Lecture Notes 9 (part 1).pdf - Chapter 9 The IS-LM/AD-AS...

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Chapter 9: The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Tingjun Liu FBE of HKU March 1, 2018 T Liu (FBE of HKU) MFIN7007 March 1, 2018 1 / 58
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Chapter Outline ° Discuss factors that affect the the full-employment ( FE ) Line (Equilibrium in the labor market). ° Discuss factors that affect the IS Curve (equilibrium in the goods market). ° Discuss factors that affect the LM Curve (asset market equilibrium). ° Describe the conditions necessary for general equilibrium using the complete IS ± LM model. ° Discuss the role of price adjustment in achieving general equilibrium. ° Explain the fundamentals and implications of the AD ± AS model. T Liu (FBE of HKU) MFIN7007 March 1, 2018 2 / 58
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The FE Line: Equilibrium in the Labor Market ° We have discussed three main markets of the economy: the labor market, the goods market, and the asset market. In this chapter we discuss how they fit into a complete macro system. ° Labor market in Chapter 3 showed how equilibrium in the labor market leads to employment at its full-employment level ( N ) and output at its full-employment level ( Y ). ° Our ultimate objective is a diagram that has the real interest rate on the vertical axis and output on the horizontal axis. ° If we plot output against the real interest rate, we get a vertical line, since labor market equilibrium is unaffected by changes in the real interest rate (Fig. 9.1). T Liu (FBE of HKU) MFIN7007 March 1, 2018 3 / 58
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T Liu (FBE of HKU) MFIN7007 March 1, 2018 4 / 58
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The FE Line ° Factors that shift the FE line. The full employment level of output is determined by the full-employment level of employment and
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