Scribd Logo
Upload

Welcome to Scribd!

  • ISTR ADAS Guideline

    Uploaded by

    Gamma Mpetsheni
    11 views1 page
    An increase in government spending will lead to higher interest rates, income, and price levels in the short-run according to the ISTR model. With a fixed exchange rate and flexible prices, the increase in spending shifts the IS curve right, increasing equilibrium output and prices. Higher prices decrease net exports, shifting IS left to a new equilibrium with lower output. Meanwhile, a cut in interest rates shifts the TR curve right in the ADAS model, increasing investment and output. Equilibrium output and prices rise in the short-run until prices adjust and the economy reaches a new long-run equilibrium with higher output, income, and price levels.

    Original Description:

    Steps to describe macroeconomic changes to consumption

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    An increase in government spending will lead to higher interest rates, income, and price levels in the short-run according to the ISTR model. With a fixed exchange rate and flexible prices, the increase in spending shifts the IS curve right, increasing equilibrium output and prices. Higher prices decrease net exports, shifting IS left to a new equilibrium with lower output. Meanwhile, a cut in interest rates shifts the TR curve right in the ADAS model, increasing investment and output. Equilibrium output and prices rise in the short-run until prices adjust and the economy reaches a new long-run equilibrium with higher output, income, and price levels.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    11 views1 page

    ISTR ADAS Guideline

    Uploaded by

    Gamma Mpetsheni
    An increase in government spending will lead to higher interest rates, income, and price levels in the short-run according to the ISTR model. With a fixed exchange rate and flexible prices, the increase in spending shifts the IS curve right, increasing equilibrium output and prices. Higher prices decrease net exports, shifting IS left to a new equilibrium with lower output. Meanwhile, a cut in interest rates shifts the TR curve right in the ADAS model, increasing investment and output. Equilibrium output and prices rise in the short-run until prices adjust and the economy reaches a new long-run equilibrium with higher output, income, and price levels.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Use both the ISTR model and the ADAS model to Use both the ISTR model and

    R model and the ADAS model to


    illustrate and explain the impact on interest rates, illustrate and explain the impact on interest rates,
    income and the price level of an increase in income and the price level of a cut in interest rates
    government spending for an economy in which for an economy in which prices are flexible but the
    prices are flexible but the exchange rate is fixed. exchange rate is fixed. Assume that the AS curve is
    Assume that the AS curve is positively sloped in the positively sloped in the short-run.
    short-run.

     ↑G  IS curve shifts to right  ↓i  TR curve shifts to right (down).


     ↑desired demand  firms ↑Y  ↓i ↑I  ↑ desired demand  firms ↑Y
     TR not met, CB ↑i  ↓I  ↓Y= ∆I x 1/1-mpc  Move down IS curve. ↑Y= ↑I x 1/1-mpc
     New equil is point E1.  New equil is point E1.
     Shift in equilibrium to E1 means that at P0 AD curve  Shift in equilibrium to E1 means that at P0 AD curve
    shifts to right to point B. shifts to right to point B.
     @P0 AD > AS P↑  @P0 AD > AS P↑
     As P↑ AD↓ and AS↑ until new equilibrium is reached  As P↑ AD↓ and AS↑ until new equilibrium is reached
    at P1 and Y1. This is E2 at P1 and Y1. This is E2
     @E2 AD=AS, P = P1 & Y = Y2  @E2 AD=AS, P = P1 & Y = Y2
     ↑P  ↓X & ↑Z  ↑P  ↓X & ↑Z
      ↓Y=C+I+G+↓X-↑Z   ↓Y=C+I+G+↓X-↑Z
      IS curve shifts to left to IS2.   IS curve shifts to left to IS2.
     @X Taylor Rule is not met because output gap has  @X Taylor Rule is not met because output gap has
    fallen. fallen.
     Central Bank  lowers i in line with falling output  Central Bank  lowers i in line with falling output
    gap. gap.
     ↓i  ↑I  ↑Y = ↑I x 1/1-mpc.  ↓i  ↑I  ↑Y = ↑I x 1/1-mpc.
     New equilibrium is E2 where i = i2 Y = Y2 & P = P1  New equilibrium is E2 where i = i2 Y = Y2 & P = P1

    You might also like