中级宏观经济学s统一课件chap11islm

1、Chapter 11: Aggregate Demand I:Building the IS-LM modelYulei PengLingnan (University) CollegeSun Yat-sen UniversityIN 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 ho

2、w the IS-LM model determines income and the interest rate in the short run when P is fixed1Context Chapter 10 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

3、 prices fixed output determined by aggregate demand unemployment negatively related to outputContext 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

4、 12) focus on the closed-economy case. Chapter 13 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 investmentPE = C + I + G = planned expenditureY = real GDP = actual expenditure

5、Difference between actual & planned expenditure = unplanned inventory investmentElements of the Keynesian Cross()CC YTII,GGTT()PEC YTIGYPEconsumption function:for now, plannedinvestment is exogenous:planned expenditure:equilibrium condition:govt policy variables:actual expenditure = planned expendit

6、ureGraphing planned expenditureincome, output, Y PEplannedexpenditurePE =C +I +G MPC1Graphing the equilibrium conditionincome, output, Y PEplannedexpenditurePE =Y 45The equilibrium value of incomeincome, output, Y PEplannedexpenditurePE =Y PE =C +I +G Equilibrium incomeAn increase in government purc

7、hasesY PEPE =Y PE =C +I +G1PE1 = Y1PE =C +I +G2PE2 = Y2 YAt Y1, there is now an unplanned drop in inventoryso firms increase output, and income rises toward a new equilibrium. GSolving for YYCIGYCIG MPC YGCG (1MPC) YG11MPC YGequilibrium conditionin changesbecause I exogenousbecause C = MPC Y Collect

8、 terms with Y on the left side of the equals sign:Solve for Y :The government purchases multiplierDefinition: the increase in income resulting from a $1 increase in G.In this model, the govt purchases multiplier equalsExample: If MPC = 0.8, then11MPCYG1510.8YGAn increase in G causes income to increa

9、se 5 times as much!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 taxesY PEPE =Y PE =C2 +I +GPE2 = Y2PE =C1 +I +GPE1 = Y1 YAt

10、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 PE:Solving for YYCIG MPC YTC (1MPC)MPC YTeqm condition in changesI and G exogenousSolving for Y :MPC1MPC YTFinal re

11、sult:The tax multiplierdef: the change in income resulting from a $1 increase in T :MPC1MPCYT0.80.8410.80.2 YTIf MPC = 0.8, then the tax multiplier equalsThe tax multiplieris negative: A tax increase reduces C, which reduces income.is greater than one (in absolute value): A change in taxes has a mul

12、tiplier 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. NOW YOU TRY: Practice with the Keynesian CrossUse a graph of the Keynesian cross to s

13、how the effects of an increase in planned investment on the equilibrium level of income/output. ANSWERS: Increase in planned investmentY PEPE =Y PE =C +I1 +GPE1 = Y1PE =C +I2 +GPE2 = Y2 YAt Y1, there is now an unplanned drop in inventoryso firms increase output, and income rises toward a new equilib

14、rium. IThe IS curvedef: a graph of all combinations of r and Y that result in goods market equilibriumi.e. actual expenditure (output) = planned expenditureThe equation for the IS curve is:()( )YC YTI rGY2Y1Y2Y1Deriving the IS curver IY PErY PE =C +I (r1 )+G PE =C +I (r2 )+G r1r2PE =YIS I PE YWhy th

15、e IS curve is negatively sloped A fall in the interest rate motivates firms to increase investment spending, which drives up total planned spending (PE ). To restore equilibrium in the goods market, output (a.k.a. actual expenditure, Y ) must increase. The IS curve and the loanable funds modelS, IrI

16、 (r ) r1r2rYY1r1r2(a)The L.F. model(b) The IS curveY2S1S2ISFiscal Policy and the IS curve We can use the IS-LM model to see how fiscal policy (G and T ) affects aggregate demand and output. Lets start by using the Keynesian cross to see how fiscal policy shifts the IS curveY2Y1Y2Y1Shifting the IS cu

17、rve: GAt any value of r, G PE YY PErY PE =C +I (r1 )+G1 PE =C +I (r1 )+G2 r1PE =YIS1The horizontal distance of the IS shift equals IS2so the IS curve shifts to the right.11 MPCYG YNOW YOU TRY: Shifting the IS curve: TUse the diagram of the Keynesian cross or loanable funds model to show how an incre

18、ase in taxes shifts the IS curve.If you can, determine the size of the shift. ANSWERS: Shifting the IS curve: TY2Y2At any value of r, T C PEPE =C2 +I (r1 )+G IS2The horizontal distance of the IS shift equals Y PErY PE =YY1Y1PE =C1 +I (r1 )+G r1IS1so the IS curve shifts to the left.MPC1 MPCYT YThe Th

19、eory of Liquidity Preference Due to John Maynard Keynes. A simple theory in which the interest rate is determined by money supply and money demand. Money supplyThe supply of real money balances is fixed:sM PM PM/P real money balancesrinterestratesM PM PMoney demandDemand forreal money balances:M/P r

20、eal money balancesrinterestratesM PM P( )dM PL rL (r ) EquilibriumThe interest rate adjusts to equate the supply and demand for money:M/P real money balancesrinterestratesM PM P( )M PL rL (r ) r1How the Fed raises the interest rateTo increase r, Fed reduces MM/P real money balancesrinterestrate1MPL

21、(r ) r1r22MPCASE STUDY: Monetary Tightening & Interest Rates Late 1970s: 10% Oct 1979: Fed Chairman Paul Volcker announces 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 would affect nominal interest ra

22、tes? Monetary Tightening & Interest Rates, cont.i 08/1979: i = 10.4%1/1983: 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 ratespricesmode

23、llong runshort runThe LM curveNow lets put Y back into the money demand function:( ,)M PL r YThe 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:dM PL r Y( ,)Deriving the LM curveM/P r1MPL (r , Y1 ) r1r2rYY

24、1r1L (r , Y2 ) r2Y2LM(a)The market for real money balances(b) The LM curveWhy the LM curve is upward sloping 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

25、 to restore equilibrium in the money market.How M shifts the LM curveM/P r1MPL (r , Y1 ) r1r2rYY1r1r2LM1(a)The market for real money balances(b) The LM curve2MPLM2NOW YOU TRY: Shifting the LM curveSuppose a wave of credit card fraud causes consumers to use cash more frequently in transactions. Use t

26、he liquidity preference model to show how these events shift the LM curve.NOW YOU TRY: Shifting the LM curveM/P r1MPL (r , Y1 ) r1r2rYY1r1r2LM1(a)The market for real money balances(b) The LM curveLM2L (r , Y1 ) The short-run equilibriumThe short-run equilibrium is the combination of r and Y that sim

27、ultaneously satisfies the equilibrium conditions in the goods & money markets: ()( )YC YTI rGY r( ,)M PL r YISLMEquilibriuminterestrateEquilibriumlevel ofincomeThe Big PictureKeynesianCrossTheory of Liquidity PreferenceIScurveLM curveIS-LMmodelAgg. demandcurveAgg. supplycurveModel of Agg. Demand and

28、 Agg. SupplyExplanation of short-run fluctuationsPreview of Chapter 12In Chapter 12, we will use the IS-LM model to analyze the impact of policies and shocks. learn how the aggregate demand curve comes from IS-LM. use the IS-LM and AD-AS models together to analyze the short-run and long-run effects of shocks. use our models to learn about the Great Depression.C H A P T E R S U M M A R Y1.Keynes