Aggregate Demand
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The document discusses aggregate demand and the goods and money markets. It explains that: 1) The goods market determines the equilibrium level of aggregate output where demand equals supply. Demand is the sum of consumption, investment, and government spending. 2) The money market determines the equilibrium interest rate where the demand for money equals the supply. 3) Aggregate demand specifies the total demand for final goods and services in an economy at a given price level. 4) The IS-LM model graphs the relationships between interest rates and output in the goods and money markets. The point where the IS and LM curves intersect indicates the overall equilibrium in both markets.
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2. It then derives the IS curve, showing the combinations of interest rates (i) and output (Y) that maintain equilibrium in both the goods market and foreign exchange market. The IS curve slopes downward, as lower interest rates increase investment and the trade balance via currency depreciation.
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Department of Economics, University at Buffalo Winston Chang.docx
Department of Economics, University at Buffalo Winston Chang
For use by students of my course only. Further distribution is prohibited.1
Simple Pure Exchange Models
1 Introduction
The price of a good or service observed in a national market, without foreign trade, is determined
by demand and supply in that nation. On the supply side, nations generally have different natural
endowments, different factors of production, and different technologies relevant to the production
of goods and services. These differences result in variations in production costs. On the demand
side, people have different incomes and tastes, which generate unique patterns of demand among
nations. Thus, the autarkic prices observed among nations tend to be different. Once foreign
trade is opened up, goods and services move between nations. Some questions that come to mind
when considering foreign trade are: Which country exports which good? What role do autarkic
prices play in determining the direction of trade? What are the equilibrium terms of trade? Are
there gains from trade? These are some of the basic questions to be answered in the study of
international economics.
In this chapter, we will consider some simple exchange models in order to illustrate the deter-
minants of trade. It will be shown that it is the difference in relative autarkic prices, not money
prices, that causes trade to take place. We will also examine the determination of the equilibrium
terms of trade and gains from trade with the help of a simple exchange model, while keeping the
supply of goods fixed.
2 The Determinants of Barter Trades
To illustrate the basic determinants of trade, we consider a very simple pure exchange model in
which there are two countries, called home (H) and foreign (F), and two goods, good 1 (G1)
1Copyright c
2009 by Winston Chang. All rights reserved.
1
and good 2 (G2). Goods are already produced so there are no new production activities in either
country. Before trade is opened up, each good has an autarkic price in each country. Let the home
country’s variables be represented without an asterisk and foreign variables with an asterisk. Let
pj be the money price of goodj in H (j = 1;2), measured, say, in U.S. dollars andp
�
j be the money
price of goodj in F (j = 1;2), measured in British pounds. These are the money (nominal) prices
observed in the autarkic (no foreign trade) equilibrium. Assume that there are no impediments to
trade; namely, there are no transport costs or other trading costs. The markets are competitive,
and the buyers and sellers all face the same prices. How is the trade pattern determined? Is it
determined by these nominal prices?
To answer both questions, we first consider a barter exchange economy in which one good is
directly exchanged for the other. Since there are no trading costs, if the barter exchange ratios
between the two goods in the two countries are different, gainful arbitrage activities will take.
Semester Two Diagrams
1) The document contains diagrams summarizing key macroeconomic concepts including the aggregate demand curve, short-run and long-run aggregate supply curves, the Phillips curve, and diagrams showing the effects of fiscal and monetary policy as well as supply-side policies.
2) The diagrams show how aggregate demand and supply determine equilibrium output and price levels in both the short-run and long-run. Shifts in demand or supply can cause changes in output, employment, and inflation.
3) Policy tools like government spending, taxes, and money supply influence aggregate demand and thereby output and price levels, but may lead to tradeoffs like higher inflation. Supply-side policies aim to shift aggregate supply curves to increase potential output.
Diagrams
1) The document contains diagrams summarizing key macroeconomic concepts including the aggregate demand curve, short-run and long-run aggregate supply curves, the Phillips curve, and diagrams showing different types of supply curves.
2) The diagrams illustrate how factors like fiscal and monetary policy, supply shocks, taxes, and wages can impact macroeconomic equilibrium and outcomes like output, employment, and price levels.
3) Different models are shown including Keynesian, neoclassical, and those involving externalities, unemployment, and wage rigidities.
AGGREGATE DEMAND CURVE IN LONG RUN CONCEPT
This document discusses the concept of aggregate demand in the long run. It defines aggregate demand as the total demand for final goods and services in an economy at a given time and price level. In the long run, aggregate demand is represented by the equation: AD = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, and (X-M) is net exports. Key variables that influence aggregate demand include consumption, investment, government spending, imports and exports. The aggregate demand curve slopes downward because as price levels increase, consumption decreases due to income and substitution effects. Factors that can cause the aggregate demand curve to shift include changes in income, wealth, population,
Islm
This document provides an overview of the IS-LM model for macroeconomic equilibrium. It explains that:
1) The IS curve depicts the combinations of interest rates and output levels that achieve equilibrium in the goods market. It slopes downward because higher interest rates decrease investment and output.
2) The LM curve depicts the combinations of interest rates and output that achieve equilibrium in the money market. It slopes upward because higher output increases money demand, raising interest rates at a given money supply.
