Chapter 10 - CHAPTER 10 Aggregate Demand 1 Building the IS-LM Model A PowerPoint Tutorial To Accompany MACROECONOMICS 6th ed N Gregory Mankiw By Chapter

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

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Chapter Ten1CHAPTER 10Aggregate Demand 1: Building the I S-LM Model®A PowerPointTutorialTo AccompanyMACROECONOMICS,6th. ed.N. Gregory MankiwByMannig J. Simidian
Chapter Ten2The Great Depression caused many economists to question thevalidity 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 mightease some of the economic hardship that society was experiencing.In 1936, John Maynard Keynes wrote The General Theory ofEmployment, Interest and Money. In it, he proposed a new way toanalyze the economy, which he presented as an alternative tothe classical theory.Keynes proposed that low aggregate demand is responsible for the lowincome and high unemployment that characterize economic downturns.He criticized the notion that aggregate supply alone determines nationalincome.
Chapter Ten3
Chapter Ten4“Keynesian” means different things to different people. It’s useful to think of the basic textbookKeynesian model as an elaboration and extensionof 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.The model of aggregate demand (AD)can be split into two parts: IS model of the “goods market” and the LMmodel of the “money market”.
Chapter Ten5Price level, PIncome, Output, YSRASADY*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 calledthe IS-LMis 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 ADto shift.The Keynesian model can be viewed as showing what causes the aggregate demand curve to shift.
Chapter Ten6IS(investment and saving)model of the ‘goods market’ LM(liquidity and money)model of the ‘money market
Chapter Ten7The 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.

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