Curve IS reflects all combinations of interest rate and income at which the commodity market is in equilibrium. The curve LM- all combinations Y and d, which ensure the equilibrium of the money market. To determine the general equilibrium in the commodity and money markets, it is necessary to combine both curves on one chart (Fig. 6.9). Dot E- the only one in which both markets will be in equilibrium.
Consider point A. It lies on a curve IS, but out of the curve LM. It is known that at all points above the curve LM, the supply of real money balances exceeds the demand for them.
An excess money supply means that economic agents will have “extra money”, which will force them to buy bonds. An increase in demand for securities will increase their market price, which will cause a decrease in the interest rate, accompanied by an increase in planned investments, total costs, and hence an increase in equilibrium income. All these processes will lead to movement along the curve
IS down to point E . Dot D located on a curve IS below the curve LM. In her_demand for real cash balances exceeds their offer. The shortage of money forces economic entities to sell bonds, the supply of which will increase, which will lead to a decrease in their market price and, accordingly, an increase in the interest rate. As a result, planned investments and total expenditures will decrease, and, consequently, the equilibrium real income will decrease. Eventually economic system will move up the curve IS, To balance point E .
Consider next the state of the markets in point IN. . Because the dot IN located above the IS curve, then real income Y2 more than the total costs at the rate of interest r2. Firms in this situation will not be able to sell their products, which will lead to an increase in inventory. The growth of the latter will force firms to reduce production, will lead to a decrease in real income. As income decreases, the demand for real money balances will fall, which, with the money supply unchanged, will lead to a decrease in the interest rate. A simultaneous decrease in income and the interest rate means movement along the curve LM down to equilibrium point E .
Point C located on the LM curve below balance points E. IN point C at an interest rate r1 total spending exceeds real income. Firms, reacting to excess aggregate spending, will begin to increase investment, which will lead to an increase in income. At the same time, the demand for real money balances will also grow. Since the money supply has remained the same, an increase in this demand will lead to an increase in the interest rate. As a result, the economic system will move up the curve LM until it reaches an equilibrium state in point E.
Thus, we can draw the following conclusion: there are market mechanisms that, in the event of a violation of the equilibrium state of the commodity and money markets, return them to the point of equilibrium.
20.IS-LM model and curve construction aggregate demand. Relationship between the IS-LM model and the AD-AS model.
Using the model IS-LM, construct an aggregate demand curve. Each of its points will reflect the relationship between price levels and income (output). price level R2 corresponds to income Yx. Let's find in Fig. 6.186 point with coordinates (Y1; P1). This is the point E "1. Suppose the price level has risen from P1 before R2. This will reduce the real money supply from M/P1 to M/P2.
rates and curve shift LM1 position LM2(see fig.). 
Equilibrium in the money market will be restored at a higher interest rate - r2. In the commodity market, as the interest rate rises, investment and total spending will decrease, which will cause a decrease in real equilibrium income from Y1 before Y2. So the price level R2 will correspond to the new equilibrium state in the model
IS-LM at the point E2 at the rate of interest r2 and real income Y2.
On fig. 6.186 build a point E "2 with coordinates (Y2; P2). Can
also consider all possible price levels and the levels of equilibrium real income corresponding to them and construct a set of points with coordinates (Yi; Pi). By connecting them, we get the aggregate demand curve, AR (see Fig. 6.186). It will have a negative slope, as it reflects the inverse relationship between the price level and income level. Since the curve AD derived from the model IS-LM, its slope will be determined by the slopes of the curves IS And LM.
25. Types of budget deficit. Funders of the budget deficit.
There are structural and cyclic deficits. The cyclical deficit is the def budget, which is the result of the cyclical decline in production, the automatic tax cuts have been received and the increase in state transfers against the backdrop of an economic recession. He witnesses about the underutilization of the products of the possibilities of society. Structural def is the difference between m / y expenditures and income parts of the budget in conditions of a fairly equilibrium function of the economy system. it arose as a result of those deliberately taken by the government of measures to increase the state expenses and lower taxes in order to prevent a recession.
Methods for covering the budget deficit:
Increasing taxes - the age of state income (this measure is rarely used, because business activity is decreasing and reducing output)
Monetary financing - implemented through the monetization of the def state budget. Monetarizats is not obligated to be accompanied by the issue of cash, it can be carried out in the form of: a) expanded loans provided by the state enterprise at preferential rates%; b) deferred payments (government buying T and Y, not paying them on time)
Debt financing through the issuance and sale of state-owned Central Banks. At domestic debt financing the state sells the Central Bank to the subjects of the economy and the population of the country, paying%. The money from the sale of the Central Bank is used for refinancing. If state securities are sold by the cent bank, this can lead to an expanded money supply and inflation; if a financial and credit institution - this leads to a decrease business activity. At external debts financed by the state Central Bank are sold to governments, business entities and residents of other countries. This is possible if the income from the Central Bank of a given country is higher than from obligations in other states;
Use Wed-in from the privatization of the state-oh property-ti.
ВD=G-T - budget deficit.
Approaches to the regulation of the budget deficit:
the budget should be balanced annually, i.e. each financial year must provide equal m / y doh and raskh.
The budget should balance during the economy cycle, and not annually. During the period of declines in production, the government will increase expenses, which leads to an increase in deficits, and during the period of recovery, reduce expenses, which will increase the surplus of income. As a result, at the end of the industrial cycle, the surplus of dox should cover the deficit, formed as a result of the decline in production.
functional finance concept. The goal of public finance is to ensure macroeconomic balance. First: the consequence of macroeconomic equilibrium is economic growth, thanks to which the national income increased, and so on. growing taxes received in the budget; secondly, the government can always raise taxes by issuing additional money, and, consequently, eliminate the deficit; thirdly, the budget def does not negatively affect the development of E.
