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how to incorporate dynamics into the
ADAS model we previously studied
how to use the dynamic ADAS model to
illustrate longrun economic growth
how to use the dynamic ADAS model to
trace out the effects over time of various
shocks and policy changes on output,
inflation, and other endogenous variables
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CHAPTER 1
The Science of Macroeconomics
A summary of what we learned
We have learned the following relationships that
jointly determine the macroeconomic
equilibrium:
The aggregate supply curve
The IS curve and the LM curve
The ISLM can be used to derive the AD curve
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CHAPTER 1
The Science of Macroeconomics
The AS curve
natural rate
of output
a positive
parameter
expected
price level
actual
price level
agg.
output
Other things equal,
Y
and
P
are positively
related, so the SRAS curve is upwardsloping.
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CHAPTER 1
The Science of Macroeconomics
The AS curve
The AS curve also suggests that higher
expected
price will lead to lower output:
Sticky price model: stickyprice firms expect higher
costs, and will set a higher price at any given level
of output, which will increase the price level.
Incomplete information model: incompleteinfo firms
will reduce output at each price level because they
realize their relative prices do not increase as much
as before.
The AS curve shifts up.
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CHAPTER 1
The Science of Macroeconomics
The IS curve
Tells us how the real interest rate and output are
related when the goods market is in equilibrium.
An example of the IS curve in mathematical form
that we derived in chapter 10:
0.25 Y = 1500 – 50 r
Intuition: lower real interest rates boost
investment spending, therefore increases GDP.
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CHAPTER 1
The Science of Macroeconomics
The LM curve
Tells us how the real interest rate and output are
related when the money market is in equilibrium.
An example of the LM curve in mathematical form:
25 r = 0.5 Y – 1250
Intuition: higher output increases money demand,
leads to sales of interestbearing assets, and
therefore higher interest rates (equivalent to lower
prices for interestbearing assets).
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CHAPTER 1
The Science of Macroeconomics
The AD curve
The AD curve tells us that higher price
level
leads to lower output demanded.
Intuition: higher prices lower the value of existing
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 Fall '08
 BIRZ
 Macroeconomics, Inflation, Monetary Policy, Supply And Demand, Science of Macroeconomics

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