AGGREGATE DEMAND CURVE. Dongpeng Liu Department of Economics Nanjing University

Size: px
Start display at page:

Download "AGGREGATE DEMAND CURVE. Dongpeng Liu Department of Economics Nanjing University"

Transcription

1 AGGREGATE DEMAND CURVE Dongpeng Liu Department of Economics Nanjing University

2 FROM SHORT-RUN TO INTERMEDIATE-RUN Up to now, the models we have discussed are short-run models Income expenditure model Liquidity preference model IS-LM model In these short run models, general price level is assumed to be constant Short-run models evolve into intermediate-run models if we relax the assumption of constant price MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 2

3 ROADMAP INCOME EXPENDITURE LIQUIDITY PREFERENCE IS CURVE LM CURVE SHORT-RUN IS-LM MODEL AGGREGATE DEMAND AGGREGATE SUPPLY INTERMEDIATE-RUN AS-AD MODEL SOLOW MODEL LONG-RUN w/ CAPITAL ACCUMULATION LONG-RUN AS-AD MODEL LONG-RUN w/o CAPITAL ACCUMULATION LABOR MARKET PHILLIPS CURVE MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 3

4 AGGREGATE DEMAND CURVE Aggregate demand curve characterizes the relationship between general price level and real total output when goods market and money market are simultaneously in equilibrium Let s recall the IS-LM model Y = C Y T + I i + G M P = YL(i) If changes of P are considered, we can deduct the aggregate demand curve from the IS-LM model MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 4

5 FROM THE IS-LM MODEL TO THE AD CURVE General price level rises Given unchanged nominal money supply, real money supply is reduced Money supply curve shifts to the left Given any level of income, interest rate increases LM curve shifts upwards According to the IS-LM model, equilibrium output decreases P and Y move in opposite directions. The aggregate demand curve is downward sloping. MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 5

6 FROM THE IS-LM MODEL TO THE AD CURVE MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 6

7 FROM THE IS-LM MODEL TO THE AD CURVE LM curve shifts upwards Real output decreases Downward sloping aggregate demand curve MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 7

8 FISCAL POLICIES AND THE AD CURVE If governments increase expenditures (or cut taxes), what will happen to the aggregate demand curve Given a certain price level, the LM curve remains at its original position. The IS curve shifts to the right According to the IS-LM model, Y rises This is true for any given level of P. Aggregate demand curve shifts the right If governments decrease expenditures (or increase taxes), what will happen to the aggregate demand curve Given a certain price level, the LM curve remains at its original position. The IS curve shifts to the left According to the IS-LM model, Y decreases This is true for any given level of P. Aggregate demand curve shifts the right MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 8

9 FISCAL POLICIES AND THE AD CURVE MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 9

10 MONETARY POLICIES AND THE AD CURVE If the central bank increases nominal money supply, what will happen to the aggregate demand curve? Given any general price level, the LM curve shifts downwards. IS curve remains at its original position According to the IS-LM model, Y increases This is true for any given level of P. Aggregate demand curve shifts to the right If the central bank decreases nominal money supply, what will happen to the aggregate demand curve? Given any general price level, the LM curve shifts upwards. IS curve remains at its original position According to the IS-LM model, Y decreases This is true for any given level of P. Aggregate demand curve shifts to the left MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 10

11 MONETARY POLICIES AND THE AD CURVE MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 11

12 POLICY IMPLICATIONS IS CURVE LM CURVE AD CURVE Increase in T Shifts to the left - Shifts to the left Decrease in T Shifts to the right - Shifts to the right Increase in G Shifts to the right - Shifts to the right Decrease in G Shifts to the left - Shifts to the left Increase in M - Shifts downwards Shifts to the right Decrease in M - Shifts upwards Shifts to the left MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 12

13 SUMMARY Aggregate demand curve Fiscal policies and the aggregate demand curve Monetary policies and the aggregate demand curve MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 13