{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

lecture7 - Context Lecture 7 Chapter 9 introduced the model...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 0 Lecture 7 CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 1 Context Context Chapter 9 introduced the model of aggregate demand and supply. Chapter 10 developed the IS-LM model, the basis of the aggregate demand curve. In Chapter 11, we will use the IS-LM model to see how policies and shocks affect income and the interest rate in the short run when prices are fixed derive the aggregate demand curve explore various explanations for the Great Depression CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 2 The intersection determines the unique combination of Y and r that satisfies equilibrium in both markets. The LM curve represents money market equilibrium. Equilibrium in the Equilibrium in the IS IS - LM LM Model Model The IS curve represents equilibrium in the goods market. ( ) ( ) Y C Y T I r G = + + ( , ) M P L r Y = IS Y r LM r 1 Y 1 CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 3 Policy analysis with the Policy analysis with the IS IS - LM LM Model Model Policymakers can affect macroeconomic variables with fiscal policy: G and/or T monetary policy: M We can use the IS-LM model to analyze the effects of these policies. ( ) ( ) Y C Y T I r G = + + ( , ) M P L r Y = IS Y r LM r 1 Y 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 4 causing output & income to rise. IS 1 An increase in government purchases An increase in government purchases 1. IS curve shifts right Y r LM r 1 Y 1 IS 2 Y 2 r 2 1. 2. This raises money demand, causing the interest rate to rise… 2. 3. …which reduces investment, so the final increase in Y 3. CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 5 2. …causing the interest rate to fall IS Monetary Policy: an increase in Monetary Policy: an increase in M 1. M > 0 shifts the LM curve down (or to the right) Y r LM 1 r 1 Y 1 Y 2 r 2 LM 2 3. …which increases investment, causing output & income to rise. CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 6 Interaction between Interaction between monetary & fiscal policy monetary & fiscal policy Model: monetary & fiscal policy variables ( M , G and T ) are exogenous Real world: Monetary policymakers may adjust M in response to changes in fiscal policy, or vice versa. Such interaction may alter the impact of the original policy change. CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 7 The Fed The Fed’ s response to G > 0 > 0 Suppose Congress increases G . Possible Fed responses: 1. hold M constant 2. hold r constant 3. hold Y constant In each case, the effects of the G are different:
Image of page 2
CHAPTER 11 CHAPTER 11 Aggregate Demand II Aggregate Demand II slide 8 If Congress raises G , the IS curve shifts right IS 1 Response 1: hold Response 1: hold M constant constant Y r LM 1 r 1 Y 1 IS 2 Y 2 r 2 If Fed holds M constant, then LM curve doesn’t shift.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern