DEMANDA AGREGADA I DERIVACION DE EQUILIBRIO EN EL MERCADO DE BIENES Y SERVICIOS. CURVA IS. INTERPRETACION CON TEORIA DE FONDOS PRESTABLES. DERIVACION DE EQUILIBRIO EN EL MERCADO DE ACTIVOS. CURVA LM. 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 the KC model.

CAMBIOS EN DEMANDA AGREGADA. Para un nivel de precios dado, el ingreso fluctua por desplazamientos de la curva de demanda. El modelo IS LM toma los precios dados, y muestra qué es lo que produce las variaciones en el ingreso. Así, el modelo muestra qué es lo que produce que la demanda agregada se desplace. