Lecture Notes - Final Exam

Lecture Notes - Final Exam - Chapter20TheISLMModel...

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Chapter 20 – The ISLM Model 12:59 Part I: The Keynesian Cross Part II: The IS/LM Model Whats important in Part I Components of Agregate Demand The consumption Function MPC Autonomous Investment Spending The keynsian cross (AE vs AI) Changes in autonomous spending Potential role of govt Determination of Aggregate Output The total quantity demanded of an economy’s output is the sum of four types  of spending Equilibrium occurs in the economy when the total quantity of output supplied  equals the total quantity of output demanded Consumption Expenditure and the Conumption Function Income is the most disposable factor determining conspumption spending  The change in consumer expenditure that results from an additional dollar of  disposable income a is autonomous consumer expenditure, the amount of  consumer expenditure that is independent of disposable income (how much  will be spent when disposable income is 0 C = a + mpc(Yd)
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Investment Spending Fixed investment – always planned; takes time to build plant and equipment Inventory investment – cane be unplanned, a difference between planned and  actual Planned investment spending is based on Interest rates (cost of financing and carry) Expectations – fo future demand, prices and costs Expenditure Multiplier A change in planned investment spending leads to an even larger change in  aggregate output Role of International Trade A change in net exports (exports-imports) is positively related to changes in  aggregate output
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Chapter 20 Part II The IS/LM Model 12:59 Whats important in Ch. 20 Part II The IS Curve o What it represents o Why it is downaward sloping The LM Curve o What it represents o Why it is upward sloping IS/LM equilibrium: What it means Model assumptions and applicability The IS/LM Model Includes money and interest rates in the heynesian framework Examines n equilibrium where aggregate semand equals aggregate output Assumes a fixed price level  The IS Curve is the relationship between quilibrium aggregate output and the  interest rate – representing various interest rates at which yD=yS The LM curve is the combination of interest rates and aggregate output for  which mD=mS Equilibrium in he Goods Market The IS Curve: Y=C + I(i) + G + NX(i) o Interest rates and planned investment spending: I(i) is downward sloping o Interest rates and net exports: NX(i) is also downward sloping
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Chapter 20 Part II The IS/LM Model 12:59 o The locus of points at which the total quantity of goods produced equals 
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This note was uploaded on 10/27/2009 for the course ECON 2411 taught by Professor Martel during the Spring '08 term at UConn.

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Lecture Notes - Final Exam - Chapter20TheISLMModel...

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