macroeconomics fifth editionN. Gregory MankiwPowerPoint Slides by Ron CronovichCHAPTER TENAggregate Demand Imacro 2002 Worth Publishers, all rights reservedCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 2ContextChapter 9 introduced the model of aggregate demand and aggregate supply. Long runprices flexibleoutput determined by factors of production & technologyunemployment equals its natural rateShort runprices fixedoutput determined by aggregate demandunemployment is negatively related to output经济萧条会发生什么？失业、资源浪费CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 3ContextThis 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. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 4The Keynesian CrossA simple closed economy model in which income is determined by expenditure. (due to J.M. Keynes)Notation: I = planned investmentE = C + I + G = planned expenditureY = real GDP = actual expenditureDifference between actual & planned expenditure: unplanned inventory investment不包括存货投资假设价格固定，没有通货膨胀CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 5Elements of the Keynesian Crossconsumption function:for now, investment is exogenous:planned expenditure:Equilibrium condition:govt policy variables:CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 6Graphing planned expenditureincome, output, Y EplannedexpenditureE =C +I +G MPC1C=C(Y-T)= a+ b(Y-T)B成为边际消费倾向MPCCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 7Graphing the equilibrium conditionincome, output, Y EplannedexpenditureE =Y 45CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 8The equilibrium value of incomeincome, output, Y EplannedexpenditureE =Y E =C +I +G Equilibrium incomeCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 9An increase in government purchasesY EE =Y E =C +I +G1E1 = Y1E =C +I +G2E2 = Y2 YAt Y1, there is now an unplanned drop in inventoryso firms increase output, and income rises toward a new equilibrium GY的增大来源于两个方面，一方面G增大，另一方面人均收入增大导致人们消费增加CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 10Solving for Yequilibrium conditionin changesbecause I exogenousbecause C = MPC Y Collect terms with Y on the left side of the equals sign:Finally, solve for Y :中国的MPC比较小，因为中国倾向于储蓄，所以政府支出增加导致的GDP的增加不如美国多CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 11The government purchases multiplierExample: MPC = 0.8 The increase in G causes income to increase by 5 times as much!CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 12The government purchases multiplierIn the example with MPC = 0.8, Definition: the increase in income resulting from a $1 increase in G.In this model, the G multiplier equals税收乘数：MPC/(1-MPC)为了刺激经济中国倾向于增加政府支出，美国倾向于减税。减税实际上是刺激老百姓消费，增加政府支出是政府消费。CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 13Why the multiplier is greater than 1Initially, the increase in G causes an equal increase in Y: Y = G.But Y C further Y further C further YSo the final impact on income is much bigger than the initial G.CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 14An increase in taxesY EE =Y E =C2 +I +GE2 = Y2E =C1 +I +GE1 = Y1 YAt Y1, there is now an unplanned inventory buildupso firms reduce output, and income falls toward a new equilibrium C = MPC TInitially, the tax increase reduces consumption, and therefore E:CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 15Solving for Yeqm condition in changesI and G exogenousSolving for Y :Final result:CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 16The Tax Multiplierdef: the change in income resulting from a $1 increase in T :If MPC = 0.8, then the tax multiplier equalsCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 17The Tax Multiplieris negative: A tax hike reduces consumer spending, which reduces income.is greater than one (in absolute value): A change in taxes has a multiplier effect on income. is smaller than the govt spending multiplier: Consumers save the fraction (1-MPC) of a tax cut, so the initial boost in spending from a tax cut is smaller than from an equal increase in G. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 18The Tax Multiplieris negative: An increase in taxes reduces consumer spending, which reduces equilibrium income.is greater than one (in absolute value): A change in taxes has a multiplier effect on income. is smaller than the govt spending multiplier: Consumers save the fraction (1-MPC) of a tax cut, so the initial boost in spending from a tax cut is smaller than from an equal increase in G. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 19Exercise:Use a graph of the Keynesian Cross to show the impact of an increase in investment on the equilibrium level of income/output. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 20The IS curvedef: a graph of all combinations of r and Y that result in goods market equilibrium,i.e. actual expenditure (output) = planned expenditureThe equation for the IS curve is:CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 21Y2Y1Y2Y1Deriving the IS curver IY ErY E =C +I (r1 )+G E =C +I (r2 )+G r1r2E =YIS I E Y利率增加，投资下降，GDP减少，反过来GDP减少，利率增加，两者互为相关关系而不是因果关系CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 22Understanding the IS curves slopeThe IS curve is negatively sloped. Intuition:A fall in the interest rate motivates firms to increase investment spending, which drives up total planned spending (E ). To restore equilibrium in the goods market, output (a.k.a. actual expenditure, Y ) must increase. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 23The IS curve and the Loanable Funds modelS, IrI (r ) r1r2rYY1r1r2(a)The L.F. model(b) The IS curveY2S1S2ISIS是商品市场上利率和GDP的关系CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 24Fiscal Policy and the IS curveWe can use the IS-LM model to see how fiscal policy (G and T ) can affect aggregate demand and output. Lets start by using the Keynesian Cross to see how fiscal policy shifts the IS curveCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 25Y2Y1Y2Y1Shifting the IS curve: GAt any value of r, G E YY ErY E =C +I (r1 )+G1 E =C +I (r1 )+G2 r1E =YIS1The horizontal distance of the IS shift equals IS2so the IS curve shifts to the right. YCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 26Exercise: Shifting the IS curveUse the diagram of the Keynesian Cross or Loanable Funds model to show how an increase in taxes shifts the IS curve. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 27The Theory of Liquidity Preferencedue to John Maynard Keynes.A simple theory in which the interest rate is determined by money supply and money demand. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 28Money SupplyThe supply of real money balances is fixed:M/P real money balancesrinterestrate货币供给是外生的，是政府控制的CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 29Money DemandDemand forreal money balances:M/P real money balancesrinterestrateL (r ) 持有货币的原因是为了流动性，为了交易。货币需求是Y和i的函数，Y越高，消费欲望越强，货币需求越大，i越高，人们越不愿意持有货币CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 30EquilibriumThe interest rate adjusts to equate the supply and demand for money:M/P real money balancesrinterestrateL (r ) r1CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 31How the Fed raises the interest rateTo increase r, Fed reduces MM/P real money balancesrinterestrateL (r ) r1r2CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 32CASE STUDY CASE STUDY Volckers Monetary TighteningLate 1970s: 10%Oct 1979: Fed Chairman Paul Volcker announced that monetary policy would aim to reduce inflation.Aug 1979-April 1980: Fed reduces M/P 8.0%Jan 1983: = 3.7%How do you think this policy change How do you think this policy change would affect interest rates? would affect interest rates? CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 33Volckers Monetary Tightening, cont.cont.i 01/1983: i = 8.2%8/1979: i = 10.4%4/1980: i = 15.8%flexiblestickyQuantity Theory, Fisher Effect(Classical)Liquidity Preference(Keynesian)predictionactual outcomeThe effects of a monetary tightening on nominal interest ratespricesmodellong runshort runCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 34The LM curveNow lets put Y back into the money demand function:The LM curve is a graph of all combinations of r and Y that equate the supply and demand for real money balances.The equation for the LM curve is:CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 35Deriving the LM curveM/P rL (r , Y1 ) r1r2rYY1r1L (r , Y2 ) r2Y2LM(a)The market for real money balances(b) The LM curveCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 36Understanding the LM curves slopeThe 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.CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 37How M shifts the LM curveM/P rL (r , Y1 ) r1r2rYY1r1r2LM1(a)The market for real money balances(b) The LM curveLM2货币供给减少，LM曲线左移CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 38Exercise: Shifting the LM curveSuppose a wave of credit card fraud causes consumers to use cash more frequently in transactions. Use the Liquidity Preference model to show how these events shift the LM curve. 在美国，降息和增加货币供给是一回事，美联储会在货币市场上购买债券，实际上相当于注入流动性CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 39The short-run equilibriumThe short-run equilibrium is the combination of r and Y that simultaneously satisfies the equilibrium conditions in the goods & money markets: Y rISLMEquilibriuminterestrateEquilibriumlevel ofincomeCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 40The Big PictureKeynesianCrossTheory of Liquidity PreferenceIScurveLM curveIS-LMmodelAgg. demandcurveAgg. supplycurveModel of Agg. Demand and Agg. SupplyExplanation of short-run fluctuationsCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 41Chapter summary1.Keynesian Crossbasic model of income determinationtakes fiscal policy & investment as exogenousfiscal policy has a multiplied impact on income.2. IS curvecomes from Keynesian Cross when planned investment depends negatively on interest rateshows all combinations of r and Y that equate planned expenditure with actual expenditure on goods & servicesCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 42Chapter summary3.Theory of Liquidity Preferencebasic model of interest rate determinationtakes money supply & price level as exogenousan increase in the money supply lowers the interest rate4. LM curvecomes from Liquidity Preference Theory when money demand depends positively on incomeshows all combinations of r andY that equate demand for real money balances with supplyCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 43Chapter summary5. IS-LM modelIntersection of IS and LM curves shows the unique point (Y, r ) that satisfies equilibrium in both the goods and money markets. CHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 44Preview of Chapter 11In Chapter 11, we willuse the IS-LM model to analyze the impact of policies and shockslearn how the aggregate demand curve comes from IS-LMuse the IS-LM and AD-AS models together to analyze the short-run and long-run effects of shockslearn about the Great Depression using our modelsCHAPTER 10CHAPTER 10 Aggregate Demand I Aggregate Demand Islide 45