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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 1 of 37
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 2 of 37
PART III THE CORE OF MACROECONOMIC THEORY
Aggregate
Demand
12
in the Goods and
Money Markets
Prepared by:
Fernando & Yvonn Quijano
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster
PART III THE CORE OF MACROECONOMIC THEORY
Aggregate
Demand
11
12
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 5 of 37
Planned Investment and the Interest Rate
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 6 of 37
Planned Investment and the Interest Rate
Other Determinants of Planned Investment
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 7 of 37
Planned Investment and the Interest Rate
Other Determinants of Planned Investment
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 8 of 37
Planned Investment and the Interest Rate
Planned Aggregate Expenditure and the Interest Rate
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
AE ≡ C + I + G
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 9 of 37
Planned Investment and the Interest Rate
Planned Aggregate Expenditure and the Interest Rate
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
FIGURE 12.2 The Effect of an Interest Rate Increase on Planned Aggregate Expenditure
An increase in the interest rate from 3 percent to 6 percent lowers planned aggregate
expenditure and thus reduces equilibrium income from Y0 to Y1.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 10 of 37
Planned Investment and the Interest Rate
Planned Aggregate Expenditure and the Interest Rate
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 11 of 37
Planned Investment and the Interest Rate
Planned Aggregate Expenditure and the Interest Rate
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
r I AE Y
r I AE Y
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 12 of 37
Equilibrium in Both the Goods and Money Markets
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
Y M d r
d
Y M r
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 13 of 37
Equilibrium in Both the Goods and Money Markets
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
FIGURE 12.3 Links Between the Goods Market and the Money Market
Planned investment depends on the interest rate, and money demand depends on aggregate output.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 14 of 37
Policy Effects in the Goods and Money Markets
Expansionary Policy Effects
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 15 of 37
Policy Effects in the Goods and Money Markets
Expansionary Policy Effects
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 16 of 37
Policy Effects in the Goods and Money Markets
Expansionary Policy Effects
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 17 of 37
Policy Effects in the Goods and Money Markets
Expansionary Policy Effects
G Y M d r I
Y increases less than if r did not increase
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 18 of 37
Policy Effects in the Goods and Money Markets
Expansionary Policy Effects
Money Supply
M s r I Y M d
d
r decreases less than if M did not increase
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 19 of 37
Policy Effects in the Goods and Money Markets
Contractionary Policy Effects
G or T Y M d r I
Y decreases less than if r did not decrease
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 20 of 37
Policy Effects in the Goods and Money Markets
Contractionary Policy Effects
Money Supply
M s r I Y M d
d
r increases less than if M did not decrease
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 21 of 37
Policy Effects in the Goods and Money Markets
The Macroeconomic Policy Mix
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 22 of 37
The Aggregate Demand (AD) Curve
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 23 of 37
The Aggregate Demand (AD) Curve
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
FIGURE 12.5 The Impact of an Increase in the Price Level on the Economy—Assuming No
Changes in G, T, and Ms
This figure shows that when P increases, Y decreases.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 24 of 37
The Aggregate Demand (AD) Curve
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 25 of 37
The Aggregate Demand (AD) Curve
The Aggregate Demand Curve: A Warning
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 26 of 37
The Aggregate Demand (AD) Curve
Other Reasons for a Downward-Sloping Aggregate Demand Curve
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 27 of 37
The Aggregate Demand (AD) Curve
Other Reasons for a Downward-Sloping Aggregate Demand Curve
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 28 of 37
The Aggregate Demand (AD) Curve
Other Reasons for a Downward-Sloping Aggregate Demand Curve
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 29 of 37
The Aggregate Demand (AD) Curve
Aggregate Expenditure and Aggregate Demand
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
equilibrium condition: C + I + G = Y
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 30 of 37
The Aggregate Demand (AD) Curve
Shifts of the Aggregate Demand Curve
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 31 of 37
The Aggregate Demand (AD) Curve
Shifts of the Aggregate Demand Curve
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 32 of 37
The Aggregate Demand (AD) Curve
Shifts of the Aggregate Demand Curve
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 33 of 37
REVIEW TERMS AND CONCEPTS
aggregate demand
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 34 of 37
APPENDIX A
THE IS-LM DIAGRAM
THE IS CURVE
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 35 of 37
APPENDIX A
THE IS-LM DIAGRAM
THE LM CURVE
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 36 of 37
APPENDIX A
THE IS-LM DIAGRAM
THE IS-LM DIAGRAM
CHAPTER 12 Aggregate Demand in the Goods and Money Markets
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 37 of 37
APPENDIX A
THE IS-LM DIAGRAM
THE IS-LM DIAGRAM
CHAPTER 12 Aggregate Demand in the Goods and Money Markets