26.Gos debt, its types and social economy consequences. Government debt regulations.
State debt - the amount of a country's debt to other countries, its own or foreign legal entities and individuals.
Distinguish between internal and external public debt. Internal debt - the debt of the state is inhabited, enterprises, organizations of their country, in the form of loans, state loans, other promissory notes, guaranteed by the government. External debt - the debt of the state to foreign states, organizations and individuals of other countries. In order to pay the interest on the foreign debt and repay it, the nation is forced to give valuable T and Y to creditors, which negatively affects E. foreign debt is estimated by such variables as the share external debt in GDP and the ratio of the annual volume of payments on external debt to the volume of foreign exchange received for the year (should not exceed 25%).
Ways to repay external debt:
Payment from gold and foreign exchange reserves
Consolidation of external debt - changing the terms of borrowing, due to the change in terms of repayment, when short-term obligations (bonds) turn into long and medium-term ones.
Conversion - reducing the total amount of external debt of the state by changing the terms of the loan, the forms and terms of its return,% rates, i.e. conditions relating to profitability
Addressed to international banks
D / GDP - the burden of public debt.
Problems with internal debt:
The payment of interest on the debt increased the disparity in income, tk. state Central Bank purchase the most wealthy, and taxes, which are financed by Xia%, everyone pays.
In order to repay the debt and pay the interest, the government is forced to raise cash rates, which reduces incentives to invest, and therefore slows down the development of E.
The issuance of a new Central Bank to raise the lending rate, which complicates the process of investing capital.
Large domestic debt scares away foreign investors and generates uncertainty among the population.
Expansion of budget taxes (growth of state spending and tax cuts) leads to substitution effect, the cat is expressed in reducing the level of real private investment plans as a result of an increase in state expenses. If the state expenses are increased, then the age of the scoop is expenses, deaths and consumption of expenses. This is a scoop stimulus and increase breath with a multiplier effect. An increase in income will increase the demand for money. An increase in the demand for money with fixed supply causes an increase in the interest rate, which lowers the level of investment and net exports. The drop in net exports is due to the growth of the scoop of dox, which was accompanied by an increase in imports.
The degree of stabilization of the impact of the budget deficit depends on the way it is financed. In the case of monetarization of the def, seigniorage arose - the state's income from printing money
In terms of increasing the level of inflation, having shown the effect of Oliver-Tanzi - consciously, by delaying tax payments, the terms of taxes were deducted to the state budget.
Topic 4. JOINT EQUILIBRIUM OF COMMODITY AND MONEY MARKETS (IS-LM MODEL)
Equilibrium in the market of goods and services.
money market equilibrium.
Interaction of the real and monetary sectors of the economy.
IS-LM model and construction of the aggregate demand curve.
Equilibrium in the market of goods and services.
The simplest graphical derivation of the IS curve is associated with the use of the savings and investment functions (Fig. 6.1).
Rice. 6.1. Plotting the IS Curve
Quadrant II shows a graph of the savings function S(Y): as income Y1 rises to Y2, savings increase from S1 to S2.
Quadrant III shows the I=S plot (line at 45° to the I and S coordinate axes). I1 = S1, I2 = S2.
Quadrant IV contains a graph of the investment function I=I(r), showing investment growth as a function inverse to the level of interest rate r.
Based on these data, in quadrant I we find a set of equilibrium combinations of Y and r, i.e. IS curve: IS1(Y1, r1) and IS2(Y2, r2), the lower the interest rate, the higher the level of income.
Similar conclusions can be drawn using the Keynesian cross model (Figure 6.2).
The investment graph (Figure 6.2, I) shows that low interest rates correspond to a high level of investment. At the level of interest rate r1, the volume of planned investments will be I1. Accordingly, the total expenditures E1 (Fig. 6.2, II) are shown by the line C + I1 (r1) + G, which, intersecting with the bisector, determines the equilibrium point E1 and the equilibrium volume of national income Y1. Thus, at the interest rate r1, the national income Y1 will be in equilibrium. These parameters will define point A (Fig. 6.2, III). If the interest rate rises from r1 to r2, investments decrease from I1 to I2 (Fig. 6.2, I), the total expenditure curve shifts down to position C + I2 (r2) + G (Fig. 6.2, II). This, in turn, lowers the equilibrium level of national income from Y1 to Y2 (Fig. 6.2, III). These parameters will determine point B. If we continuously change the values of the interest rate and find the corresponding values of national income for each, we will get the IS curve (Fig. 6.2, III).
Rice. 6.2. Plotting the IS Curve from the Keynesian Cross Model
Moving along the IS curve shows how the level of national income must change with a change in the level of the interest rate in order for the goods market to remain in equilibrium.
The IS curve has a negative slope, i.e. the output that balances the market for goods falls as the interest rate rises. A higher interest rate causes a decrease in investment and consumer spending, and hence aggregate demand (aggregate spending), leading to more low level equilibrium income (Fig. 6.3).
The IS curve splits the economic space into two regions. At all points above, the supply of goods is greater than the demand for them, i.e. the amount of national income is more than planned expenditures. At point A, the total output Y1 is greater than the equilibrium output. This oversupply of goods leads to unplanned stockpiling, which reduces output and moves the economy towards the IS curve. At all points below the IS curve, there is a shortage in the goods market. At point B, the total output Y2 is below the equilibrium. Excess demand leads to an unplanned drawdown of stocks, which implies an increase in output and a shift towards the IS curve. Thus, the IS curve connects the points where the total quantity of goods produced is equal to the total quantity demanded for them.
