Aggregate Demand I. Building the IS–LM Model презентация

Market and the LM Curve
11-3 Conclusion: The Short-Run Equilibrium

of explaining the Depression.
national Y depends on factor supplies and the available technology,
neither of which changed substantially from 1929 to 1933.
A new model was needed.
In 1936 the British economist John Maynard Keynes revolutionized economics with his book The General Theory of Employment, Interest, and Money.
Keynes proposed that
↓ AD is responsible for the ↓ Y & ↑ U that characterize economic ↘.
He criticized classical theory for assuming that AS alone determines Y.
Economists today reconcile these 2 views with the model of AD&AS (Ch.10)
In the LR, Ps are flexible, and AS determines Y.
In the SR, Ps are sticky, so changes in AD influence Y.

the variables that shift the AD curve, causing fls in national Y.
to examine the tools policymakers can use toﬧ A D .
(Ch. 10) We showed that monetary policy can shift the AD curve.
(this Ch.) We see that the government can ﬧAD with both
monetary and fiscal policy.

IS–LM model,
is the leading interpretation of Keynes’s theory.
The goal of the model is to show what determines national Y for a given P.
We can view the IS–LM model as showing what causes
Y to change in the SR when the P is fixed because all Ps are sticky
the AD curve to shift.

given P, national Y fluctuates because of shifts in the AD curve.
The IS–LM model takes the P as given and shows what causes Y to change.
The model therefore shows what causes AD to shift.

stands for “investment’’ and “saving,’’
represents what’s going on in the market for G&S (Ch. 3).
The LM curve
stands for “liquidity’’ and “money,’’
Represents what’s happening to the S&D for money (Ch. 5).
The r ﬧ both I & money demand, →
it is the variable that links the 2 halves of the IS–LM model.
The model shows
how interactions between the G & money markets determine
the position and slope of the AD curve and
→ the level of national Y in the SR.

level of Y
that arises in the market for G&Ss.
To develop this relationship, we start with the Keynesian cross –
It shows how national Y is determined and
It is block for the IS–LM model.

In The General Theory Keynes proposed that
an economy’s total Y is, in the SR, determined largely by the spending plans of H, B, and G.
> people want to spend →
> G&S firms can sell →
> Y they will choose to produce →
> workers they will choose to hire.

Keynes believed that the problem during recessions and depressions is inadequate spending.
The KC is an attempt to model this insight.

11-1 The Goods Market and the IS Curve

The Keynesian Cross
The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

Planned Expenditure
Let us draw a distinction between actual & planned expenditure.
Actual expenditure
is the amount Hs, Fs, & the G spend on G&S(Ch.2), it = the economy’s GDP.
Planned expenditure
is the amount Hs, Fs, & the G would like to spend on G&S.
Why would AE ever differ from PE?
The answer is that
firms might engage in unplanned inventory investment because their sales do not meet their expectations.
When Fs sell < of their product than they planned,
their stock of inventories automatically r↑;
When Fs sell > than planned,
their stock of inventories f↓.
These unplanned changes in inventory are counted
as INVESTMENT spending by Fs,
→ AE can be either ͞ or _͟ PE .

The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

Now we consider the determinants of PE.
Assuming
that the economy is closed, → NX = 0, →
PE = C + I + G. We add the consumption function:
C = C(Y − T)- consumption ~on disposable Y (Y − T),
To keep things simple, we take PI as exogenously fixed:
3.
As in Ch.3, we assume that fiscal policy— the levels of G & T—is fixed:
4.
5.
Combining these 5 equations, we obtain


PE is a function of Y, the level of PI , & the fiscal policy variables.

higher Y leads to ↑er consumption, which is part of PE.
The slope of the PE function is the marginal propensity to consume, MPC.

The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

The Economy in Equilibrium
The next assumption is that the economy is in equilibrium when AE = PE.
is based on the idea that
when people’s plans have been realized, they have no reason to change what they are doing.
Recalling that
Y as GDP = not only total Y but also total AE on G&S, we can write this equilibrium condition as
AE = PE
Y = PE.
The 45-degree line plots the points where this condition holds.
With the addition of the PE function, this diagram becomes the KC.

at which Y (AE ) equals PE (point A).

How does the economy get to equilibrium?
Whenever an economy is not in equilibrium, Fs experience
unplanned changes in inventories, →
Changes in production levels →
Changes in total Y and expenditure →
equilibrium.

are producing at level Y2, then PE2 exceeds production, and Fs run down their inventories.
This fall in inventories induces Fs to increase production.
In both cases, the Fs ’ decisions drive the economy toward equilibrium.

If Fs are producing at level Y1,
then PE1 falls short of production, and Fs accumulate inventories.

This inventory accumulation induces Fs to ↘ production.

G affect the economy.
G are one component of expenditure →
↑er G result in ↑er PE for any given level of Y.
If G r↗ by ∆G, then the PE schedule shifts up↑ by ∆G
The equilibrium of the economy moves from point A to point B.
This graph shows that
an ↗ in G → to an even greater ↗ in Y.
→ ∆Y is > ∆G.
The ratio ∆Y/∆G is called the government-purchases multiplier;
it tells us how much I r↑ in response to a $1 ↗ in G.
An implication of the KC is that the G multiplier is larger than 1.

The Keynesian Cross
The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

11-1 The Goods Market and the IS Curve

↗ in Y exceeds the ↗ in G.
→ fiscal policy has a multiplied effect on Y.

An ↗ of G raises PE by that amount for any given level of Y.
The equilibrium moves from point A to point B, and Y rises from Y1 to Y2.

change in Y.
Expenditure r↑ by ∆G → Y r↑ by ∆G as well.
This ↗ in Y in turn r↑ consumption by MPC× ∆G,
where MPC is the marginal propensity to consume.
This ↗ in consumption r↑ expenditure and Y once again.
This second ↗ in Y of MPC × ∆G again raises C, this time by MPC × (MPC ×∆ G), which again ↑s expenditure and Y, and so on.
This feedback from C to Y to C continues indefinitely.
The total effect on Y is
Initial Change in Government Purchases = ∆G
First Change in Consumption = MPC × ∆G
Second Change in Consumption = MPC2 × ∆G
Third Change in Consumption = MPC3 × ∆G
.. .. . .
∆Y = (1 + MPC + MPC2 + MPC3 + . . .)∆G.

The Keynesian Cross
The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

11-1 The Goods Market and the IS Curve

How Fiscal Policy Shifts the IS Curve

11-1 The Goods Market and the IS Curve

The G multiplier is Y/G = 1 + MPC + MPC2 + MPC3 + . . .
This expression for the multiplier is an example of an infinite geometric series.
A result from algebra allows us to write the multiplier as
Y/G = 1/(1 − MPC).
For example, if the MPC is 0.6, the multiplier is
Y/G = 1 + 0.6 + 0.62 + 0.63 + . . .= 1/(1 − 0.6) = 2.5.
In this case, a $1.00 increase in government purchases raises equilibrium income by $2.50.3

∆T immediately r↑ disposable income Y − T by ∆T and, →
↗ consumption by MPC × T.
For any given level of Y, PE is now ↑er.
The PE schedule shifts up↑ by MPC × T.
The equilibrium of the economy moves from point A to point B.
Just as an ↗ in G has a multiplied effect on Y, → does a ↘ in Ts.
As before, the initial change in expenditure,
now MPC × T, is multiplied by 1/(1 − MPC).
The overall effect on Y of the change in Ts is Y/T = −MPC/(1 − MPC).
This expression is the tax multiplier,
the amount Y changes in response to a $1 change in Ts.
The “-” sign indicates that Y moves in the opposite direction from Ts.
For example,
if the marginal propensity to consume is 0.6, then
the tax multiplier is Y/T = −0.6/(1 − 0.6) = −1.5.
A $1.00 cut in taxes r↑s equilibrium Y by $1.50.

The Keynesian Cross
The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

11-1 The Goods Market and the IS Curve

T of ∆T r↑ PE by MPC × ∆T for any given level of Y.
The equilibrium moves from point A to point B, and Y r↑ from Y1 to Y2.
Fiscal policy has a multiplied effect on Y.

of the council’s first proposals was to expand national Y by reducing taxes.
Tax cuts stimulate aggregate supply by improving workers’ incentives and expand AD by raising households’ disposable Y.
GDP ↗, U ↘
George W. Bush was elected president in 2000, a major element of his platform was a cut in Y taxes.
Bush used both supply-side and Keynesian rhetoric to make the case for their policy.
When people have more M., they can spend it on G&S.
When they demand an additional G&S, somebody will produce the G or S.
When somebody produces that G&S, it means somebody is more likely to be able to find a job.
GDP ↗, U ↘

