Lecture21 - Economics 310 Money and Banking Lecture21...

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Economics 310 Money and Banking Lecture 21 University of Michigan   Fall 2010  
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2 Lecture 1 Mishkin, Chapter 19 The first part of 19 (Quantity Theory) The second part of 19 (Liquidity Preference Model) Mishkin, Chapter 20 – The IS-LM model Mishkin, Chapter 21 – Applying the IS-LM model Readings
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The LM curve:   Money Market Equilibrium Y i LM Y 0 Y 1 i 0  i 1 Excess supply of money: i tends to fall Excess demand for money: i tends to rise
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Quantity of Goods = Quantity of Goods Demanded Supplied OR Aggregate Demand = Aggregate Supply Aggregate Supply: Y Aggregate demand: Y AD = C + I + G Demand for private consumption (C) Demand for planned investment (I) Demand for public sector consumption (G) Equilibrium Condition: Y = C + I + G Goods Market Equilibrium
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Components of Aggregate Demand Real Consumption C is a function of real disposable income C = C(Y d ) = C(Y – T) marginal propensity to consume 0 ≤ mpc ≤ 1 Government spending Exogenously determined Budget deficit: G – T Real Investment I is a function of the real interest rate I = I(r) Investment falls as the real interest rate rises
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Goods Market Equilibrium Y = C(Y – T) + G + I(r) Exogenous variables:
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