EC21A_lecture_7_2009 - Aggregate Demand and Aggregate Supply

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Aggregate Demand and Aggregate Supply
Background image of page 1

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

View Full DocumentRight Arrow Icon
What are shocks to the IS and LM curves? What is an expansionary/contractionary fiscal policy? What is an expansionary/contractionary monetary policy? How does a contractionary fiscal policy affect the IS-LM  model and what is the result? Explain the crowding out effect. How does a contractionary monetary policy affect the IS-LM  model and what is the result? Explain the interaction between monetary and fiscal policy. Specify the conditions that make fiscal policy effective. Specify the conditions that make monetary policy effective.
Background image of page 2
Keynesian Cross Keynesian Cross Theory of Liquidity Preference Theory of Liquidity Preference IS curve IS curve LM curve LM curve IS-LM model IS-LM model Agg. demand curve Agg. demand curve Agg. supply curve Agg. supply curve Model of Agg. Demand and Agg. Supply Model of Agg. Demand and Agg. Supply Explanation of short-run fluctuations Explanation of short-run fluctuations
Background image of page 3

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

View Full DocumentRight Arrow Icon
The  IS-LM  model has been used to analyze the  short run when price level is assumed to be fixed.   Here, we relax the assumption of a fixed price  level. Therefore P is allowed to change The A ggregate Demand Curve (AD)  captures this  relationship between  P   and  Y.
Background image of page 4
The aggregate demand (AD) curve relates the  demand for goods and services (AE or AD) to the  aggregate price level.  In deriving the IS and LM curves we held the price  level constant.  To derive the aggregate demand curve we adjust the  price level and allow nominal money supply to  remain fixed. 
Background image of page 5

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

View Full DocumentRight Arrow Icon
If the price level increases (with a constant nominal money  supply),  the real money supply will decrease. Real Money Supply =  LM curve will shift to the left.  Interest rate increases and aggregate expenditure (income)  decreases. The ultimate result is that a higher price level implies a  lower income level. P
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 31

EC21A_lecture_7_2009 - Aggregate Demand and Aggregate Supply

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online