Ch10_Explaining_Aggregate_Demand.pptx - Chapter 10...

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Chapter 10Explaining Aggregate Demand: The IS-MP ModelHewei ShenUniversity of Oklahoma1
IntroductionChapter 9: AD-AS modelThe causes of business cycles: AS and AD shocksThis chapter: IS-MP modelExplain changes in the unemployment rate, real GDP, interest rate, and inflation rate.Examine how monetary policy and fiscal policy can be used to affect the economyShort-run model: fixed pricesShort run is important. Keynes: “In the long run, we are all dead.”2
This chapterExplain how the IS curve represents:relationship between the real interest rate and the aggregate expenditure.Use the monetary policy, MP, curve :show how the interest rate set by the central bank helps to determine the output gap.Use the IS-MP model: understand why real GDP fluctuates.3
The IS Curve: The relationship between Real Interest Rates and Aggregate Expenditure4
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How is good market equilibrium determined?
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Consumption function and aggregate expendituresConsumption () follows:: autonomous consumption, does not depend on income; assume , are constantchange one-to-one with .Rewrite consumption:We can write aggregate expenditure as:How do we graph as a function of output ?8
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Disequilibrium in the goods marketWhat if AE< Y? Disequilibrium.At , : unplanned increase in inventory.Firms cut production, unemployment rises. GDP falls.GDP gradually goes back to the equilibrium output, . Output, Planned aggregate expenditure, ??=????1? ?1? ?2?210?2
Disequilibrium in the goods marketWhat if AE> Y? Similar.

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