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Assume G = 0, NX = 0, T= 0
Yad = C + I = 200 + .5Y + 300 = 500 + .5Y
Equilibrium: 1. When Y > Y*, Iu > 0
Y ↓ to Y* 2. When Y < Y*, Iu < 0
Y to Y*
23.1.5 1.Expenditure Multiplier
have excess goods
1800 (3)With G and T, Yd = 900 + mpc Y – mpc
T = 700 + .5Y, Y3 = 1400
2.Conclusions: (1) G Y ; T Y (2) G = T = + 400, Y 400
23.1.7 Role of International Trade
2. Expenditure Multiplier
(1)Suppose planned investment increases by 100. What happens to equilibrium output? It increases by 200. Why? It is because of the multiplier effect in the economy.
3.IS Curve
IS curve 1. i I NX ,
Yad , Y Points 1, 2, 3 in figure 2. Right of IS: Y > Yad Y to IS Left of IS: Y < Yad Y to IS
25
23.2.2 LM Curve
The LM curve is derived from the money market equilibrium condition (money demand= money supply).
(6)US goods became more expensive, which leads to a increase in import and a decrease in export. that is, a fall in net export.
2.What the IS Curve Tells Us
Y ad C I G NX
Determination of Aggregate Output
The equilibrium happens when the total quantity of aggregate demand is equal to that of the aggregate output.
3、IS-LM Approach to Aggregate Output and Interest Rate
Equilibrium occurs where the IS and LM curves intersect, point E. At point E, both
the goods market and money market are in equilibrium.
2.Investment Spending Two factors affect planned investment: interest rates and businesses’ expectations about the future
We will discuss it laterian-Cross Diagram
NX = +100,
Y/NX
= 200/100 =
2
= 1/(1 – mpc) =
1/(1 – .5)
Summary: Factors that
Affect Y
23.2 The IS LM Model
23.2.1 The IS Curve 1.The IS curve is derived from the
Y Y ad
Keynes assumed that prices are fixed
23.1.1 Consumer Expenditure
1.There is a very close relationship between consumer expenditure and disposable income (YD). This relationship is called the consumption function.
equilibrium condition in the goods market (aggregate output equals aggregate demand).
(1)Interest rates and planned investment are negatively correlated.
mpc = (ΔC/ ΔYD)
3. Consumer Expenditure
The term a is autonomous consumption: portion of consumption that does not depend on disposal income(YD).
23.1.2 Consumption Function
For each point on the IS curve satisfy the equilibrium in goods market
Below the IS curve, there is excess demand for goods
Above the IS curve, there is excess supply of goods
(4)Interest rates and planned investment are also negatively correlated.
(5)As interest rate in US rises, foreigners are willing to buy US assets, $ appreciates.
C a mpc YD
2. Consumer Expenditure Its slope is used to predict the change in consumption that will be caused by a change in income taxes. The slope is called the marginal propensity to consume (mpc).
For a given level of output, it shows the corresponding interest rates required for equilibrium in the money market.
1. LM Curve
(1)Recall, according to Keynes’s Liquidity Preference Theory, the demand for real money balances is a function of interest rates and income.
(2)We call ΔY/ ΔI the expenditure multiplier
3.Analysis of Figure 3: Expenditure Multiplier
I = + 100 Y/I = 200/100 = 2 1
Y = (a + I)1 – mpc A = a + I = autonomous spending
(2)Investment occurs when the expected revenue of the investment project is greater than the cost of the borrowed funds.
(3)If you use your own funds, you have to consider the the opportunity cost of the
2. Right of LM: excess Md, i to LM Left of LM : excess Ms, i
to LM
28
2.IS-LM Model
Point E, equilibrium where Y = Yad (IS) and Md = M s (LM )
At other points like A, B, C, D, one of two markets is not in equilibrium and arrows mark movement towards point E
23.1.6 Role of Government
Analysis of Figure 5: Role of Government
1.G = + 400, T = + 400 (1) With no G and T, Yd = C + I = 500 + mpc
Y = 500 + .5Y, Y1 = 1000 (2) With G, Y= C + I + G = 900 + .5Y, Y2 =
Chapter 23
The Keynesian Framework and the
ISLM Model
Preview
Determination of aggregate output, The IS LM model.
23.1Determination of Aggregate Output
(2)Real money balances are negatively related to interest rates and positively related to income.
M d f (i,Y ) P
(3) LM Curve
LM curve
1. Y , Md , i
Points 1, 2, 3 in figure
Keynes regards that the four major components of aggregate demand are:
(1) consumer expenditure (2)planned investment spending (3)government spending (4)net export
8
23.1.3 Investment Spending
1.Investment is on physical assets (not financial assets). There are two types of investment:fixed and inventory investment.
(1)At point A(on IS, above LM), we have
excess money, people are holding more money than they want to buy bonds
i falls.
(2)At point B (on LM, below IS), we
Conclusions: (1)Expenditure multiplier = Y/A = 1/(1 – mpc)
whether change in A is due to change in a or I (2)Animal spirits change A
4.The Great Depression and the Collapse of Investment
(1)Fixed investment is spending on equipment and structure and it is planned.
(2)Inventory investment is spending on raw materials, parts and finished goods. Sometimes, inventory investment is unplanned.