Shifts in the IS curve are due to changes in any of the expenditure components C, I, G, and taxes T. Anything that increases spending (the optimism of entrepreneurs and consumers that increases their desire to increase spending at any interest rate, which leads to an increase in consumer and investment spending; an increase in government spending, lowering lump-sum taxes, and increasing transfer payments) shifts the IS curve to the right, and vice versa.
Thus, the IS curve shifts from position IS1 to position IS2 (Fig. 6.4) as a result of:
increase in consumer spending;
increase in planned investments (not related to changes in the interest rate);
an increase in government spending;
tax cuts.
^ Simple IS Curve Algebra
Most full view about the relationship between the level of income, the interest rate and the features of the IS curve gives its algebraic analysis.
The IS curve equation can be obtained by substituting the consumption and investment function into the basic macroeconomic identity and its solution with respect to Y.
The equation for the IS curve with respect to Y is:
The IS curve has a negative slope because the coefficient at the rate of interest is negative. If the investment is very sensitive to the interest rate, then d is large and the IS curve is flatter, otherwise it is relatively steep. The slope of the IS curve also depends on the marginal propensity to consume b: the more marginal propensity to consumption, the greater the change in income resulting from a change in the rate of interest.
The slope of the IS curve is determined by two factors: the government spending multiplier and the interest rate sensitivity of investment.
Since the coefficient on G (government spending multiplier) is positive, an increase in government spending shifts the IS curve to the right, while the coefficient on T (tax multiplier) is negative and an increase in taxes shifts the IS curve to the left. Also, the larger the marginal propensity to consume, the larger the multiplier, and hence the larger the shift in the IS curve. The IS curve shifts a smaller distance with a change in taxes than with a change of the same amount in government spending.
^ money market equilibrium.
The construction of the LM curve is based on the Keynesian theory of liquidity preference, which explains how the ratio of demand and supply of real reserves Money determine the rate of interest. Real cash reserves are nominal reserves adjusted for changes in the price level and equal to M/R. According to the liquidity preference theory, the supply of real money is fixed and determined by the central bank. Let's consider the construction of the LM curve based on the graphical analysis of the money market equilibrium.
Rice. 6.5. Graphical output of the LM curve (first method)
In Figure 6.5, the money supply curve is a vertical line corresponding to a given real amount of money in the economy. The intersection of the demand curve with the money supply curve gives us the interest rate r1, which balances the money market at given level income Y1. If income increases to the level Y2, then the money demand curve will shift to the right, a higher level of income corresponds to a higher equilibrium interest rate r2. The sum of all the pairs (Y, r) that balance the money market will give us the LM curve.
T 
Just as the economy tends to the equilibrium points that lie on the IS curve, it tends to the equilibrium points determined by the LM curve (Fig. 6.6).
If economic situation corresponds to the point to the left (top) of the LM curve (point A), then we can talk about an excess supply of money. People turn out more money than they wish to have. In order to get rid of the “extra” money, they will, for example, buy bonds, this will lead to an increase in bond prices and a decrease in interest rates. With an excess supply of money, the interest rate will fall until it reaches the equilibrium level given by the LM curve.
If the economy is described by a point to the right (below) of the LM curve, then we can talk about an excess demand for money. At point B, people want more money than they have. To do this, they will sell bonds, thereby reducing their price and increasing the interest rate. This process will continue until the interest rate rises to the equilibrium level defined by the point on the LM curve.
Consider alternative way plotting an LM curve. Let us assume that the volumes of money supply and demand for them for transactions do not depend on the interest rate (Fig. 6.7).
Rice. 6.7. Graphical output of the LM curve (second method)
Quadrant IV shows a graph of the money demand function from the asset side, and quadrant II shows a graph of the money demand function depending on income (money demand for transactions - Mdsd). In quadrant III, the straight line shows how a given real amount of money can be distributed between asset demand for money and transaction demand for money. Based on these lines in quadrant I, a set of combinations of r and Y is determined, corresponding to equilibrium in the money market.
At the interest rate r0, the demand for money from the assets is equal to M 0 dakt. Then the demand for money for transactions is M 0 dsd. Such an amount of money for the indicated purposes will be required only if the income is equal to Y0. Therefore, at r0 and Y0, the demand in the money market will be equal to their supply. You can find another equilibrium combination in reverse order.
If we take into account that the supply of money and the demand for them for transactions may depend on the interest rate, then the construction of the LM curve becomes more complicated, since each interest rate has its own lines in quadrants II and III.
Thus, the LM curve describes all combinations of interest rates and aggregate output for which the money market is in equilibrium. The points lying above the line LM correspond to an excess supply of money, which can be seen by considering, for example, point F. In order for the demand for money to equal their supply with income YF, the interest rate rF is needed. Point F corresponds to the higher rate of interest at which the demand for money from the asset side is less than what is required to fully use the amount of money offered. By similar reasoning, one can verify that in the area below the LM line, the amount of demand for money is greater than their supply.
The configuration of the LM curve makes it possible to distinguish three sections on it: Keynesian (horizontal), intermediate (sloping) and classical (vertical).
It should be noted that the LM curve, as well as the IS curve, does not express the functional dependence of national income on the interest rate, or vice versa, but determines all possible combinations of combinations of equilibrium values of income and the interest rate.
^ Simple LM Curve Algebra
The LM curve equation can be obtained by solving the equation 
relative to r.
The equation of the LM curve with respect to r is: 
.
The equilibrium interest rate equation shows the rate that gives equilibrium in the money market for any value of income and the value of the real money supply. Along the LM curve, the real money supply is fixed.
Since the coefficient characterizing the slope of the curve is positive, the LM curve has a positive slope and reflects a direct relationship between income and the interest rate. Higher income predetermines a higher demand for money, which leads to a higher rate of interest.
The slope of the LM curve depends on two parameters: the sensitivity of money demand to income (e) and the sensitivity of money demand to the interest rate (f).
