EC21A_lecture_7_2009 - Aggregate Demand and Aggregate...

Info icon This preview shows pages 1–8. Sign up to view the full content.

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

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

View Full Document Right 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.
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
Image of page 3

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

View Full Document Right 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.
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. 
Image of page 5

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

View Full Document Right 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 M
Image of page 6
A higher price level is associated with a lower  income level (and a lower aggregate demand since  there is equilibrium in the goods market).  Having established this, it is then easy to plot a  downward sloping AD curve .
Image of page 7

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

View Full Document Right Arrow Icon
Image of page 8
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