Chapter 10

Chapter 10 - CHAPTER 10 Aggregate Demand 1 Building the...

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1 ® A PowerPoint Tutorial To Accompany M ACROECONOM I CS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Ten 2 The Great Depression caused many economists to question the validity 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 might ease some of the economic hardship that society was experiencing. In 1936, John Maynard Keynes wrote The General Theory of Employment, Interest and Money. In it, he proposed a new way to analyze the economy, which he presented as an alternative to the classical theory. Keynes proposed that low aggregate demand is responsible for the low income and high unemployment that characterize economic downturns. He criticized the notion that aggregate supply alone determines national income.
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4 “Keynesian” means different things to different people. It’s useful to think of the basic textbook Keynesian model as an elaboration and extension of 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. can be split into two parts:
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Chapter Ten 5 Price level, P Income, Output, Y SRAS AD Y* 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. The model of aggregate demand developed in this chapter called the IS-LM is the leading interpretation of Keynes’ work. The IS-LM model takes the price level as given and shows what causes income to change. It shows what causes AD to shift. The Keynesian model can be viewed as showing what causes the aggregate demand curve to shift.
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6 IS (investment and saving) model of the ‘goods market’ LM (liquidity and money) model of the ‘money market
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The IS curve (which stands for investment saving) plots the relationship between the interest rate and the level of income that arises in the market for goods and services. The LM curve (which stands for liquidity and money) plots the relationship between the interest rate and the level of income that arises in the money market.
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Chapter Ten 8 In the General Theory of Money, Interest and Employment (1936),
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Chapter 10 - CHAPTER 10 Aggregate Demand 1 Building the...

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