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《宏观经济学》课程教学资源（英文版）Lecture 4-11 Aggregate Demand II

Aggregate Demand ll Science is a parasite: the greater the patient population the better the ad ance in physiology and pathology; and out of pathology arises therapy The year 1932 was the trough of the great depression, and from its rotten soil was belatedly begot a new subject that today we call macroeconomics In Chapter 10 we assembled the pieces of the IS-LM model. We saw that the IS curve represents the equilibrium in the market for goods and services, that the LM curve represents the equilibrium in the market for real money balances, and that the IS and LM curves together

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Worth: Mankiw Economics 5e CHAPTER 11 Aggregate Demand ll 287 Policy Analysis With Macroeconometric Models The IS-LM model shows how monetary and fiscal policy infuence the equilib- rium level of income. The predictions of the model, however, are qualitative, not quantitative. The IS-LM model shows that increases in government purchas raise GDP and that increases in taxes lower GDP. But when economists analyze specific policy proposals, they need to know not only the direction of the effect but also the size. For example, if Congress increases taxes by $100 billion and if monetary policy is not altered, how much will GDP fall? To answer this question, economists need to go beyond the graphical representation of the IS-LM model. Macroeconometric models of the economy provide one way to evaluate policy proposals. A macroeconometric model is a model that describes the economy quanti tatively, rather than only qualitatively. Many of these models are essentially more complicated and more realistic versions of our IS-LM model. The economists ho build macroeconometric models use historical data to estimate parameters such as the marginal propensity to consume, the sensitivity of investment to the interest rate, and the sensitivity of money demand to the interest rate. Once a model is built, economists can simulate the effects of alternative policies with the help of a computer. Table 11-1 shows the fiscal-policy multipliers implied by one widely used macroeconometric model, the Data Resources Incorporated(DRI)model, named for the economic forecasting firm that developed it. The multipliers are given for two assumptions about how the Fed might respond to changes in fiscal polio One assumption about monetary policy is that the Fed keeps the nominal in- terest rate constant. That is, when fiscal policy shifts the IS curve to the right or to the left, the Fed adjusts the money supply to shift the LM curve in the same direction. Because there is no crowding out of investment due to a changing in- terest rate, the fiscal-policy multipliers are similar to those from the Keynesian cross.The DRI model indicates that, in this case, the government-purchases mul- tiplier is 1.93, and the tax multiplier is -1.19. That is, a $100 billion increase in government purchases raises GDP by $193 billion, and a $100 billion increase in taxes lowers GDP by $119 billi table 11-1 The Fiscal-Policy Multipliers in the DRI Model VALUE OF MULTIPLIERS Assumption About Monetary P △Y△G 1.93 Money supply held constant 0.60 -0.26 fiscal-pol ultipliers for a sustained change in government hases or in personal income taxes. These multipliers are for the fourth quarter after the Otto Eckstein, The DRI Model of the U.S. Economy(New York: McGraw-Hill, 1983), 169 User JOENA: Job EFF01427: 6264_ch11: Pg 287: 27334 #/eps at 100s wed,Feb13,200210:27M

