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Aggregate Demand Relation

aggregate demand - relates the equilibrium from the IS-LM model, but w/o interest  

  • Y = C(Y-T) + I(Y,i) + G
  • M/P = Y L(i)
  • downward sloping relation
    • decrease in output >> demand decrease >> interest increases >> real money (M/P) decreases >> price increases as M stays constant
    • variables shifts IS or LM curve >> variable will shift AD relation

 

  • essentially eliminates interest from IS-LM and re-plots by using the shifts caused by price changes
    • algebraically, solve both IS and LM in terms of interest to eliminate that component
  • for price change to P' from P, interest rate rises (while real money M/P decreases)
  • price change doesn't shift IS curve
  • Y = Y(M/P, G, T)
    • output increases w/ money supply, gov't spending
    • decreases w/ price level, taxes
Subject: 
Economics
Subject X2: 
Economics

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