曼昆10.ppt

CHAPTER 10 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 is negatively related to output Context This chapter develops the IS-LM model, the theory that yields the aggregate demand curve. We focus on the short run and assume the price level is fixed. 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 Example: MPC = 0.8 The government purchases multiplier Definition: the increase in income resulting from a $1 increase in G. In this model, the G 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 hike reduces consumer spending, which reduces income. …is greater than one  (in absolute value): A change in taxes has a multiplier