Shifting ad curve with higher g p y r y is g t lm m p

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Shifting AD Curve with Higher GPYrYIS(G0,T)LM(MP0)P0Y0AD(G0,T,M)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201559 / 95
IS-LM as a Theory of Aggregate DemandShifting AD Curve with Higher G (con’t)PYrYIS(G0,T)LM(MP0)P0Y0HigherGshifts theIScurve out ...AD(G0,T,M)IS(G1,T)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201560 / 95
IS-LM as a Theory of Aggregate DemandShifting AD Curve with Higher G (con’t)PYrYIS(G0,T)LM(MP0)P0Y0Y1... generating a newpoint inAS/ADspace ...AD(G0,T,M)IS(G1,T)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201561 / 95
IS-LM as a Theory of Aggregate DemandShifting AD Curve with Higher G (con’t)PYrYIS(G0,T)LM(MP0)P0Y0Y1AD(G1,T,M)... and shiftingtheADcurve outAD(G0,T,M)IS(G1,T)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201562 / 95
IS-LM as a Theory of Aggregate DemandShort-Run and Long-Run EquilibriaIn this figure, the economy is in recession at pointK. BecauseYis belowY, there is pressure onprices to fall. The fall inPis expressed as slow downward shifts in SRAS in the AS-AD diagram.LowerPalso increasesMP, causing the LM curve to shift out over time. Eventually, the economyreturns toYin both graphs.Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201563 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price AdjustmentPYYLM(MP0)IS(G0,T)SRAS0P0rYAD(G0,T,M)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201564 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP0)IS(G0,T)SRAS0P0rYIS(G1,T)AD(G1,T,M)HigherGshiftsADandIS,raisingYatfixedPY1Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201565 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP0)IS(G0,T)SRAS0P0rYIS(G1,T)AD(G1,T,M)Y1NowY >Y, sothere is pressureonPto riseFoote (Ec 1010b)Aggregate Demand IIMarch 12, 201566 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP0)IS(G0,T)SRAS0P0rYIS(G1,T)AD(G1,T,M)Y1SRASrises andLMshifts backFoote (Ec 1010b)Aggregate Demand IIMarch 12, 201567 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP1)IS(G0,T)SRAS1P1rYIS(G1,T)AD(G1,T,M)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201568 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP2)IS(G0,T)SRAS2P2rYIS(G1,T)AD(G1,T,M)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201569 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP3)IS(G0,T)SRAS3P3rYIS(G1,T)AD(G1,T,M)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201570 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP4)IS(G0,T)SRAS4P4rYIS(G1,T)AD(G1,T,M)Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201571 / 95
IS-LM as a Theory of Aggregate DemandLong-Run Price Adjustment (con’t)PYYLM(MP4)IS(G0,T)SRAS4P4rYIS(G1,T)AD(G1,T,M)End result of higherG:Higherrand no ΔYFoote (Ec 1010b)Aggregate Demand IIMarch 12, 201572 / 95
IS-LM as a Theory of Aggregate DemandLook Familiar? HigherGin Chapter 3Foote (Ec 1010b)Aggregate Demand IIMarch 12, 201573 / 95

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