User JOEWA:Job EFF01427:6264_ch11:Pg 287:27334#/eps at 100% *27334* Wed, Feb 13, 2002 10:27 AM CHAPTER 11 Aggregate Demand II | 287 CASE STUDY Policy Analysis With Macroeconometric Models The IS–LM model shows how monetary and fiscal policy influence the equilibrium level of income.The predictions of the model, however, are qualitative, not quantitative. The IS–LM model shows that increases in government purchases raise GDP and that increases in taxes lower GDP. But when economists analyze specific policy proposals, they need to know not only the direction of the effect but also the size. For example, if Congress increases taxes by $100 billion and if monetary policy is not altered, how much will GDP fall? To answer this question, economists need to go beyond the graphical representation of the IS–LM model. Macroeconometric models of the economy provide one way to evaluate policy proposals. A macroeconometric model is a model that describes the economy quantitatively, rather than only qualitatively. Many of these models are essentially more complicated and more realistic versions of our IS–LM model. The economists who build macroeconometric models use historical data to estimate parameters such as the marginal propensity to consume, the sensitivity of investment to the interest rate, and the sensitivity of money demand to the interest rate. Once a model is built, economists can simulate the effects of alternative policies with the help of a computer. Table 11-1 shows the fiscal-policy multipliers implied by one widely used macroeconometric model, the Data Resources Incorporated (DRI) model, named for the economic forecasting firm that developed it.The multipliers are given for two assumptions about how the Fed might respond to changes in fiscal policy. One assumption about monetary policy is that the Fed keeps the nominal interest rate constant.That is, when fiscal policy shifts the IS curve to the right or to the left, the Fed adjusts the money supply to shift the LM curve in the same direction. Because there is no crowding out of investment due to a changing interest rate, the fiscal-policy multipliers are similar to those from the Keynesian cross.The DRI model indicates that, in this case, the government-purchases multiplier is 1.93, and the tax multiplier is −1.19.That is, a $100 billion increase in government purchases raises GDP by $193 billion, and a $100 billion increase in taxes lowers GDP by $119 billion. VALUE OF MULTIPLIERS Assumption About Monetary Policy DY/ DG DY/ DT Nominal interest rate held constant 1.93 −1.19 Money supply held constant 0.60 −0.26 Note: This table gives the fiscal-policy multipliers for a sustained change in government purchases or in personal income taxes. These multipliers are for the fourth quarter after the policy change is made. Source: Otto Eckstein, The DRI Model of the U.S. Economy (New York: McGraw-Hill, 1983), 169. The Fiscal-Policy Multipliers in the DRI Model table 11-1

Worth: Mankiw Economics 5e 288 PART IV Business Cycle Theory: The Economy in the Short Run The second assumption about monetary policy is that the Fed keeps the money supply constant so that the LM curve does not shift. In this case, the inter- est rate rises, and investment is crowded out, so the multipliers are much smaller. The government-purchases multiplier is only 0.60, and the tax multiplier is only -0. 26. That is, a $100 billion increase in government purchases raises gDp by $60 billion, and a $100 billion increase in taxes lowers gDP by $26 billion. Table 11-1 shows that the fiscal-policy multipliers are very different under the two assumptions about monetary policy. The impact of any change in fiscal pol icy depends crucially on how the Fed responds to that change. Shocks in the /s-LM Model Because the is-lm model shows how national income is determined in the short run. we can use the model to examine how various economic disturbances affect income. So far we have seen how changes in fiscal policy shift the IS curve and how changes in monetary policy shift the LM curve. Similarly, we can group other disturbances into two categories: shocks to the IS curve and shocks to the LM curve Shocks to the IS curve are exogenous changes in the demand for goods and services. Some economists, including Keynes, have emphasized that such changes in demand can arise fron Im Investors a nimal spirits-exogenous and perhaps self- fulfilling waves of optimism and pessimism. For example, suppose that firms be come pessimistic about the future of the economy and that this pessimism causes hem to build fewer new factories This reduction in the demand for investment goods causes a contractionary shift in the investment function: at every interest rate, firms want to invest less. The fall in investment reduces planned expenditure and shifts the IS curve to the left, reducing income and employment. This fall r equilibrium income in part validates the firms'initial pessimism. Shocks to the IS curve may also arise from changes in the demand for consumer goods. Suppose, for instance, that the election of a popular president increases con- sumer confidence in the economy. This induces consumers to save less for the fu ture and consume more today. We can interpret this change as an upward shift in the consumption function. This shift in the consumption function increases planned expenditure and shifts the IS curve to the right, and this raises income Calvin and Hobbes by Bill Watterson · User JoENA: Job EFFo1427: 6264_chl1: Pg 288: 27335#/eps at 100sm I wea,Feb13,200210:27AM

