Lecture_notes_3_2009 - Intermediate Macroeconomics I...

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Unformatted text preview: Intermediate Macroeconomics I EC21A (Econ 2002) Income Determination in the Short Run Recall From Previous Lecture How to calculate GDP, Unemployment and Inflation Link between these three major macroeconomic variables Introduction to Keynesian Macroeconomics What determines national income levels? Classical Economics suggests factor availability and the available technology. The great depression in the 1930s challenged this view. Why? Need for a new approach to explaining national income. John Maynard Keynes Suggests that national income is determined primarily by aggregate demand (AD) – at least in the short run where prices are fixed. Objectives To indentify the variables that causes fluctuations in national income. introduce students to the Keynesian cross which is the building block of the IS-LM model To investigate how government and monetary authorities can influence the economy through fiscal and monetary policy respectively. The Big Picture 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 Introduction to Keynesian Macroeconomics What is the IS-LM model? • The IS-LM model shows how interactions between the goods and money market determines the position and slope of the AD curve. Introduction to Keynesian Macroeconomics IS- stands for investment and savings • IS curve shows what is happening in the goods market. LM-stands for liquidity and money • LM curve tells what is happening in the money market Introduction to Keynesian Macroeconomics Keynesian Cross The Keynesian cross presents the simplest and most basic interpretation of Keynes’ view of Macroeconomics. The Keynesian Cross uses two main variables: Actual output/expenditure Planned Aggregate Expenditure Keynesian Cross Income/Output, Y AE p Planned Exp. AE p =Y AE p = C +I p + G +NX Keynesian Cross Actual output is simply the output produced by a country in any given time period. Y = C + I + G + NX The planned aggregate expenditure (AE p ) tells us the total planned spending within the economy....
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This note was uploaded on 12/15/2011 for the course ECON EC21A taught by Professor Georgiamcleod during the Fall '09 term at University of the West Indies at Mona.

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Lecture_notes_3_2009 - Intermediate Macroeconomics I...

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