An inquiry into the multiplier process in IS-LM model
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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