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Chapt10 - Chapter 10 Aggregate Demand I The IS-LM Model A...

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Chapter 10: Aggregate Demand I
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The IS-LM Model A short-run macroeconomic model which takes the price level constant and shows how changes in the level of Aggregate Demand cause changes in income. The IS curve: The Keynesian Cross Theory The LM curve: The Liquidity Preference Theory
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Shift in Aggregate Demand Output, Income Price level AD 2 An increase in the level AD increases the level of income, given the price level. SRAS P AD 1 AD 3 Y 1 Y 2 Y 3
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The Keynesian Cross Equilibrium in the product market: Planned Expenditures: E = C(Y-T) + I + G Actual Expenditures: Y Aggregate Equilibrium: Y = C(Y-T) + I + G Total income = Total planned expenditures
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Aggregate Equilibrium E Y Actual Expenditure: Y = E Keynesian Cross Y Planned Expenditure: E = C + I + G Y 2 Y 1 Reduce inventories Increase inventories
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Adjustment to Equilibrium Y 1 > Y indicates an excess supply of goods in the market. So, businesses accumulate inventories to reduce Y 1 to Y Y 2 <Y indicates an excess demand for goods in the market. So, businesses reduce inventories to increase Y 2 to Y
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