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An inquiry into the multiplier process in IS-LM model

Author

Listed:
  • Li ziran

    (Pking University)

  • Li weiye

    (Pking University)

Abstract

The multiplier theory is still an important analytical tool in many macroeconomic textbooks. For example, a number of textbook authors use the theory to explain the process of growth in goods market by expanding the multiplier process into a geometric series, and thus obtain the route of economic growth. Then some students raise an interesting question: Can we induce the dynamics of the monetary and fiscal transmission mechanism of IS-LM model through the multiplier process? (None of the textbooks involve this problem; alternative solutions are available in economics journals, but go beyond the scope of our students¡¯ knowledge.) If not, what is the problem in the analysis of the multiplier process? Here I first show some professor¡¯s deduction of the "monetary transmission mechanism", and then analyze the main problems and discuss the multiplier theory. Finally, I propose a generalization of the monetary transmission mechanism approach. I trace the change of demand and output in the process of increase respectively, and use a stochastic series of variables to reflect regularity in the their relationship, and obtain another two curves in IS-LM model representing their relationship In conclusion, I demonstrate theoretically that the economy will ultimately reach its equilibrium point, following the route of LM curve between one static equilibrium point to another.

Suggested Citation

  • Li ziran & Li weiye, 2001. "An inquiry into the multiplier process in IS-LM model," GE, Growth, Math methods 0111003, EconWPA.
  • Handle: RePEc:wpa:wuwpge:0111003
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    More about this item

    Keywords

    multiplier IS-LM model transmission mechanism;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics

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