ch10a - Economic news CHAPTER 10 Aggregate Demand I slide 0...

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slide 0 Economic news CHAPTER 10 Aggregate Demand I
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slide 1 Economic news GDP growth is 2% for the 3 rd quarter – lower than the 3.5% long-run average. Initial claims for unemployment benefits fall. 434,000 claims in the week of Oct 23, down from 455,000 in the previous week. This is the lowest of the last three months. The Federal Reserve is ready for Quantitative Easing . CHAPTER 10 Aggregate Demand I
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slide 2 CHAPTER 10 Aggregate Demand I In this chapter, you will learn… A sticky price model that describes the determination of GDP and the interest rate. Prices are assumed to be fixed in the short-run. It is called the IS-LM model – a building block of the AD-AS model.
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slide 3 CHAPTER 10 Aggregate Demand I Keynes’s Insight British economist John Maynard Keynes observed the Great Depression, and concluded that the classical theory (ch 3) was useless in dealing with short-run issues. His important insight: when prices are fixed (in the short-run), it is aggregate demand, not the supply side, that determines real GDP. Successful stabilization policies must target aggregate demand.
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slide 4
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slide 5 Keynes’s insight His thoughts were published in the book The General Theory of Employment, Interest, and Money – the most influential book of economics ever published. Later, his followers summarized his main ideas with the IS-LM model. CHAPTER 10 Aggregate Demand I
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slide 6 IS-LM model IS: investment and saving – when investment and saving are in equilibrium in the loanable funds market, the goods market will be in equilibrium (ch3). LM: liquidity and money. So, the IS-LM model is about the interaction of the goods market and the financial market. CHAPTER 10 Aggregate Demand I
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slide 7 What we will learn … The IS curve The LM curve The equilibrium From the IS-LM model to the AD-AS model. CHAPTER 10 Aggregate Demand I
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slide 8 The Keynesian cross A simple closed economy model in which income is determined by expenditure. A model of the short-run only. A first step towards the construction of the IS curve. CHAPTER 10 Aggregate Demand I
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slide 9 The Keynesian cross The basic ideas: The price level is fixed. Buyers have planned expenditure , which is a function of income. Planned expenditure = planned C, I, and G (closed economy). Firms do not have full information of the planned
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This note was uploaded on 05/08/2011 for the course ECON 362 taught by Professor Birz during the Fall '08 term at Binghamton.

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ch10a - Economic news CHAPTER 10 Aggregate Demand I slide 0...

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