Aggregate Demand I：Building the IS -LM Model 总需求I：建立IS-LM.ppt

Aggregate Demand I:Building the IS -LM Model In this chapter, you will learn… the IS curve, and its relation to the Keynesian cross the loanable funds model the LM curve, and its relation to the theory of liquidity preference how the IS-LM model determines income and the interest rate in the short run when P is fixed Context Chapter 9 introduced the model of aggregate demand and aggregate supply. Long run prices flexible output determined by factors of production technology unemployment equals its natural rate Short run prices fixed output determined by aggregate demand unemployment negatively related to output Context This chapter develops the IS-LM model, the basis of the aggregate demand curve. We focus on the short run and assume the price level is fixed (so, SRAS curve is horizontal). This chapter (and chapter 11) focus on the closed-economy case. Chapter 12 presents the open-economy case. The Keynesian Cross A simple closed economy model in which income is determined by expenditure. (due to J.M. Keynes) Notation: I = planned investment E = C + I + G = planned expenditure Y = real GDP = actual expenditure Difference between actual planned expenditure = unplanned inventory investment Elements of the Keynesian Cross Graphing planned expenditure Graphing the equilibrium condition The equilibrium value of income An increase in government purchases Solving for ?Y The government purchases multiplier Definition: the increase in income resulting from a $1 increase in G. In this model, the govt purchases multiplier equals Why the multiplier is greater than 1 Initially, the increase in G causes an equal increase in Y: ?Y = ?G. But ?Y ? ?C ? further ?Y ? further ?C ? further ?Y So the final impact on income is much bigger than the initial ?G. An increase in taxes Solving for ?Y The tax multiplier def: the change in income resulting from a $1 increase in T : The tax multiplier …is negative: A tax increase reduces C, whic