aggregate demand curve
TRANSCRIPT
AGGREGATE DEMAND
CURVE
Dongpeng Liu
Department of Economics
Nanjing University
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
ROADMAP
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INCOME
EXPENDITURE
LIQUIDITY
PREFERENCE
IS
CURVE
LM
CURVE
AGGREGATE
DEMAND
SHORT-RUN
LABOR
MARKET
AGGREGATE
SUPPLY
AS-AD
MODEL
IS-LM
MODEL
PHILLIPS
CURVE
INTERMEDIATE-RUN
SOLOW
MODEL
LONG-RUN w/
CAPITAL
ACCUMULATION
LONG-RUN
AS-AD
MODEL
LONG-RUN w/o
CAPITAL
ACCUMULATION
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 + 𝐺𝑀
𝑃= 𝑌𝐿(𝑖)
If changes of P are considered, we can deduct the aggregate
demand curve from the IS-LM model
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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.
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FROM THE IS-LM MODEL TO THE AD CURVE
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FROM THE IS-LM MODEL TO THE AD CURVE
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• LM curve shifts upwards
• Real output decreases
• Downward sloping aggregate demand curve
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
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FISCAL POLICIES AND THE AD CURVE
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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
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MONETARY POLICIES AND THE AD CURVE
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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
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SUMMARY
Aggregate demand curve
Fiscal policies and the aggregate demand curve
Monetary policies and the aggregate demand curve
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