The LM curve will be flatter if:
The sensitivity of the demand for money to changes in the interest rate is high. This means that even a slight change in the rate of interest leads to a significant change in the demand for money;
The sensitivity of the demand for money to changes in income is low. A significant change in income causes a small change in the demand for money.
Two factors can cause the LM curve to shift: a change in the demand for money and a change in the money supply.
Consider, for example, an increase in the money supply at a given price level and a fixed output at Ya (Figure 6.8).
Rice. 6.8. Shift in the LM curve (increase in money supply)
On fig. 6.8, b shows the curves of demand Md and money supply Ms1, and the point of their intersection (point A) determines the initial level of the interest rate r1. Suppose the central bank increases the money supply by buying securities for open market. At a fixed level of income, an increase in the amount of money shifts the money supply curve to Ms2, and the equilibrium interest rate falls to r2. On fig. 6.8, a decrease in the equilibrium rate from r1 to r2 corresponds to a shift in equilibrium from point A to point A 'and a shift in the curve from position LM1 to position LM2 (lower and to the right).
On fig. 6.9 the shift of the LM curve is due to a change in the demand for money for exogenous reasons at a given price level and a fixed output at the level Ya.
Rice. 6.9. Shift in the LM curve (increased demand for money)
Consider point A on the original LM1 curve. Assume that the economy has financial crisis which caused many companies to go bankrupt. As a result of the fact that securities have become more risky assets, people have a desire to have more money. This increase in the demand for money at a fixed level of income is shown in Fig. 6.9b by a shift in the money demand curve from Md1 to Md2. The new equilibrium in the money market shows that the equilibrium interest rate will increase to the level r2, and the equilibrium point will shift from point A to point A'. As the demand for money grows, the LM curve in Fig. 6.8 a shifts from position LM1 to position LM2 (up and to the left).
^ Interaction of the real and monetary sectors of the economy.
money market equilibrium. The intersection of the IS and LM curves gives the only values of the interest rate r* (the equilibrium rate of interest) and the level of income Y* (the equilibrium level of income), ensuring simultaneous equilibrium in the commodity and money markets. Equilibrium in the economy is reached at point E (Fig. 6.10). On fig. 6.10 (for example, at point A, which lies on the IS curve, but outside the LM curve), there is an equilibrium in the commodity market (ie, aggregate output is equal to aggregate demand). At this point, the interest rate is above the equilibrium rate, so the demand for money is less than their 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, and this, in turn, will lead to an increase in planned investment spending. Thus, aggregate demand will rise. 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 bring it to equilibrium. At point B, despite the fact that the demand for money is equal to their supply, the total output is above the equilibrium level, more than the total demand. Firms cannot 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 LM curve until it reaches the point of general equilibrium.
The equilibrium position of both markets can be determined by jointly solving the equations of the IS and LM curves. Algebraically, the equilibrium output can be found by substituting the value r equations LM: 
into the equation IS and his decisions regarding Y:
,
Where 
.
The resulting expression is an algebraic form of the aggregate demand function. From this equality, it can be seen that, influencing the amount of spending by manipulating the volume of public spending (G) and taxes (T), the state uses tools fiscal policy, by changing the money supply () – monetary (monetary) policy.
^ Model IS-LM in various economic concepts
The toolkit of the IS-LM model proposed by J. Hicks is considered by various economic schools.
IN classical concept the IS-LM model can be used with a certain degree of conventionality, since the markets of the classics are not connected. The IS curve should be fairly flat because aggregate demand is highly elastic with the interest rate. The LM curve is vertical, fixed at the level of natural output. IN this case the IS-LM model is not a joint equilibrium model: the same level of income is provided at any rate of interest, and the level of natural output is given by the number of factors of production used.
IN monetarist concept the IS-LM model can be correctly used. At the same time, the IS curve will be quite flat due to the high elasticity of aggregate demand with respect to the interest rate. The LM curve will be quite steep due to the fact that the main argument for money demand is permanent income.
In the Keynesian concept, the IS curve is rather steep due to the fact that of all the components of aggregate demand, only investment demand has an interest rate as an argument of its function, and at the same time, the interest rate elasticity of investment spending is small. The LM curve is fairly flat due to the high elasticity of demand for money with respect to the interest rate. 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 is the amount of aggregate demand corresponding to joint equilibrium. 
The graphical toolkit of the IS-LM model allows you to analyze the impact various options macroeconomic policy on aggregate demand and consider how each planned policy change affects the equilibrium level of income.
The IS and LM curves can change their position under the influence of various factors, of which the most interesting are changes in government spending, taxes and the money supply, since they are tools of fiscal and monetary policy. In the IS-LM model, the impact of fiscal policy will be reflected in shifts in the IS curve, and monetary policy in shifts in the LM curve.
Impact of fiscal policy
Consider a shift in the IS curve caused by an increase in government spending. Suppose that initially equilibrium in the markets for goods and money was achieved at point E1 with the interest rate r1 and national income Y1 (Fig. 6.11).
Suppose the economic situation in the country required an increase in government spending. They lead to an increase in total spending, which leads to an increase in national output, the IS1 curve shifts to IS2. But the growing total output increases the demand for money, which begins to exceed the money supply, which, accordingly, leads to an increase in the interest rate to r2. In the commodity market, an increase in total spending encourages entrepreneurs to increase investment. In turn, the growth of the interest rate begins to restrain this process, forcing entrepreneurs to reduce the investment growth planned at the interest rate r1. In this case, a new equilibrium position in the markets for goods and money will be reached at point E2, and the total output will increase to Y2.
