# Macroeconomics plus MyEconLab plus eBook 1-semester Student Access Kit (6th Edition)

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Chapter 9 The IS - LM/AD-AS Model: A General Framework for Macroeconomic Analysis Learning Objectives I. Goals of Chapter 9 A) Combine the labor market (Chapter 3), the goods market (Chapter 4), and the asset market (Chapter 7) into a complete macroeconomic model (for a closed economy) B) Although the IS - LM model was originally a Keynesian model because it assumes prices are fixed, by allowing prices to adjust, it’s possible to use the IS - LM framework to discuss the classical approach C) Using one model for both approaches (the classical model in Chapter 10 and the Keynesian model in Chapter 11) avoids the need to learn two different models and helps show clearly both the similarities and the differences of the two approaches II. Notes to Fifth Edition Users A) Box 9.1 now includes a discussion of the Federal Reserve’s FRB/US model, rather than discussing private sector forecasters and their models B) Appendix 9.A is new and provides a worked numerical example of solving the IS-LM model C) Old Appendix 9.A on algebraic versions of the models has now become Appendix 9.B Teaching Notes I. The FE Line: Equilibrium in the Labor Market (Sec. 9.1) A) In the discussion of the labor market in Chapter 3, we showed how equilibrium in the labor market leads to employment at its full-employment level N and output at Y

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Chapter 9 The IS - LM/AD-AS Model: A General Framework for Macroeconomic Analysis 173 B) If we plot output against the real interest rate, we get a vertical line at Y = Y , since labor market equilibrium is unaffected by changes in the real interest rate (Figure 9.1) Figure 9.1 C) Factors that shift the FE line 1. Y is determined by the full-employment level of employment and the current levels of capital and productivity; any change in these variables shifts the FE line 2. Summary Table 11 lists the factors that shift the full-employment line a. The full-employment line shifts right because of (1) a beneficial supply shock (2) an increase in labor supply (3) an increase in the capital stock b. The full-employment line shifts left when the opposite happens to the three factors above II. The IS Curve: Equilibrium in the Goods Market (Sec. 9.2) A) The goods market clears when desired investment equals desired national saving 1. Adjustments in the real interest rate bring about equilibrium 2. For any level of output Y , the IS curve shows the real interest rate r for which the goods market is in equilibrium
174 Abel/Bernanke/Croushore • Macroeconomics, Sixth Edition 3. Derivation of the IS curve from the saving-investment diagram (Figure 9.2) Figure 9.2 a. Key features (1) The saving curve slopes upward because a higher real interest rate increases saving (2) An increase in output shifts the saving curve to the right, because people save more when their income is higher (3) The investment curve slopes downward because a higher real interest rate reduces the desired capital stock, thus reducing investment b. Consider two different levels of output (1) At the higher level of output, the saving curve is shifted to the right compared to the

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