Cutting Taxes to Stimulate the Economy: The Kennedy and Bush Tax Cuts

was suffering from a significant recession.
The package included some tax cuts and higher transfer payments, but much of it was made up of ↗ in G of G&S.
Congress went ahead with President Obama’s proposed stimulus plans with relatively minor modifications.
The president signed the $787 billion billon February 17, 2009.
Did it work?
The economy did recover from the recession,
but much more slowly than the Obama administration economists initially forecast.
Whether the slow recovery reflects
the failure of stimulus policy or
a sicker economy than the economists first appreciated
is a question of continuing debate.

Increasing Government Purchases to Stimulate the Economy: The Obama Spending Plan

of H, F, the G determine the Y.
makes the assumption that the level of PI is fixed.
An important macroeconomic relationship is that PI ~ on the r (Ch.3).
To add this relationship between the r & I to our model,
we write the level of PI as I = I(r).

The r is the cost of borrowing to finance investment projects
→ an ↗ in the r reduces PI.
→ the investment function slopes downward.
To determine how Y changes when the r changes,
we can combine the investment function with the KС diagram.

11-1 The Goods Market and the IS Curve

The Keynesian Cross
The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

↗ in the r from r1 to r2 reduces PI from I(r1) to I(r2).

Panel (b) shows the KC:
a ↘ in PI from I(r1) to I(r2) shifts the PE function ↘ and → reduces Y from Y1 to Y2.

Panel (c) shows the IS curve summarizing
this relationship between the r and Y:
the ↑er the r, the ↓er the level of Y.

of Y that brings the goods market into equilibrium.
As we learned from the KC,
the equilibrium level of Y also ~on Gnt spending G and taxes T.

The IS curve is drawn for a given FP; that is,
when we construct the IS curve, we hold G and T fixed.
When FP changes, the IS curve shifts.

Changes in FP that
r↑ the demand for G&S shift the IS curve to the right.
r↓ the demand for G&S shift the IS curve to the left.

11-1 The Goods Market and the IS Curve

The Keynesian Cross
The Interest Rate, Investment, and the IS Curve
How Fiscal Policy Shifts the IS Curve

(a) shows that an ↗ in G r↑s PE.

For any given r,
the u↑ shift in PE of G → to an ↗ in Y of ∆G/(1 – MPC).

→ in panel (b), the IS curve shifts to the right by this amount.

Preference
Income, Money Demand, and the LM Curve
How Monetary Policy Shifts the LM Curve

S curve for RMB is vertical because the S does not ~on the r.
The D curve is d↓ sloping because a ↑er r
r↑ the cost of holding money and →
lowers the quantity demanded.
At the equilibrium r, the quantity of RMB demanded = the quantity supplied.

Preference
If the P is fixed, a reduction in the M from M1 to M2 reduces the S of RMB.
The equilibrium r → r↑ from r1 to r2.

Preference
Income, Money Demand, and the LM Curve
How Monetary Policy Shifts the LM Curve

an ↗ in Y from Y1 to Y2 raises the demand for money and thus raises the interest rate from r1 to r2.
Panel (b) shows the LM curve summarizing this relationship between the interest rate and income: the higher the level of income, the higher the interest rate.

the level of Y that are consistent with equilibrium in the market for RMB.
The LM curve is drawn for a given supply of RMB.
↘ in the supply of RMB shift the LM curve u↑.
↗in the supply of RMB shift the LM curve d↓.

11-2 The Money Market and the LM Curve

The Theory of Liquidity Preference
Income, Money Demand, and the LM Curve
How Monetary Policy Shifts the LM Curve

two equations of this model are
Y = C(Y − T ) + I(r) + G - IS,
M/P = L(r, Y) - LM.

11-3 Conclusion: The Short-Run Equilibrium

in the market for G&S & in the market for RMB
for given values of Gnt spending, T, the M, and the P.

Equilibrium in the IS–LM Model

different pieces of the theory of SR fluctuations fit together.
The KC explains the IS curve, and the TLP explains the LM curve.
The IS and LM curves together yield the IS–LM model, which explains the AD curve.
The AD curve is part of the model of AS & AD, which economists use to explain SR fluctuations in economic activity.