Chapter 10 Student Notes - 10 IN THIS CHAPTER YOU WILL...

This preview shows page 1 - 3 out of 8 pages.

4/26/2015 1 MACROECONOMICS N. Gregory Mankiw Aggregate Demand I: Building the IS - LM Model 10 IN THIS CHAPTER, YOU WILL LEARN: the IS curve and its relation to: the Keynesian cross the loanable funds model the LM curve and its relation to: the theory of liquidity preference how the IS - LM model determines income and the interest rate in the short run when P is fixed 1 2 Context Chapter 10 introduced the model of aggregate demand and aggregate supply. Long run: prices flexible output determined by factors of production & technology unemployment equals its natural rate Short run: prices fixed output determined by aggregate demand unemployment negatively related to output 3 Context This chapter develops the IS - LM model, the basis of the aggregate demand curve. We focus on the short run and assume the price level is fixed (so the SRAS curve is horizontal). Chapters 11 and 12 focus on the closed- economy case. Chapter 13 presents the open- economy case. 4 The Keynesian cross A simple closed-economy model in which income is determined by expenditure. (due to J. M. Keynes) Notation: I = planned investment PE = C + I + G = planned expenditure Y = real GDP = actual expenditure Difference between actual & planned expenditure = unplanned inventory investment 5 Elements of the Keynesian cross ( ) C C Y T I I , G G T T ( ) PE C Y T I G Y PE consumption function: for now, planned investment is exogenous: planned expenditure: equilibrium condition: govt policy variables: actual expenditure = planned expenditure