User JOEWA:Job EFF01427:6264_ch11:Pg 288:27335#/eps at 100% *27335* Wed, Feb 13, 2002 10:27 AM Shocks in the IS–LM Model Because the IS–LM model shows how national income is determined in the short run, we can use the model to examine how various economic disturbances affect income. So far we have seen how changes in fiscal policy shift the IS curve and how changes in monetary policy shift the LM curve. Similarly, we can group other disturbances into two categories: shocks to the IS curve and shocks to the LM curve. Shocks to the IS curve are exogenous changes in the demand for goods and services. Some economists, including Keynes, have emphasized that such changes in demand can arise from investors’ animal spirits—exogenous and perhaps selffulfilling waves of optimism and pessimism. For example, suppose that firms become pessimistic about the future of the economy and that this pessimism causes them to build fewer new factories.This reduction in the demand for investment goods causes a contractionary shift in the investment function: at every interest rate, firms want to invest less.The fall in investment reduces planned expenditure and shifts the IS curve to the left, reducing income and employment.This fall in equilibrium income in part validates the firms’ initial pessimism. Shocks to the IS curve may also arise from changes in the demand for consumer goods. Suppose, for instance, that the election of a popular president increases consumer confidence in the economy.This induces consumers to save less for the future and consume more today.We can interpret this change as an upward shift in the consumption function. This shift in the consumption function increases planned expenditure and shifts the IS curve to the right, and this raises income. 288 | PART IV Business Cycle Theory: The Economy in the Short Run The second assumption about monetary policy is that the Fed keeps the money supply constant so that the LM curve does not shift. In this case, the interest rate rises, and investment is crowded out, so the multipliers are much smaller. The government-purchases multiplier is only 0.60, and the tax multiplier is only −0.26.That is, a $100 billion increase in government purchases raises GDP by $60 billion, and a $100 billion increase in taxes lowers GDP by $26 billion. Table 11-1 shows that the fiscal-policy multipliers are very different under the two assumptions about monetary policy.The impact of any change in fiscal policy depends crucially on how the Fed responds to that change. Calvin and Hobbes © 1992 Watterson. Dist. by Universal Press Syndicate

Worth: Mankiw Economics 5e CHAPTER 11 Aggregate Demand ll 289 Shocks to the LM curve arise from exogenous changes in the demand for money. For example, suppose that new restrictions on credit-card availabilit increase the amount of money people choose to hold. According to the theory of liquidity preference, when money demand rises, the interest rate necessary to equilibrate the money market is higher(for any given level of income and money supply). Hence, an increase in money demand shifts the LM curve up ward, which tends to raise the interest rate and depress Income In summary, several kinds of events can cause economic fuctuations by shift ing the iS curve or the Lm curve. Remember, however, that such fluctuations are not inevitable. Policymakers can try to use the tools of monetary and fiscal polie to offset exogenous shocks If policymakers are sufficiently quick and skillful(ad- mittedly, a big if), shocks to the IS or LM curves need not lead to fluctuations in Income or employment. CASE STUDY The U.s. slowdown of 2001 In 2001, the U.S. economy experienced a pronounced slowdown in economic activity. The unemployment rate rose from 3.9 percent in October 2000 to 4.9 percent in August 2001, and then to 5.8 percent in December 2001. In many ways, the slowdown looked like a typical recession driven by a fall in aggregate demand Two notable shocks can help explain this event. The first was a decline in the stock market. During the 1990s, the stock market experienced a boom of his- toric proportions, as investors became optimistic about the prospects of the new information technology. Some economists viewed the optimism as excessive at the time, and in hindsight this proved to be the case. When the optimism faded, average stock prices fell by about 25 percent from August 2000 to August 2001 The fall in the market reduced household wealth and thus consumer spending In addition, the declining perceptions of the profitability of the new technologies led to a fall in investment spending. In the language of the IS-LM model, the IS curve shifted to the left The second shock was the terrorist attacks on New York and Washington on September 11, 2001. In the week after the attacks, the stock market fell another 12 percent, its biggest weekly loss since the Great Depression of the 1930s Moreover, the attacks increased uncertainty about what the future would hold Uncertainty can reduce spending because households and firms postpone some of their plans until the uncertainty is resolved. Thus, the terrorist attacks shifted the Is curve further to the left Fiscal and monetary policymakers were quick to respond to these events. ongress passed a tax cut in 2001, including an immediate tax rebate. One goal of the tax cut was to stimulate consumer spending. After the terrorist attacks, Congress increased government spending by appropriating funds to rebuild New York and to bail out the ailing airline industry. Both of these fiscal measures shifted the Is curve to the right User JOENA: Job EFF01427: 6264_ch11: Pg 289: 27336#/eps at 100s wed,Feb13,200210:27M

