{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

mankiw7e-chap10 - Chapter 10 Aggregate Demand I Building...

Info icon This preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
In this chapter, you will learn: the IS curve, and its relation to: the Keynesian cross the loanable funds model the LM curve, and its relation to: the theory of liquidity preference how the IS - LM model determines income and the interest rate in the short run when P is fixed Chapter 10: Aggregate Demand I: Building the IS-LM Model
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 CHAPTER 10 Aggregate Demand I Context Chapter 9 introduced the model of aggregate demand and aggregate supply. Long run prices flexible output determined by factors of production & technology unemployment equals its natural rate Short run prices fixed output determined by aggregate demand unemployment negatively related to output
Image of page 2
3 CHAPTER 10 Aggregate Demand I Context This chapter develops the IS - LM model, the basis of the aggregate demand curve. We focus on the short run and assume the price level is fixed (so, SRAS curve is horizontal). This chapter (and chapter 11) focus on the closed-economy case. Chapter 12 presents the open-economy case.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 CHAPTER 10 Aggregate Demand I The Keynesian Cross A simple closed economy model in which income is determined by expenditure. (due to J.M. Keynes) Notation: I = planned investment PE =  +   +  G = planned expenditure Y = real GDP = actual expenditure Difference between actual & planned expenditure = unplanned inventory investment
Image of page 4
5 CHAPTER 10 Aggregate Demand I Elements of the Keynesian Cross ( ) C C Y T = - I I = , G G T T = = = - + + ( ) PE C Y T I G = Y PE consumption function: for now, planned investment is exogenous: planned expenditure: equilibrium condition: govt policy variables: actual expenditure = planned expenditure
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 CHAPTER 10 Aggregate Demand I Graphing planned expenditure income, output, Y PE planned expenditure PE  = + + G MPC 1
Image of page 6
7 CHAPTER 10 Aggregate Demand I Graphing the equilibrium condition income, output, Y PE planned expenditure PE  = Y 45 º
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8 CHAPTER 10 Aggregate Demand I The equilibrium value of income income, output, Y PE planned expenditure PE  = Y PE  = + + G Equilibrium income
Image of page 8
9 CHAPTER 10 Aggregate Demand I An increase in government purchases Y PE PE  = Y PE  = + + G 1 PE 1  =  Y 1 PE  = + + G 2 PE 2  =  Y 2 Y At Y 1 , there is now an unplanned drop in inventory… …so firms increase output, and income rises toward a new equilibrium. G
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
10 CHAPTER 10 Aggregate Demand I Solving for  Y Y C I G = + + Y C I G = ∆ + ∆ + ∆ MPC = × ∆ + ∆ Y G C G = + (1 MPC) - ×∆ = ∆ Y G 1 1 MPC = × ∆ - Y G equilibrium condition in changes because I   exogenous because C   = MPC   Collect terms with Y    on the left side of the equals sign: Solve for Y  :
Image of page 10
11 CHAPTER 10 Aggregate Demand I
Image of page 11

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern