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An inquiry into the multiplier process in IS-LM model

  • Li ziran

    (Pking University)

  • Li weiye

    (Pking University)

Registered author(s):

    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.

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    Paper provided by EconWPA in its series GE, Growth, Math methods with number 0111003.

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    Date of creation: 25 Nov 2001
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    Handle: RePEc:wpa:wuwpge:0111003
    Note: Type of Document - MS word; prepared on IBM PC - PC-TEX/;
    Contact details of provider: Web page: http://econwpa.repec.org

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