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Aggregate Demand I Aggregate Demand I: Macroeconomics
Aggregate Demand I Aggregate Demand I: Macroeconomics
Aggregate Demand I Aggregate Demand I: Macroeconomics
CHAPTER TEN
macro Aggregate
Aggregate Demand
Demand II
(chapter 10)
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
planned expenditure:
Equilibrium condition:
Actual expenditure Planned expenditure
_____________
CHAPTER 10 Aggregate Demand I slide 5
Graphing planned expenditure
E
planned
expenditure
income, output, Y
income, output, Y
income, output, Y
income, output, Y
E>Y: ___________ inventories: must produce more.
E<Y: ___________ inventories: must produce less.
CHAPTER 10 Aggregate Demand I slide 9
An increase in government purchases
E
E =C +I +G1
G
Looks like
…so firms Y>G
increase output,
and income Y
rises toward a
new equilibrium E1 = Y1
C even more
C more
C
Y even more
Y more
G
Y once
G MPC 1G MPC 2 G MPC 3 G ...
This is a standard geometric series from algebra:
Y C I G in changes
C G because I exogenous
1 1 a b
Y G I T
1b 1b 1b 1b
So if b=MPC=0.75, multiplier =
C = ______
…so firms
reduce output,
and income falls Y
toward a new
E1 = Y1
equilibrium
MPC Y T
Solving for Y : (1 MPC) Y MPC T
Final result:
Y C (Y T ) I (r ) G
r E =C +I (r1 )+G
Y1 Y2 Y
r
r1
r2
IS
Y1 Y2 Y
G E Y E =C +I (r1 )+G1
…so the IS curve
shifts to the right.
The horizontal Y1 Y2 Y
r
distance of the
r1
IS shift equals
Y ___________ IS2
IS1
Y1 Y2 Y
IS: or write as
IS:
CHAPTER 10 Aggregate Demand I slide 27
Graph the IS curve
r
__ Slope =
IS
IS: r = 2 - 0.0025Y
The supply of r
M P
s
real money interest
rate
balances
is fixed:
M P M P
s
M/P
M P
real money
balances
Demand for r
real money interest
rate
balances:
M P
d
L (r )
L (r )
M/P
M P
real money
balances
M P L (r ) L (r )
M/P
M P
real money
balances
r1
L (r )
M/P
M2 M1 real money
P P balances
r1 r1
L (r , Y1 )
M1 M/P Y1 Y
P
CHAPTER 10 Aggregate Demand I slide 38
Understanding the LM curve’s slope
The LM curve is positively sloped.
Intuition:
An increase in income raises money
demand.
Since the supply of real balances is fixed,
there is now excess demand in the money
market at the initial interest rate.
The interest rate must rise to restore
equilibrium in the money market.
So: M /P
or write as:
CHAPTER 10 Aggregate Demand I slide 40
Graph the LM curve
r
LM
e 1 M
r Y
f f P
LM1
r2 r2
r1 r1
L ( r , Y1 )
M1 M/P Y1 Y
P
CHAPTER 10 Aggregate Demand I slide 42
The short-run equilibrium
The short-run equilibrium is r
the combination of r and Y
that simultaneously satisfies
the equilibrium conditions in
the goods & money markets:
Y C (Y T ) I (r ) G
M P L (r ,Y ) Y
Equilibrium
interest Equilibrium
rate level of
income