User JOEWA:Job EFF01427:6264_ch11:Pg 289:27336#/eps at 100% *27336* Wed, Feb 13, 2002 10:27 AM Shocks to the LM curve arise from exogenous changes in the demand for money. For example, suppose that new restrictions on credit-card availability increase the amount of money people choose to hold.According to the theory of liquidity preference, when money demand rises, the interest rate necessary to equilibrate the money market is higher (for any given level of income and money supply). Hence, an increase in money demand shifts the LM curve upward, which tends to raise the interest rate and depress income. In summary, several kinds of events can cause economic fluctuations by shifting the IS curve or the LM curve. Remember, however, that such fluctuations are not inevitable. Policymakers can try to use the tools of monetary and fiscal policy to offset exogenous shocks. If policymakers are sufficiently quick and skillful (admittedly, a big if ), shocks to the IS or LM curves need not lead to fluctuations in income or employment. CHAPTER 11 Aggregate Demand II | 289 CASE STUDY The U.S. Slowdown of 2001 In 2001, the U.S. economy experienced a pronounced slowdown in economic activity.The unemployment rate rose from 3.9 percent in October 2000 to 4.9 percent in August 2001, and then to 5.8 percent in December 2001. In many ways, the slowdown looked like a typical recession driven by a fall in aggregate demand. Two notable shocks can help explain this event.The first was a decline in the stock market. During the 1990s, the stock market experienced a boom of historic proportions, as investors became optimistic about the prospects of the new information technology. Some economists viewed the optimism as excessive at the time, and in hindsight this proved to be the case.When the optimism faded, average stock prices fell by about 25 percent from August 2000 to August 2001. The fall in the market reduced household wealth and thus consumer spending. In addition, the declining perceptions of the profitability of the new technologies led to a fall in investment spending. In the language of the IS–LM model, the IS curve shifted to the left. The second shock was the terrorist attacks on New York and Washington on September 11, 2001. In the week after the attacks, the stock market fell another 12 percent, its biggest weekly loss since the Great Depression of the 1930s. Moreover, the attacks increased uncertainty about what the future would hold. Uncertainty can reduce spending because households and firms postpone some of their plans until the uncertainty is resolved.Thus, the terrorist attacks shifted the IS curve further to the left. Fiscal and monetary policymakers were quick to respond to these events. Congress passed a tax cut in 2001, including an immediate tax rebate. One goal of the tax cut was to stimulate consumer spending. After the terrorist attacks, Congress increased government spending by appropriating funds to rebuild New York and to bail out the ailing airline industry. Both of these fiscal measures shifted the IS curve to the right

