This chapter sets up the IS-LM model, which chapter 11 then uses extensively to analyze the effects of policies and economic shocks. This chapter also introduces students to the Keynesian Cross and Liquidity Preference models, which underlie the IS curve and LM curve, respectively. If you would like to spend less time on this chapter, you might consider omitting the Keynesian Cross, instead using the loanable funds model from Chapter 3 to derive the IS curve. | Review of the previous lecture Long run: prices are flexible, output and employment are always at their natural rates, and the classical theory applies. Short run: prices are sticky, shocks can push output and employment away from their natural rates. Aggregate demand and supply: a framework to analyze economic fluctuations The aggregate demand curve slopes downward. The long-run aggregate supply curve is vertical, because output depends on technology and factor supplies, but not prices. The short-run aggregate supply curve is horizontal, because prices are sticky at predetermined levels. 0 Review of the previous lecture 7. Shocks to aggregate demand and supply cause fluctuations in GDP and employment in the short run. 8. The Fed can attempt to stabilize the economy with monetary policy. 1 Lecture 15 Aggregate demand – I Instructor: Prof. Dr. Qaisar Abbas 2 This chapter sets up the IS-LM model, which chapter 11 then uses extensively to analyze the effects of policies and economic . | Review of the previous lecture Long run: prices are flexible, output and employment are always at their natural rates, and the classical theory applies. Short run: prices are sticky, shocks can push output and employment away from their natural rates. Aggregate demand and supply: a framework to analyze economic fluctuations The aggregate demand curve slopes downward. The long-run aggregate supply curve is vertical, because output depends on technology and factor supplies, but not prices. The short-run aggregate supply curve is horizontal, because prices are sticky at predetermined levels. 0 Review of the previous lecture 7. Shocks to aggregate demand and supply cause fluctuations in GDP and employment in the short run. 8. The Fed can attempt to stabilize the economy with monetary policy. 1 Lecture 15 Aggregate demand – I Instructor: Prof. Dr. Qaisar Abbas 2 This chapter sets up the IS-LM model, which chapter 11 then uses extensively to analyze the effects of policies and economic shocks. This chapter also introduces students to the Keynesian Cross and Liquidity Preference models, which underlie the IS curve and LM curve, respectively. If you would like to spend less time on this chapter, you might consider omitting the Keynesian Cross, instead using the loanable funds model from Chapter 3 to derive the IS curve. Advantage: students are already familiar with the loanable funds model, so skipping the KC means one less model to learn. Additionally, the KC model is not used anywhere else in this textbook. Once it’s used to derive IS, it disappears for good. However, there are some good reasons for NOT omitting the KC model: 1) Many principles textbooks (though not Mankiw’s) cover the KC model; students who learned the KC model in their principles class may benefit from seeing it here, as a bridge to new material (the IS curve). 2) The KC model has historical value. One could argue that somebody graduating from college with a degree in economics should be familiar with
