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CHAPTER 9

CHAPTER 9. Aggregate Demand and Aggregate Supply. General Equilibrium. Labor market equilibrium = FE line. (Chapter 3) Goods market equilibrium = IS curve. (Chapter 4) Asset market equilibrium = LM curve. (Chapter 7). Changes in FE Line. Real interest rate, r.

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CHAPTER 9

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  1. CHAPTER 9 Aggregate Demand and Aggregate Supply

  2. General Equilibrium • Labor market equilibrium = FE line. (Chapter 3) • Goods market equilibrium = IS curve. (Chapter 4) • Asset market equilibrium = LM curve. (Chapter 7)

  3. Changes in FE Line Real interest rate, r Real interest rate, r Y1 Y2 Output, Y Y2 Y1 Output, Y i.e. Beneficial supply shock. i.e. Adverse supply shock.

  4. IS curve shifts to the right i.e. Temporary increase in G.

  5. IS curve shifts to the left S1 S2 Real interest rate, r Real interest rate, r I IS1 IS2 I, S Output, Y i.e. Temporary decrease in G.

  6. LM curve shifts to the right i.e. An increase nominal money supply

  7. LM curve shifts to the left i.e. An increase in wealth

  8. Effects of Adverse Supply Shock An adverse supply shock (lower Nbar, less productivity, FE left)  an increase in the price level (lower real Ms, LM left).

  9. End of Lecture 2 Week 7 • General Equilibrium • Shifts in FE Line • Shifts in IS Curve • Shifts in LM Curve • Changes in General Equilibrium

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