Worth: Mankiw Economics 5e 290 PART IV Business Cycle Theory: The Economy in the Short Run At the same time, the Fed pursued expansionary monetary policy, shifting the LM curve to the right. Money growth accelerated, and interest rates fell. The in- terest rate on three-month Treasury bills fell from 6.4 percent in November of 2000 to 3.3 percent in August 2001, and then to 2. 1 percent in September 2001 in the immediate aftermath of the terrorist attacks The magnitude of the slowdown of 2001 was not yet determined as this book was going to press. The big question was whether the policy measures under taken were sufficient to offset the shocks that the economy had suffered. By the time you are reading this, you may know the answer. What Is the Fed's Policy Instrument-The Money Supply or the interest rate? Our analysis of monetary policy has been based on the assumption that the Fed infuences the economy by controlling the money supply. By contrast, when th media report on changes in Fed policy, they often simply say that the Fed has raised or lowered interest rates. Which is right? Even though these two views may seem different, both are correct, and it is important to understand why In recent years, the Fed has used the federal funds rate-the interest rate that banks charge one another for overnight loans as its short-term policy instrument. When the Federal Open Market Committee meets every six weeks to set monetary policy, it votes on a target for this interest rate that will apply until the next meeting. After the meeting is over, the Feds bond traders in New York are told to conduct the open-market operations necessary to hit that target. These open-market operations change the money supply and shift the LM curve so that the equilibrium interest rate(determined by the intersection of the IS and LM curves)equals the target in- terest rate that the Federal Open Market Committee has chosen. As a result of this operating procedure, Fed policy is often discussed in terms of changing interest rates. Keep in mind, however, that behind these changes in interest rates are the necessary changes in the money supply. A newspaper might report, for instance, that "the Fed has lowered interest rates. "To be more precise, we can translate this statement as meaning " the Federal Open Market Commit- tee has instructed the Fed bond traders to buy bonds in open-market operations so as to increase the money supply, shift the LM curve, and reduce the equilib- rium interest rate to hit a new lower target. Why has the Fed chosen to use an interest rate, rather than the money supply, as its short-term policy instrument? One possible answer is that shocks to the LM curve are more prevalent than shocks to the IS curve. When the Fed targets nterest rates, it automatically offsets LM shocks by altering the money supply, but the policy exacerbates IS shocks If LM shocks are the more prevalent type, chen a policy of targeting the interest rate leads to greater economic stability than a policy of targeting the money supply(problem 7 at the end of this chapter asks you to analyze this issue more fully Another possible reason for using the interest rate as the short-term po strument is that interest rates are easier to measure than the money supply. As we User JOENA: Job EFF01427: 6264_ch11: Pg 290: 27337#/eps at 100s wea,Feb13,200210:27AM

User JOEWA:Job EFF01427:6264_ch11:Pg 290:27337#/eps at 100% *27337* Wed, Feb 13, 2002 10:27 AM What Is the Fed’s Policy Instrument—The Money Supply or the Interest Rate? Our analysis of monetary policy has been based on the assumption that the Fed influences the economy by controlling the money supply. By contrast, when the media report on changes in Fed policy, they often simply say that the Fed has raised or lowered interest rates. Which is right? Even though these two views may seem different, both are correct, and it is important to understand why. In recent years, the Fed has used the federal funds rate—the interest rate that banks charge one another for overnight loans—as its short-term policy instrument.When the Federal Open Market Committee meets every six weeks to set monetary policy, it votes on a target for this interest rate that will apply until the next meeting.After the meeting is over, the Fed’s bond traders in New York are told to conduct the open-market operations necessary to hit that target.These open-market operations change the money supply and shift the LM curve so that the equilibrium interest rate (determined by the intersection of the IS and LM curves) equals the target interest rate that the Federal Open Market Committee has chosen. As a result of this operating procedure, Fed policy is often discussed in terms of changing interest rates. Keep in mind, however, that behind these changes in interest rates are the necessary changes in the money supply.A newspaper might report, for instance, that “the Fed has lowered interest rates.” To be more precise, we can translate this statement as meaning “the Federal Open Market Committee has instructed the Fed bond traders to buy bonds in open-market operations so as to increase the money supply, shift the LM curve, and reduce the equilibrium interest rate to hit a new lower target.” Why has the Fed chosen to use an interest rate, rather than the money supply, as its short-term policy instrument? One possible answer is that shocks to the LM curve are more prevalent than shocks to the IS curve.When the Fed targets interest rates, it automatically offsets LM shocks by altering the money supply, but the policy exacerbates IS shocks. If LM shocks are the more prevalent type, then a policy of targeting the interest rate leads to greater economic stability than a policy of targeting the money supply. (Problem 7 at the end of this chapter asks you to analyze this issue more fully.) Another possible reason for using the interest rate as the short-term policy instrument is that interest rates are easier to measure than the money supply.As we 290 | PART IV Business Cycle Theory: The Economy in the Short Run At the same time, the Fed pursued expansionary monetary policy, shifting the LM curve to the right. Money growth accelerated, and interest rates fell.The interest rate on three-month Treasury bills fell from 6.4 percent in November of 2000 to 3.3 percent in August 2001, and then to 2.1 percent in September 2001 in the immediate aftermath of the terrorist attacks. The magnitude of the slowdown of 2001 was not yet determined as this book was going to press. The big question was whether the policy measures undertaken were sufficient to offset the shocks that the economy had suffered. By the time you are reading this, you may know the answer

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