Chpt 9 Review - (Part 1)

Chpt 9 Review - (Part 1) - Introduction The 3 major markets...

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1 Chapter 9 A General Framework for Macroeconomic Analysis Introduction The 3 major markets in the economy: Labor Market (Chapter 3) Goods Market (Chapter 4) Asset Market (Chapter 7) In the previous chapters, we Define the equilibrium for each market Analyze the factors that affect the equilibrium of a particular market Ignore the linkages between different markets. Introduction This kind of analysis is called partial equilibrium analysis . In this chapter, we put these 3 markets together into a single framework that allows us to analyze them simultaneously. A situation in which all 3 markets are in equilibrium at the same time is called general equilibrium . Introduction We want to highlight 3 main variables: Real output / Real income ( Y ) Real interest rate ( r ) General price level ( P ) The framework that we use is called the IS-LM-FE framework. The IS Curve (Goods Market) Recall from Chapter 4 that the goods market is in equilibrium when the national saving and aggregate investment are equal. Graphically, the equilibrium is represented by the intersection point between the upward-sloping saving curve and the downward-sloping investment curve . Goods Market Equilibrium Real Interest Rate, r Aggregate Investment, I Investment Curve S (Y = 4,000) E 7%
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