3) The intersection of the IS and LM curves indicates the general equilibrium interest rate and output level that simultaneously achieve equilibrium in both the goods and money markets. Shifts in autonomous spending, the money supply, or money demand cause the
Diagrams for terence
1. The document contains diagrams summarizing macroeconomic concepts including the aggregate demand curve, short-run and long-run aggregate supply curves, the Phillips curve, and different types of supply curves.
2. It shows how fiscal and monetary policy can be used to shift aggregate demand and impact output and price levels in the short-run.
3. Supply-side policies are described as shifting long-run aggregate supply curves rightward, increasing potential output.
Revenue
Macro Economics
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This document provides an outline and explanation of IS-LM analysis and how it can be used to derive the aggregate demand curve. It begins by explaining why IS-LM analysis was developed as a synthesis of classical and Keynesian thought. It then defines the IS curve as representing goods market equilibrium and the LM curve as representing money market equilibrium. It shows how the intersection of the IS and LM curves determines the equilibrium interest rate and level of output. It further explains how shifts in the IS and LM curves affect this equilibrium and can be used to trace the aggregate demand curve. Fiscal and monetary policy shifts are also discussed through their impacts on the IS and LM curves.
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This document provides an outline and explanation of IS-LM analysis and how it can be used to derive the aggregate demand curve. It begins by explaining why IS-LM analysis was developed as a synthesis of classical and Keynesian thought. It then defines the IS curve as representing goods market equilibrium and the LM curve as representing money market equilibrium. It shows how the intersection of the IS and LM curves determines the equilibrium interest rate and level of output. It further explains how shifts in the IS and LM curves affect this equilibrium and can be used to trace the aggregate demand curve. Fiscal and monetary policy shifts are also discussed through their impacts on the IS and LM curves.
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2. It then derives the IS curve, showing the combinations of interest rates (i) and output (Y) that maintain equilibrium in both the goods market and foreign exchange market. The IS curve slopes downward, as lower interest rates increase investment and the trade balance via currency depreciation.
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Department of Economics, University at Buffalo Winston Chang.docx
Department of Economics, University at Buffalo Winston Chang
For use by students of my course only. Further distribution is prohibited.1
Simple Pure Exchange Models
1 Introduction
The price of a good or service observed in a national market, without foreign trade, is determined
by demand and supply in that nation. On the supply side, nations generally have different natural
endowments, different factors of production, and different technologies relevant to the production
of goods and services. These differences result in variations in production costs. On the demand
side, people have different incomes and tastes, which generate unique patterns of demand among
nations. Thus, the autarkic prices observed among nations tend to be different. Once foreign
trade is opened up, goods and services move between nations. Some questions that come to mind
when considering foreign trade are: Which country exports which good? What role do autarkic
prices play in determining the direction of trade? What are the equilibrium terms of trade? Are
there gains from trade? These are some of the basic questions to be answered in the study of
international economics.
In this chapter, we will consider some simple exchange models in order to illustrate the deter-
minants of trade. It will be shown that it is the difference in relative autarkic prices, not money
prices, that causes trade to take place. We will also examine the determination of the equilibrium
terms of trade and gains from trade with the help of a simple exchange model, while keeping the
supply of goods fixed.
2 The Determinants of Barter Trades
To illustrate the basic determinants of trade, we consider a very simple pure exchange model in
which there are two countries, called home (H) and foreign (F), and two goods, good 1 (G1)
1Copyright c
2009 by Winston Chang. All rights reserved.
1
and good 2 (G2). Goods are already produced so there are no new production activities in either
country. Before trade is opened up, each good has an autarkic price in each country. Let the home
country’s variables be represented without an asterisk and foreign variables with an asterisk. Let
pj be the money price of goodj in H (j = 1;2), measured, say, in U.S. dollars andp
�
j be the money
price of goodj in F (j = 1;2), measured in British pounds. These are the money (nominal) prices
observed in the autarkic (no foreign trade) equilibrium. Assume that there are no impediments to
trade; namely, there are no transport costs or other trading costs. The markets are competitive,
and the buyers and sellers all face the same prices. How is the trade pattern determined? Is it
determined by these nominal prices?
To answer both questions, we first consider a barter exchange economy in which one good is
directly exchanged for the other. Since there are no trading costs, if the barter exchange ratios
between the two goods in the two countries are different, gainful arbitrage activities will take.
Semester Two Diagrams
1) The document contains diagrams summarizing key macroeconomic concepts including the aggregate demand curve, short-run and long-run aggregate supply curves, the Phillips curve, and diagrams showing the effects of fiscal and monetary policy as well as supply-side policies.
2) The diagrams show how aggregate demand and supply determine equilibrium output and price levels in both the short-run and long-run. Shifts in demand or supply can cause changes in output, employment, and inflation.
3) Policy tools like government spending, taxes, and money supply influence aggregate demand and thereby output and price levels, but may lead to tradeoffs like higher inflation. Supply-side policies aim to shift aggregate supply curves to increase potential output.
