Context Chapter 9 introduced the model of aggregate demand and aggregate supply .ong 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 CHAPTER 10 Aggregate Demand I slide 1
CHAPTER 10 Aggregate Demand I slide 1 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 CHAPTER 10 Aggregate Demand I slide 2
CHAPTER 10 Aggregate Demand I slide 2 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 CHAPTER 10 Aggregate Demand I slide 3
CHAPTER 10 Aggregate Demand I slide 3 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 consumption function C=c-7 govt policy variables for now, nvestment is exogenous planned expenditure: E=C-T)+I+G Equilibrium condition Actual expenditure= Planned expenditure CHAPTER 10 Aggregate Demand I slide 4
CHAPTER 10 Aggregate Demand I slide 4 Elements of the Keynesian Cross C C Y T = − ( ) I I = G G T T = = , E C Y T I G = − + + ( ) Actual expenditure Planned expenditure Y E = = consumption function: for now, investment is exogenous: planned expenditure: Equilibrium condition: govt policy variables:
Graphing planned expenditure E planned expenditure E=C+I+G MPC income, output, Y CHAPTER 10 Aggregate Demand I slide 5
CHAPTER 10 Aggregate Demand I slide 5 Graphing planned expenditure income, output, Y E planned expenditure E =C +I +G MPC 1