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Chapter 11

Week 8 & 9 - Chapter 11.docx

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York University
ECON 2000

Week 89Chapter 11Aggregate Demand II Appling the ISLM ModelSaw the IS curve represents equilibrium in market for goods and services and that the LM curve represents equilibrium in market for real money balancesoIS and LM curves together determine r and Y in short run when price level is fixedNow we apply ISLM curve to analyze three issuesFirst we examine potential causes of fluctuations in national incomeoUse ISLM model to see how changes in exogenous variables G T M influence endogenous variables r and Y for given price leveloExamine how shocks in goods market and money market affect interest rate and national income in short unSecond discuss how ISLM model fits into model of AS and ADoExamine how ISLM model provides theory to explain slope and position of ADoRelax assumption that price level is fixed and show that ISLM model implies negative relationship between price level and national incomeThird examine Great Depression of 1930soUse ISLM model to discuss explanations of this economic downturnoAlso use model to shed light on 2008 recession111 EXPLAINING FLUCTUATIONS WITH THE ISLM MODELHow Fiscal Policy Shifts the IS Curve and Changes the ShortRun EquilibriumBegin by examining how changes in fiscal policy G and T alter economys shortrun equilibriumoRecall changes in fiscal policy influence planned expenditure which shifts IS curveChanges in Government PurchasesConsider increase in govt purchases of GoGovt purchases multiplier in Keynesian cross tells us that this change in fiscal policy raises level of income at any given interest rate by 11MPCGIS curve shifts to the right by govt purchases multiplier amountIncrease In Govt PurchasesConsider goods market as described by Keynesian crossoWhen G increases economys planned expenditure rises
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