AD–IA model: Difference between revisions

Revision as of 02:52, 27 April 2013

Revision as of 12:22, 27 April 2013

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* A change in the monetary rule

'''Example''': Suppose the government were to cut taxes. This would lead to an increase in expenditures and thus an increase in demand. The demand curve would therefore shift to the right and real GDP would be growing above potential. The inflation adjustment line would then shift upward (reflecting an increase in the inflation rate) causing a movement along the new demand curve until real GDP was equal to potential.^^

== More advanced ==

This model is further advanced in higher levels of undergraduate studies.

Economist [[David Romer]] proposed in the ''[[Journal of Economic Perspectives]]'' in 2000<ref>http://elsa.berkeley.edu/~dromer/papers/JEP_Spring00.pdf</ref> that the LM curve be replaced in the [[IS-LM]] model. <ref>http://elsa.berkeley.edu/~dromer/papers/JEP_Spring00.pdf</ref> Romer suggested that although the Federal Reserve uses open market operations to impact the federal funds rate, they are not targeting money supply, but rather the interest rate. Therefore, he suggests removing the LM curve and replacing it with the MP curve.

==See also==

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* [[Monetary policy]]

* [[Real Business Cycle Theory]]

References==

{{Reflist}}

==External links==