11/6/10
1
slide 0
Lions and deer
Let D denote the
population of deer
An equation that
characterize the
population growth of
deer:
Δ
D/D = 3 – 0.5 L
L: population of lion
L: exogenous
CHAPTER 10
Aggregate Demand I
slide 1
Lions and Deer
Population growth of lions:
Δ
L/L =  5 + 0.8 D
The more deer, the higher
the population growth of
lions.
We are treating D as
exogenous.
CHAPTER 10
Aggregate Demand I
slide 2
Lions and deer
Which variable is really exogenous?
Neither
The interaction of the lions and deer jointly
determines the population of both.
Both are endogenous.
The determined population of both
constitute some “wild life equilibrium.”
CHAPTER 10
Aggregate Demand I
slide 3
IS – LM model
IS curve:
When the goods market is equilibrium, the level
of GDP is a function of the real interest rate.
The higher the interest rate, the lower the
investment spending, and the lower the GDP.
We treat the interest rate as if it were
exogenous.
Neither the interest rate nor GDP can be
uniquely determined.
CHAPTER 10
Aggregate Demand I
slide 4
IS – LM model
LM curve:
When the money market is in equilibrium, the
level of the real interest rate is a function of
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 Fall '08
 BIRZ
 Economics, Inflation, Supply And Demand, Liquidity preference

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