mankiw7e-chap10 - N.Gregory Mankiw William Scarth...

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Canadian Edition1010CHAPTERCHAPTERMACROECONOMICSMACROECONOMICSN.Gregory Mankiw, William ScarthN.Gregory Mankiw, William ScarthPowerPoint Slides Modified by Yunkai Huang PowerPoint Slides Modified by Yunkai Huang 0CHAPTER 10Aggregate Demand I2 0 1 2 U P D A T EAggregate Demand I:Aggregate Demand I:Building the Building the ISIS-LMLMModelModel1010CHAPTERCHAPTER
In this chapter, you will learn:In this chapter, you will learn:square4the IScurve, and its relation to:square4the Keynesian crosssquare4the loanable funds modelsquare4the LMcurve, and its relation to:square4the theory of liquidity preference square4how the IS-LMmodel determines income and the interest rate in the short run when Pis fixed
Contextsquare4
CHAPTER 10Aggregate Demand Isquare4
Short runsquare4prices fixedsquare4
3CHAPTER 10Aggregate Demand Ilevel is fixed (so, SRAScurve is horizontal). square4This chapter (and chapter 11) focus on the closed-economy case. Chapter 12 presents the open-economy case.
The Keynesian Crosssquare4A simple closed economy model in which income is determined by expenditure. (due to J.M. Keynes)square4Notation: 4CHAPTER 10Aggregate Demand II= planned investmentPE= C + I + G= planned expenditureY= real GDP = actual expendituresquare4Difference between actual & planned expenditure = unplanned inventory investment
Elements of the Keynesian Cross()CC YT=-II=,GGTT==consumption function:for now, plannedinvestment is exogenous:govt policy variables:5CHAPTER 10Aggregate Demand III==-++()PEC YTIG=YPEinvestment is exogenous:planned expenditure:equilibrium condition:actual expenditure = planned expenditure
Graphing planned expenditurePEplannedexpenditurePE=C +I +GMPC6CHAPTER 10Aggregate Demand Iincome, output,YMPC1
Graphing the equilibrium conditionPEplannedexpenditurePE=Y7CHAPTER 10Aggregate Demand Iincome, output,Y45º
The equilibrium value of incomePEplannedexpenditurePE=YPE=C +I +G8CHAPTER 10Aggregate Demand Iincome, output,YEquilibrium income
11, 9CHAPTER 10Aggregate Demand IY
Solving for ΔYYCIG=++YCIGΔ= Δ+ Δ+ ΔMPC=× Δ+ ΔYGCG=Δ+Δequilibrium conditionin changesbecause Iexogenousbecause ΔC=MPCΔY 10CHAPTER 10Aggregate Demand IMPC=× Δ+ ΔYG(1MPC)-×Δ= ΔYG11MPCΔ=× Δ-YGbecause ΔC=MPCΔY Collect terms with ΔYon the left side of the equals sign:Solve for ΔY:
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11CHAPTER 10Aggregate Demand I
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