There is an increase Y not on DY = Y3 - Y1(in the model of the Keynesian cross - by the amount 
), but by the value Y2-Y1, i.e. to a lesser extent than expected: an increase in the interest rate reduces the multiplier effect of government spending. The increase in government spending partially crowds out planned investments, i.e. has a crowding out effect. This effect reduces the effectiveness of stimulating fiscal policy. It is to him that monetarists refer, arguing that fiscal policy is not effective enough and priority in macroeconomic regulation should be given to monetary policy.
Reducing taxes while keeping government spending unchanged has the same effect as increasing government spending. It leads to the fact that at any given value of the interest rate, the aggregate output will be greater due to the growth of 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 LM curve shifts the IS curve (Figure 6.12).
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 (income growth is almost equal to the distance of the shift of the IS curve). This is explained by the fact that in the initial state, the equilibrium was established at a low level of national income and close to the minimum rate percent. In such a situation, people have little demand for money for transactions and a large demand for them from assets. If, in this state of the economy, aggregate output begins to grow, then the emerging additional need for money for transactions is satisfied at the expense of money in assets without causing a significant increase in the interest rate, and the planned investment will not be reduced.
The consequences of the shift of the IS line in the intermediate section of the LM curve are analyzed in Fig. 6.11.
If the joint equilibrium in the markets for goods and money falls on the classical segment of the LM curve, a shift in the IS line will not change the aggregate demand for goods in the current period at all. The reason is that at an interest rate higher than the maximum, there is no longer any money in the composition of household assets, so new investments can only be made by redistributing the existing volume. loan 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.
The equilibrium level of income in the IS-LM model will also depend on the slope of the curves. Since the slope of the IS curve is determined by the value of the spending multiplier and the sensitivity of changes in autonomous spending to the interest rate (the smaller these coefficients, the steeper the IS curve), and the slope of the LM curve is determined by the sensitivity of money demand to changes in income and changes in the interest rate. For example, efficiency tax policy will be stronger where the marginal propensity to consume is higher (the IS curve is flatter). With high values of the propensity to save, the reduction of the tax burden will not lead to short-term stabilization, but will be expressed in the formation of additional private savings.
Thus, stimulating fiscal policy (increasing government spending and cutting taxes) shifts the IS curve to the right (upward), which increases the level of income and the interest rate. Vice versa, contractionary fiscal policy (reducing government spending and increasing taxes) shifts the IS curve to the left, which reduces income and lowers the interest rate.
Impact of monetary policy
Let the economy initially be in equilibrium at point E1 (Fig. 6.13). Suppose that the government decides to reduce the unemployment rate, increase the volume of aggregate output by increasing the money supply. An increase in the money supply shifts the LM curve to the right (downward), as a result, the interest rate falls from r1 to r2, and income increases from Y1 to Y2.
An increase in the money supply (a shift in the LM curve to LM2) creates an excess supply in the money market, causing the interest rate to fall. Its fall causes an increase in investment spending, leading to an increase in demand for goods and services, an increase in total output. The joint equilibrium of the market for goods and money moves to point E2, 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 a new, more high level money offers.
A decrease in the money supply implies the reverse process: a shift of the LM curve to the left, an increase in the interest rate, and a decrease in output.
The degree of influence of monetary policy on the economy also depends on the slope of the IS and LM curves. When the money supply changes by the same amount, the effect of lowering the interest rate will be the greater, the steeper the LM curve, i.e. the rate of interest will fall the more the demand for money is less sensitive to changes in the rate of interest. If the IS curve is flatter, which means that spending is highly sensitive to changes in the interest rate and the government spending multiplier is large, then a very small decrease in the interest rate is enough to significantly increase spending, multiplying income. The effectiveness of monetary policy is greater the steeper the LM curve and the flatter the IS curve.
Thus, stimulating monetary policy, the instrument of which is an increase in the money supply (shift to the right (down) of the LM curve), leads to an increase in the level of income and a decrease in the interest rate. The result of a contractionary monetary policy (shift to the left (up) of the LM curve), based on a reduction in the money supply, is a decrease in income and an increase in the interest rate.
Interaction of 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 results of another.
Suppose the government is concerned about the budget deficit and decides to increase taxes. Let us consider what effect this policy will have on the economy as a whole. According to the IS-LM model, the results will depend on what policy the Central Bank pursues in response to tax increases. Several options are possible.
1. The central bank maintains the money supply at a constant level (Figure 6.14a). Increasing taxes shifts the IS curve to the left (down) to position IS2. As a result, total output decreases (more high taxes reduce consumer and investment spending) and the interest rate (more low income reduces the demand for money).
2. The central bank maintains the interest rate at a constant level (Fig. 6.14, b). In this case, the tax increase also shifts the IS curve to the left (down) to position IS2, while the central bank reduces the money supply so that the interest rate remains at its original level, the LM curve shifts to position LM2. Income is reduced by an amount greater than in Figure 6.14, 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 keeping the interest rate high, deepens the recession in the economy.
3. The central bank increases the money supply to keep income levels constant (Figure 6.14c). An increase in taxes will not cause a fall in aggregate output because the LM curve shifts down to LM2 to offset the shift in the IS curve (higher taxes reduce consumption, while a lower interest rate encourages investment). In this case, an increase in taxes contributes to a fall in the interest rate.
Rice. 6.14. Interaction between fiscal and monetary
policies in the IS-LM model
This example illustrates that the impact of fiscal policy depends on the policy Central Bank, i.e. whether it keeps the money supply, the rate of interest, or the level of income at a constant level.
Combining fiscal and monetary policy, it is possible to achieve solutions to more complex problems than simple regulation of the volume of output (for example, without changing the volume of output, change its structure). Such a task can be very relevant if the economy is in a situation full time and hence a change in output is undesirable, but its structure may need to be changed.