Diagrams
1) The document contains diagrams summarizing key macroeconomic concepts including the aggregate demand curve, short-run and long-run aggregate supply curves, the Phillips curve, and diagrams showing different types of supply curves.
2) The diagrams illustrate how factors like fiscal and monetary policy, supply shocks, taxes, and wages can impact macroeconomic equilibrium and outcomes like output, employment, and price levels.
3) Different models are shown including Keynesian, neoclassical, and those involving externalities, unemployment, and wage rigidities.
AGGREGATE DEMAND CURVE IN LONG RUN CONCEPT
This document discusses the concept of aggregate demand in the long run. It defines aggregate demand as the total demand for final goods and services in an economy at a given time and price level. In the long run, aggregate demand is represented by the equation: AD = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, and (X-M) is net exports. Key variables that influence aggregate demand include consumption, investment, government spending, imports and exports. The aggregate demand curve slopes downward because as price levels increase, consumption decreases due to income and substitution effects. Factors that can cause the aggregate demand curve to shift include changes in income, wealth, population,
Islm
This document provides an overview of the IS-LM model for macroeconomic equilibrium. It explains that:
1) The IS curve depicts the combinations of interest rates and output levels that achieve equilibrium in the goods market. It slopes downward because higher interest rates decrease investment and output.
2) The LM curve depicts the combinations of interest rates and output that achieve equilibrium in the money market. It slopes upward because higher output increases money demand, raising interest rates at a given money supply.
3) The intersection of the IS and LM curves indicates the general equilibrium interest rate and output level that simultaneously achieve equilibrium in both the goods and money markets. Shifts in autonomous spending, the money supply, or money demand cause the
Diagrams for terence
1. The document contains diagrams summarizing macroeconomic concepts including the aggregate demand curve, short-run and long-run aggregate supply curves, the Phillips curve, and different types of supply curves.
2. It shows how fiscal and monetary policy can be used to shift aggregate demand and impact output and price levels in the short-run.
3. Supply-side policies are described as shifting long-run aggregate supply curves rightward, increasing potential output.
Revenue
Macro Economics
For downloading this contact- bikashkumar.bk100@gmail.com
Prepared by Students of University of Rajshahi
Pranto Karmoker (leader)
Ariful Islam
Monir Hossain
Sohag Miah
Shammira Parvin
428IS LM MODEL.pptx
This document discusses equilibrium in the product (goods) market and money market using IS-LM analysis. It provides explanations of:
- Product market equilibrium where supply and demand for goods are equal. This is represented by the IS curve which shows combinations of income and interest rates that equate saving and investment.
- Money market equilibrium where demand and supply of money are equal. This is represented by the upward-sloping LM curve which shows combinations of income and interest rates that equate money demand and supply.
- General market equilibrium is achieved where the IS and LM curves intersect, simultaneously achieving equilibrium in both the goods market and money market. This point determines the equilibrium levels of income and interest rate.
Equilibrium of product and money market
1) The document discusses the IS-LM model, which depicts macroeconomic equilibrium in the goods (or product) market and money market.
2) Equilibrium in the product market (IS curve) occurs when planned savings equals planned investment. Equilibrium in the money market (LM curve) occurs when the supply and demand for money are equal.
3) The IS-LM model shows how fiscal and monetary policies can shift the IS and LM curves to impact output and interest rates.
IS LM Model new.pdf
The document provides an overview of the IS-LM model, which explains how the goods market and money market reach equilibrium in an economy. It defines the IS curve as the locus of interest rate-income combinations where investment equals savings. The LM curve similarly shows combinations where money demand equals supply. The intersection of the IS and LM curves indicates the general equilibrium point where both markets clear simultaneously. The summary analyzes how shifts in fiscal or monetary policy can cause the IS and/or LM curves to shift, changing the equilibrium interest rate and level of income in the economy.
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Aggregate Demand
- 2. Md. Naim Hossain ID- B130202199
- 4. Goods Market The market in which goods and services are exchanged and also where the equilibrium level of aggregate output (y) is determined. Determine (y)= C + I + G Link 1 = r I AE Y r I AE Y
- 5. Money Market Money market in which financial instruments are exchanged and the equilibrium level of interest rate (r) is determined. Determine (r), Md = Ms Link 2 = Y Md r Y Md r
- 6. Aggregate Demand In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels. IS LM Investment Saving Liquidity Money
- 7. IS curve shows the negative relationship between equilibrium (y) and interest rate (r). Each and every point along IS curve shows equilibrium value of (y) for any level of interest rate in goods market Y r Y r
- 8. r3 r2 r1 y3 y2 y1 IS Curve Aggregate Output ( Income ), y InterestRate,r
- 9. LM curve shows the positive relationship between Aggregate output (y) and equilibrium interest rate (r). Each and every point along LM curve shows equilibrium Interest rate for any level of income in money market. Y Md r Y Md r
- 10. y1 y2 y3 r1 r2 r3 LM Curve Aggregate Output Income, (y) InterestRate,(r)
- 11. The IS – LM Model: Equilibrium The point at which IS and LM curves intersect each other. The point indicates the equilibrium position in both the goods market and the money market. ye re Interestrate,r Aggregate Output income, y