Closed-economy IS-LM Model

Paper Summary:

This paper discusses the effects of making changes on a closed-economy IS-LM model, first by testing government spending shock, then monetary policy shock The paper finds that a government-spending shock tends to have a positive effect on aspects of the consumer economy, increasing consumer spending, increasing private saving, and in general has an expansionary effect, while an increase in the money supply can have a similar effect.

From the Paper:

"A government-spending shock tends to have a positive effect on aspects of the consumer economy, increasing consumer spending, increasing private saving, and in general has an expansionary effect. Government spending increases the marginal utility of spending. In terms of consumer behavior, habit formation keeps the system operating in a relatively steady way with a slight increase in spending and saving, as noted, though over a longer period of time, the effect would be increased. It is not clear of the effect is because of a crowding-in effect or some other force. Though the crowding-in effect is usually considered the solution. The government spending shock in this instance stands at 0.20 percentage points of government consumption. A government spending shock is a demand shock and has the effect of increasing desired consumer behavior based on the fact that the model used for analysis is a static model."

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