The IS-LM model distinguishes special cases when one of the types of policy does not have any impact on the economy. This occurs when the LM curve is horizontal, which corresponds to a "liquidity trap" situation; the IS curve is vertical, which corresponds to the "investment trap" situation.
The economy gets into trouble liquid trap When interest rates are so low that any change in the money supply is absorbed by asset demand for money, income drops to a nadir. This situation is typical for an economy that is 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 (Fig. 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 so people are willing to hold whatever amount of money is offered to them. As a result, even with a normally negative slope of the IS curve, an increase in the money supply by the Central Bank is not capable of generating income growth. Usually, an increase in the money supply lowers the rate of interest as people try to get rid of excess money by buying bonds. But if the interest rate is at a minimum, then asset prices are at a maximum and people tend to sell them, fearing that their prices will fall and their owners will be the losers. As a result, people make an unlimited demand for money, refusing to buy securities, and the money demand curve becomes horizontal. This means that in the money demand function 
coefficient f, which characterizes 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 the change money supply will not cause it to shift. An increase in the quantity of money cannot force anyone to buy securities; the entire amount of the increase in the money supply is stored in the form of cash. The amount of income remains unchanged at the level Y0. A stimulating monetary policy will not have any effect on the interest rate, or on the volume of investment, or on the level of income, i.e. absolutely ineffective.
In this case, the effectiveness of fiscal policy is maximum. For example, an increase in government purchases by increases the equilibrium income by , i.e. there is no crowding out effect, income increases by the full value of the multiplier.
Another situation is called investment trap, corresponding to the situation in which the demand for investment is completely inelastic to the interest rate, so the graph of the investment function takes on a vertical form, and vertical to 
the investment curve corresponds to the vertical IS curve (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 total spending, leads to an increase in the demand for money, which raises the interest rate, but more high rate does not crowd out private sector spending because it does not depend on the interest rate. As a result of the fiscal impulse, there is a full multiplier increase in income. Monetary policy is completely inefficient, since a decrease in the interest rate (from r0 to r1) as a result of an increase in the money supply (shift of the LM curve to the right from LM0 to LM1) will not affect the amount of investment spending, 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 exist 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 is that an increase in the share of money economic entities perceived as a violation of the optimal structure of the asset portfolio, and as an increase in their property. Therefore, they try to exchange an excess of money not only for financial assets, but also on 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 pitfalls (Figure 6.17).
P 
In the analysis of the IS-LM model, it was assumed that the price level is fixed, but this assumption is only valid for the short term. Let's consider what happens to the IS-LM model in the long run when the price level changes, while refusing to assume that the nominal and real values are the same.
Let the economy initially be in equilibrium at point E1, 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
On fig. 6.18, and an increase in the money supply leads to a shift in the LM curve to the right to position LM2 and a shift in equilibrium to point E2, where the interest rate decreases and the total output increases to Y2. Since it exceeds natural output, the price level rises, the real money supply decreases, and the LM curve shifts again. The economy returns to initial equilibrium.
On fig. 6.18b, an increase in government spending shifts the IS curve to position IS2, and the equilibrium point of the economy shifts to position E2, where the rate rises to r2 and aggregate output rises to Y2, 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 LM2 position. Long-term equilibrium at point E3 is established at an even higher interest rate, and output returns to its natural level.
Thus, studying the impact of an 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 affect output in the long run. An important point when evaluating the effectiveness of these policies in terms of increasing aggregate output is how quickly the long run will come.
In the commodity and money markets: the IS–LM model
1. Equilibrium in the market of goods and services. Curve "investment - savings" (curve IS). IS curve shifts.
2. Equilibrium of the money market. Curve "liquidity preference - money supply" (curve LM). Shifts of the LM curve.
3. Interaction between the real and monetary sectors of the economy. Joint equilibrium of two markets. Model IS-LM.
4. Interaction of fiscal and monetary policy. Using the IS-LM model to analyze the consequences of a stabilization policy.
5. Model IS - LM as a theory of aggregate demand: building an aggregate demand curve.
Key Concepts and terms
IS curve "investment - savings"(Investment - Saving cur-ve) - an equilibrium curve in the commodity market, representing all possible combinations of interest rates and national income levels at which investment is equal to savings. The IS curve has a negative slope.
LM curve "liquidity preference - money supply"(Liquidity - Money curve) - an equilibrium curve in the commodity market, representing all possible combinations of the interest rate and the level of national income, in which the demand for money is equal to their supply. The LM curve has a positive slope.
Model IS-LM(Investment – Saving and Liquidity – Money model) – economic model, which allows to determine the values of the market interest rate and income, at which equilibrium is simultaneously achieved in the commodity and money markets (the state of general equilibrium in the economy). IN practical value The model makes it possible to assess the combined impact on the economy of the fiscal and monetary policy states.
liquid trap(liquidity trap) - a situation in the economy when the interest rate has approached its lowest possible value and therefore an increase in the money supply cannot lower it in order to stimulate investment demand. In this case, the demand curve for money becomes infinitely elastic.
Stimulating effect(incentive effect) - the results of the impact of the money supply and lower interest rates on the dynamics of investment and net exports.
Crowding effect(crowding effect) - a decrease in the economic activity of the private sector due to an increase in interest rates due to an increase in government spending.
Literature: .
Tests
1. The IS-LM model is based on the assumption that:
a) the price level in the economy does not change;
b) investment is a function of savings;
c) the amount of investment depends on the level of national spending.
2. It follows from the IS-LM model that the interest rate is determined as a result of the interaction:
a) the money market with the labor market;
b) a commodity market with a market valuable papers;
c) money and commodity markets;
d) supply and demand in the market of goods and services.
3. The crowding out effect occurs if:
(a) Increasing taxes in the private sector reduces disposable income and spending in that sector;
b) an increase in government spending causes an increase in interest rates, and spending in the private sector that is sensitive to them decreases;
c) cuts in government spending cause cuts in consumer spending.
4. In the liquidity trap, the interest elasticity of demand for money approaches:
a) to the unit;
c) infinity.
5. The government increases taxes to reduce the deficit state budget. What measures should the Central Bank take to keep the interest rate unchanged?
Answers: 1. a); 2. c); 3. b); 4. c); 5. The bank increases the amount of money in circulation.
The real sector of the economy is a concept used in domestic economic literature, journalism, and the media to contrast the processes of structural adjustment and economic growth with the movement of speculative capital.
The real sector of the economy includes both branches of material production and the sphere of production of intangible forms of wealth and services. In the second half and especially in the last decades of the XX century. cardinal changes took place in the structure of the real sector. As a result of the scientific and technological revolution and the growth of labor productivity, the ratio in it between the branches of material production and the service sector has changed dramatically. In industrialized countries, the share of employment in the service sector is almost twice that in the sectors of material production, accounting for more than two-thirds of the total number of employees. Absolutely and relatively, the mass of social labor employed in agriculture, mining industry.
Informatization of the economy, giving rise to further structural changes in the real sector, leads to the emergence of new industries, including the production of software for computers. It changes the very idea of the real sector of the economy, which includes virtual reality in telecommunications networks, and in particular the Internet.
The driving force behind the development of the real sector is direct investment in technical re-equipment and other innovations that stimulate economic growth.
The monetary sector of the economy is the link between all agents of market relations. The money market has a specific feature that distinguishes it from other markets: a special commodity, money, circulates here. They have a special price - the interest rate, which is the opportunity cost of money. Therefore, in this market, money is not sold or bought, but exchanged for other financial assets.
One of the most important problems of the accelerated development of the economy is the task of organizing constructive interaction between the real and credit and banking sectors of the economy. In the world and domestic theory, various approaches to solving this problem have been developed. At the same time, as domestic practice has shown, this experience is used inefficiently. At the same time, the subjects of both sides clearly underestimated the need to analyze the financial intermediation of the so-called "financial innovators" in economic development. This was partly due to the fact that until now the functions of credit institutions were considered by economic organizations as subordinate in the process of development of the real sector of the economy.
At the present stage of economic development, theories of information asymmetry, which also explore the mechanism of interaction between the real and financial sectors of the economy, are of great interest. This asymmetry of information is due to the fact that the company has obviously more information about the probability of repayment of the loan than the credit institution, which gives it an advantage. In turn, the credit institution, seeking to overcome the barrier of information asymmetry and understanding the desire of entrepreneurs, is skeptical about the data provided in loan applications. As a result, investment projects with net present value cash income pay a premium at an inflated level of the market interest rate, and in some cases may not have access to financial resources at all. When financing the real sector, the problem of information asymmetry collides with the peculiarities of the functioning of the financial system. Financial institutions exchange money for a promise to return it in the future under certain conditions, i.e. the choice of the investment object is based on the principle of the highest expected return. Entrepreneurs who introduce innovations are characterized by the highest level of information asymmetry, due to the lack of general information for innovators, since most of them are characterized by a lack of experience, as well as the uncertainty of its long-term economic efficiency. In the process of investing, financial institutions with significant resources can experiment with highly profitable projects based on the allocation of systemic market risks, forming a risky investment strategy.
The main part of investment resources is formed by the financial system, based on the existing system of estimates of future income, thereby financial institutions can either stimulate or hinder the process capital investments. Thus, in order to obtain an effective assessment of the interaction between the real and financial sectors of the economy, the phenomenon of market financing must be present from the outset and be considered much broader than just an auxiliary mechanism. In the conditions of information asymmetry, companies are forced to pay a premium for financing, which depends on the state of the balance sheets of companies, that is, for companies with a higher level of debt, the cost of new financial resources will be higher than for companies with a smaller amount of collateral, which later affects their development.
Thus, the interaction of the real and financial sectors of the economy based on the theory of information asymmetry shows that the financial sector is an important element market economy, and the informational nature of market financing determined the institutional conditionality of this process. In turn, the development of credit and banking institutions cannot be carried out without the real sector.
The interaction of the real and financial sectors of the economy depends on how successfully the institutional system collects information necessary for market financing, ensures the protection and reliability of information.
So, despite the variety of theoretical approaches to studying the interaction between the financial and real sectors of the economy, there is still no consensus. On the one hand, the special role of innovators and the spread of innovations over the past decades of the development of the Russian economy is constrained precisely because of the lack of optimal interaction between the financial and real sectors of the economy, which is expressed in the underdevelopment of financial mechanisms for the transition to a qualitatively new innovative level of development. On the other hand, the mechanism of the relationship between changes in financial system and the real sector, that is, the role of the institutional and financial conditions of the investment process in the transition to the stage of innovative development. To this end, it is necessary to assess the possible and necessary economic and social costs of the transition to a new innovative stage of development, since it cannot be ruled out that, with capacity utilization and the quality of production assets, the transition to a qualitatively new innovative level of development may be replaced by an undesirable decline.
The IS curve reflects all the ratios between Y and r for which the commodity market is in equilibrium. The LM curve is all combinations of Y and r that provide equilibrium for the money market. The intersection of the IS and LM curves gives the only values of the interest rate r* (the equilibrium rate of interest) and the level of income Y* (the equilibrium level of income), ensuring simultaneous equilibrium in the commodity and money markets. Equilibrium in the economy is reached at point E (Fig. 6.10).
