EC4006
                Effective Demand and IS-LM
Stephen Kinsella | stephen.kinsell@ul.ie | stephenkinsella.net
So Far

Outline of Macroeconomics
History & Development of the Subject
IS-LM
IS-LM
Developed by Hicks (1937) and others
Simple, BOE calculating Model (or is it?)
Lots of Problems:
     Long Run/Short...
Demo
Today


ISLM & Effective Demand (ED)
Message: Output of Economy
Depends on Components of ED
Effective Demand

Assume there are N workers, and a static production technology.
Let’s describe the calculations of the F...
Now from Economy’s POV:
Aggregate income is Factor Cost + Profit
Aggregate Supply Function (ASF) is expectation of
proceeds...
When ADF > ASF, employ more people
When ADF < ASF, fire people
@ ADF = ASF, entrepreneurs' expectation of
profits will be ma...
Big Questions




Does Supply create Demand
Or, does Demand create Supply?
Dynamics
If N goes up, Ag. Income goes up,
Consumption goes up.
Need increasing investment to absorb this
So eqm. level of...
Summary
Income depends on employment of N
workers
income/consumption relationship depends
on propensity to consume, call t...
Even better Summary

The volume of employment in equilibrium
depends on
(i) the aggregate supply function, ASF
(ii) the pr...
Let’s think about
   Ireland Right Now
Real GDP dropping at 4-6%
Deflation 2-4%
UE running at 11%, so far this year,
expect...
Put ISLM and Effective
  Demand Together
Next Time
Employment and Money
Read Article on Public Folders
Expect Sample Exam next Friday
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EC4006 Intermediate Macroeconomics Lecture

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EC4006 Intermediate Macroeconomics Lecture

  1. 1. EC4006 Effective Demand and IS-LM Stephen Kinsella | stephen.kinsell@ul.ie | stephenkinsella.net
  2. 2. So Far Outline of Macroeconomics History & Development of the Subject IS-LM
  3. 3. IS-LM Developed by Hicks (1937) and others Simple, BOE calculating Model (or is it?) Lots of Problems: Long Run/Short Run Aggregation Problems Idea of ‘One’ Interest Rate ‘Dark Forces of Time & Ignorance’
  4. 4. Demo
  5. 5. Today ISLM & Effective Demand (ED) Message: Output of Economy Depends on Components of ED
  6. 6. Effective Demand Assume there are N workers, and a static production technology. Let’s describe the calculations of the Firm. Value of Output - (Factor Cost + User Cost) = Profit of Firm Firm wants to Max(Profit)
  7. 7. Now from Economy’s POV: Aggregate income is Factor Cost + Profit Aggregate Supply Function (ASF) is expectation of proceeds from employment of resources in this way. ASF = f(N), where N = No. of Workers Aggregate Demand Function (ASD) is expectation of proceeds from employing N workers. ASD = f(N).
  8. 8. When ADF > ASF, employ more people When ADF < ASF, fire people @ ADF = ASF, entrepreneurs' expectation of profits will be maximised
  9. 9. Big Questions Does Supply create Demand Or, does Demand create Supply?
  10. 10. Dynamics If N goes up, Ag. Income goes up, Consumption goes up. Need increasing investment to absorb this So eqm. level of employment depends on level of investment What changes investment? Marginal Efficiency of Capital (MEC)
  11. 11. Summary Income depends on employment of N workers income/consumption relationship depends on propensity to consume, call this IC income/investment relationship depends on MEC Sum of IC and MEC is effective demand
  12. 12. Even better Summary The volume of employment in equilibrium depends on (i) the aggregate supply function, ASF (ii) the propensity to consume, IC, and (iii) the volume of investment
  13. 13. Let’s think about Ireland Right Now Real GDP dropping at 4-6% Deflation 2-4% UE running at 11%, so far this year, expectations much higher Domestic investment in toilet. Where is effective demand?
  14. 14. Put ISLM and Effective Demand Together
  15. 15. Next Time Employment and Money Read Article on Public Folders Expect Sample Exam next Friday

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