Yad = C + I = 200 + .5Y + 300 = 500 + .5Y
Equilibrium: 1. When Y > Y*, Iu > 0
Y ↓ to Y* 2. When Y < Y*, Iu < 0
Y to Y*
23.1.5 1.Expenditure Multiplier
have excess goods
1800 (3)With G and T, Yd = 900 + mpc Y – mpc
T = 700 + .5Y, Y3 = 1400
2.Conclusions: (1) G Y ; T Y (2) G = T = + 400, Y 400
23.1.7 Role of International Trade
2. Expenditure Multiplier
(1)Suppose planned investment increases by 100. What happens to equilibrium output? It increases by 200. Why? It is because of the multiplier effect in the economy.
3.IS Curve
IS curve 1. i I NX ,
Yad , Y Points 1, 2, 3 in figure 2. Right of IS: Y > Yad Y to IS Left of IS: Y < Yad Y to IS
25
23.2.2 LM Curve
The LM curve is derived from the money market equilibrium condition (money demand= money supply).
(6)US goods became more expensive, which leads to a increase in import and a decrease in export. that is, a fall in net export.
2.What the IS Curve Tells Us
Y ad C I G NX
Determination of Aggregate Output
The equilibrium happens when the total quantity of aggregate demand is equal to that of the aggregate output.
3、IS-LM Approach to Aggregate Output and Interest Rate
Equilibrium occurs where the IS and LM curves intersect, point E. At point E, both
the goods market and money market are in equilibrium.
2.Investment Spending Two factors affect planned investment: interest rates and businesses’ expectations about the future
We will discuss it laterian-Cross Diagram
NX = +100,
Y/NX
= 200/100 =
2
= 1/(1 – mpc) =
1/(1 – .5)
Summary: Factors that
Affect Y
23.2 The IS LM Model
23.2.1 The IS Curve 1.The IS curve is derived from the
Y Y ad
Keynes assumed that prices are fixed
23.1.1 Consumer Expenditure
1.There is a very close relationship between consumer expenditure and disposable income (YD). This relationship is called the consumption function.
equilibrium condition in the goods market (aggregate output equals aggregate demand).
(1)Interest rates and planned investment are negatively correlated.
mpc = (ΔC/ ΔYD)
3. Consumer Expenditure
The term a is autonomous consumption: portion of consumption that does not depend on disposal income(YD).
23.1.2 Consumption Function
For each point on the IS curve satisfy the equilibrium in goods market
Below the IS curve, there is excess demand for goods
Above the IS curve, there is excess supply of goods
(4)Interest rates and planned investment are also negatively correlated.
(5)As interest rate in US rises, foreigners are willing to buy US assets, $ appreciates.
C a mpc YD
2. Consumer Expenditure Its slope is used to predict the change in consumption that will be caused by a change in income taxes. The slope is called the marginal propensity to consume (mpc).
For a given level of output, it shows the corresponding interest rates required for equilibrium in the money market.
1. LM Curve
(1)Recall, according to Keynes’s Liquidity Preference Theory, the demand for real money balances is a function of interest rates and income.
(2)We call ΔY/ ΔI the expenditure multiplier
3.Analysis of Figure 3: Expenditure Multiplier
I = + 100 Y/I = 200/100 = 2 1
Y = (a + I)1 – mpc A = a + I = autonomous spending
(2)Investment occurs when the expected revenue of the investment project is greater than the cost of the borrowed funds.
(3)If you use your own funds, you have to consider the the opportunity cost of the
2. Right of LM: excess Md, i to LM Left of LM : excess Ms, i
to LM
28
2.IS-LM Model
Point E, equilibrium where Y = Yad (IS) and Md = M s (LM )
At other points like A, B, C, D, one of two markets is not in equilibrium and arrows mark movement towards point E
23.1.6 Role of Government
Analysis of Figure 5: Role of Government
1.G = + 400, T = + 400 (1) With no G and T, Yd = C + I = 500 + mpc
Y = 500 + .5Y, Y1 = 1000 (2) With G, Y= C + I + G = 900 + .5Y, Y2 =
Chapter 23
The Keynesian Framework and the
ISLM Model
Preview
Determination of aggregate output, The IS LM model.
23.1Determination of Aggregate Output
(2)Real money balances are negatively related to interest rates and positively related to income.
M d f (i,Y ) P
(3) LM Curve
LM curve
1. Y , Md , i
Points 1, 2, 3 in figure
Keynes regards that the four major components of aggregate demand are:
(1) consumer expenditure (2)planned investment spending (3)government spending (4)net export
8
23.1.3 Investment Spending
1.Investment is on physical assets (not financial assets). There are two types of investment:fixed and inventory investment.
(1)At point A(on IS, above LM), we have
excess money, people are holding more money than they want to buy bonds
i falls.
(2)At point B (on LM, below IS), we
Conclusions: (1)Expenditure multiplier = Y/A = 1/(1 – mpc)
whether change in A is due to change in a or I (2)Animal spirits change A
4.The Great Depression and the Collapse of Investment
(1)Fixed investment is spending on equipment and structure and it is planned.
(2)Inventory investment is spending on raw materials, parts and finished goods. Sometimes, inventory investment is unplanned.