On fig. 6.10 (for example, at point A, which lies on the IS curve, but outside the LM curve), there is an equilibrium in the commodity market (ie, aggregate output is equal to aggregate demand). At this point, the interest rate is above the equilibrium rate, so the demand for money is less than their 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, and this, in turn, will lead to an increase in planned investment spending. Thus, aggregate demand will rise. 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 bring it to equilibrium. At point B, despite the fact that the demand for money is equal to their supply, the total output is above the equilibrium level, more than the total demand. Firms cannot 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 LM curve until it reaches the point of general equilibrium.
The equilibrium position of both markets can be determined by jointly solving the equations of the IS and LM curves. Algebraically, the equilibrium output can be found by substituting the r value of the LM equation:
into the IS equation
and his solutions for Y:
The resulting expression is an algebraic form of the aggregate demand function. From this equality, it can be seen that, influencing the amount of spending by manipulating the volume of government spending (G) and taxes (T), the state uses fiscal policy tools, by changing the money supply - monetary (monetary) policy.
IS-LM model in various economic concepts
The toolkit of the IS-LM model proposed by J. Hicks is considered by various economic schools.
In the classical concept, the IS-LM model can be used with a certain degree of conventionality, since the markets of the classics are not connected. The IS curve should be fairly flat because aggregate demand is highly elastic with the interest rate. The LM curve is vertical, fixed at the level of natural output. In this case, the IS-LM model is not a joint equilibrium model: the same level of income is provided at any rate of interest, and the level of natural output is given by the number of factors of production used.
In the monetarist concept, the IS-LM model can be correctly used. At the same time, the IS curve will be quite flat due to the high elasticity of aggregate demand with respect to the interest rate. The LM curve will be quite steep due to the fact that the main argument for money demand is permanent income.
4. The activities of the glue factory and the metallurgical plant are associated with the release of chemical waste. Name three ways the city government can respond to negative external factors. What are the positive and negative aspects of each of these methods?
In my opinion, penalties can be one of the ways the city administration can influence negative external factors. The positive side of this method is that the state will profit from them, and the negative side is that the organization will remain at a loss.
BIBLIOGRAPHY
Basic legislative acts.
1. Civil Code of the Republic of Belarus: Law of the Republic of Belarus, December 7, 1998, No. 218 - 3 // Vedamasti Nat. Immediately Republic of Belarus. - 1999. - No. 7 - 9;
2. Banking Code of the Republic of Belarus. - Minsk: Amalfeya, 2001;
3. The main directions of monetary policy for 2011 // Bank Bulletin 2001. - No. 2.
Main literature.
1. Course of economic theory. / ed. Plotnitsky,. - Minsk: Book House: Misanta. - 2005;
2.Economic theory: tutorial/ ed. M.N. Bazyleva, N.I. Bazyleva: Minsk. Modern school. – 2008;
3. Economics: textbook / ed. V.L. Cluny, N.S. Tikhonovich. - Minsk, 2006. - 398 p.;
4.Economic theory, textbook A.S.Golovachev, L.P.Patskevich, I.V.Golovachev, ed. A.S.Golovachev - Mn., Higher. school, 2006 - 446 pages;
5. Bazyleva, M.N. Economic theory: studies. Benefit / M.N. Bazyleva, N.I. Bazylev. - Minsk: Modern. school, 2008. - 640 p. - P. 11 - 31;
6. Lemeshevsky, I.M. Economic theory. Introductory course: textbook.-method. A manual for university students studying in economics. Specialties / I.M. Lemeshevsky. - 4th ed., add. And a reworker. - Minsk: FU Ainform, 2010. - 496 p.;
7. Davydenko, L.N. Fundamentals of economic theory: principles, problems, policy of transformation. International experience and the Belarusian vector of development: textbook / L.N. Davydenko. - Minsk: Information Center of the Ministry of Finance, 2010. - 452 p.
Internet source.
Government of the Republic of Belarus [Electronic resource]. - Minsk, 2007. - Access mode: http: // www. government. by;
Ministry of Economy of Belarus [ Electronic resource]. - Minsk, 2007. - Access mode: http: // www. economy. gov. by;
Website of the International Monetary Fund of Belarus [Electronic resource]. - Minsk, 2007. - Access mode: http: // www. imf. org.
Big economic dictionary/ ed. A.N. Azrilyan M.: Legal Culture Foundation, 1994;
Zolotogorov B.G. Economics: Encyclopedic Dictionary. - Minsk: Interpressservice; Book House, 2003. - 720 p.;
Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B. Modern economic dictionary. – M.: INFRO-M, 1997. – 496 p.
Baskakova M.A. Explanatory legal dictionary of a businessman. =M.: Contract, 1994;
The IS curve reflects all the ratios between Y and r for which the commodity market is in equilibrium. The LM curve is all combinations of Y and r that provide equilibrium for the money market. The intersection of the IS and LM curves gives the only values of the interest rate r* (the equilibrium rate of interest) and the level of income Y* (the equilibrium level of income), ensuring simultaneous equilibrium in the commodity and money markets. Equilibrium in the economy is reached at point E (Figure 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 an equilibrium in the commodity market (i.e., aggregate output is equal to aggregate demand). At this point, the interest rate is above the equilibrium rate, so the demand for money is less than their 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, and this in turn will lead to an increase in planned investment spending. Thus, aggregate demand will rise. 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 bring it to equilibrium. At point B, even though the demand for money is equal to their supply, the total output is above the equilibrium level, more than the total demand. Firms cannot 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 point of general equilibrium.
The equilibrium position of both markets can be determined by jointly solving the equations of the IS and LM curves. Algebraically, the equilibrium output can be found by substituting the r value of the LM: equation into the IS equation and its solution for Y:
The resulting expression is an algebraic form of the aggregate demand function. From this equality it can be seen that, influencing the amount of spending by manipulating the volume of government spending (G) and taxes (T) - the state uses fiscal policy tools, 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 value of aggregate demand corresponding to the joint equilibrium.