Chapter 11 Aggregate Demand, I.

Homework: pp. 325-26 #1, 4a-c macromodel deriving _is_lm #1, 2, 4

Link to syllabus

Note: an earlier edition had a Figure 10-9, indicating the equivalence of the IS-LM and loanable funds analyses. This explanation does not appear in this edition.

Working with IS-LMFor each curve, two exercises can be performed. First, the derivation of the curve. Secondly, how a change in a key variable, such as M or G, moves the curve. Understanding the first is necessary for understanding the second. It is hard to keep these straight. Knowing how to derive the curve allows one to speak of what determines the slopes of the curves. DERIVATION OF A CURVE: for given values of the exogenous variables, show how changes in one endogenous variable (which would cause disequilibrium) can counteracted by a change in another endogenous variable to regain equilibrium MOVEMENTS OF A CURVE For a given value of one endogenous variable, show how a change in an exogenous variable affects the value of the other endogenous variable. IS curve: equilibrium in the goods market: Y = C+I+G (1) For a given investment demand curve [Figure 11-7(a)] (and keeping constant G and T) shows how a change in r would require a change in Y, in order to maintain equilibrium.

One can see that the steeper the I(r) curve, the steeper the IS. (2) Shifts of the IS curve. This is illustrated for an increase in G (Figure 11-8), although it can also be done for changes in exports, imports, autonomous investment, taxes, etc. Keeping constant one of r or Y (r in the example), how would an increase in G leads to a change in Y in order to maintain equilibrium in the goods market. LM Curve: Equilibrium in the money market, Ms = Md (3) Derivation of LM. Holding the quantity of Money M constant, Figure 11-11 shows how changing r necessitates a change in Y in order to maintain equilibrium in the money market. An extra result (corollary) is that the steeper is the Md, the steeper is the LM. This result is seen to support the Monetarists. (2) Shift of the LM. Typically this is caused by a change in M, although we will later see that it can also be caused by a change in prices. Fig. 11-12

Mankiw, Chapter 11,

p. 312

Fig. 11-1, P. 304. Shifts in AD.

Fig. 11-2, p. 306. Planned Expenditure as a Function of Income

Fig. 11-3, p. 307. The Keynesian Cross

Fig. 11-4, p. 308. Adjustment to Equilibrium in the Keynesian Cross

Fig. 11-5, p. 309. An Increase in Government Purchases in the Keynesian Cross

Fig. 11-6, p. 311. A Decrease in Taxes in the Keynesian Cross.

Fig. 11-7, p. 315. Deriving the IS

Curve

Fig. 11-8, p. 316. An Increase in

Gov’t Purchases Shifts the IS

Curve

Fig. 11-9, p. 318. Liquidity Preference.

To be consistent with later graphs, he should have written L(r,Y).

Text indicates a certain fuzziness about whether to use real or nominal interest rate.

Fig. 11-10, p. 319. A Reduction in the Money Supply in the Theory of Liquidity Preference.

Fig. 11-11, p. 321. Deriving the LM Curve

Fig. 11-12, p. 322. Reduction of the Money Supply Shifts the LM Curve Upward.

Fig. 11-13, p. 323. Equilibrium in the IS-LM Model

Fig. 11-14, p. 324. The Theory of Short Run Fluctuations.