6.10. Equilibrium in the IS-LM model

In Figure 6.10, for example, at point A, which lies on the IS curve but outside the LM curve, there is equilibrium in the goods market (i.e., total output equals total demand). At this point, the interest rate is higher than the equilibrium rate, so the demand for money is less than its supply. Since people have extra money, they will try to get rid of it by buying bonds. As a result, bond prices will increase, which will lead to a fall in interest rates, which in turn will lead to an increase in planned investment spending. Thus, aggregate demand will increase. The point describing the state of the economy moves down the IS curve until the interest rate falls and aggregate output rises to the equilibrium level.

If the economic situation is described by a point lying on the LM curve, but outside the IS curve (points B and D), market mechanisms will still lead it to equilibrium. At point B, even though the demand for money is equal to its supply, aggregate output turns out to be higher than the equilibrium level, greater than aggregate demand. Firms are unable to sell their products and accumulate unplanned inventories, which forces them to reduce production and reduce output. A decrease in output means that the demand for money will fall, which will lead to lower interest rates. The point describing the state of the economy will move down the LM curve until it reaches the general equilibrium point.

The equilibrium position of both markets can be determined by jointly solving the equations of the IS and LM curves. The algebraically equilibrium output can be found by substituting the value r of the LM: equation into the IS equation and solving it for Y:

The resulting expression is an algebraic form of the aggregate demand function. From this equality it is clear that, influencing the amount of expenditures by manipulating the volume of government expenditures (G) and taxes (T), the state uses fiscal policy instruments by changing the money supply () - monetary (monetary) policy. From the conditions of joint equilibrium, the most important concept of Keynesian theory is derived - effective demand, which is the determining parameter in the economy. Effective demand– the amount of aggregate demand corresponding to the joint equilibrium.