Chapter9 IS-LM - CHAPTER 9 Aggregate Demand 1 Building the IS-LM Model A PowerPoint Tutorial To Accompany MACROECONOMICS 7th Edition N Gregory Mankiw

Chapter9 IS-LM - CHAPTER 9 Aggregate Demand 1 Building the...

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Chapter Ten1CHAPTER 9Aggregate Demand 1: Building the IS-LM Model®A PowerPointTutorialTo AccompanyMACROECONOMICS, 7th. EditionN. Gregory MankiwTutorial written by:Mannig J. SimidianB.A. in Economics with Distinction, Duke University M.P.A., Harvard University Kennedy School of GovernmentM.B.A., Massachusetts Institute of Technology (MIT) Sloan School of
Chapter Ten2The Great Depression caused many economists to question thevalidity of classical economic theory (from Chapters 3-6). They believed they needed a new model to explain such a pervasive economic downturn and to suggest that government policies mightease some of the economic hardship that society was experiencing.In 1936, John Maynard Keynes wrote The General Theory ofEmployment, Interest, and Money. In it, he proposed a new way toanalyze the economy, which he presented as an alternative tothe classical theory.Keynes proposed that low aggregate demand is responsible for the lowincome and high unemployment that characterize economic downturns.He criticized the notion that aggregate supply alone determines nationalincome.The Great Depression caused many economists to question thevalidity of classical economic theory (from Chapters 3-6). They believed they needed a new model to explain such a pervasive economic downturn and to suggest that government policies mightease some of the economic hardship that society was experiencing.In 1936, John Maynard Keynes wrote The General Theory ofEmployment, Interest, and Money. In it, he proposed a new way toanalyze the economy, which he presented as an alternative tothe classical theory.Keynes proposed that low aggregate demand is responsible for the lowincome and high unemployment that characterize economic downturns.He criticized the notion that aggregate supply alone determines nationalincome.
Chapter Ten3In 2008 and 2009, as the United States and Europe descended into a recession, the Keynesian theory of the business cycle was often in the news. Policymakers around the world debated how best to increase aggregate demand with both monetary and fiscal policy.
Chapter Ten4“Keynesian” means different things to different people. It’s useful to think of the basic textbookKeynesian model as an elaboration and extensionof the “classical theory.” Its variable velocity of money and “sticky” prices reflects Keynes’s belief that the Classical model’s shortcomings arose from its overly-strict assumptions of constant velocity and highly flexible wages and prices.The model of aggregate demand (AD)can be split into two parts: IS model of the “goods market” and the LMmodel of the “money market.” “IS stands for Investment Saving,Whereas LM stands for Liquidity Money.”
Chapter Ten5Price level, PIncome, Output, YSRASADY*Y*'AD'AD''Y*''In the short run, when the price level is fixed, shifts in the aggregate demand curve lead to changes in national income, Y.

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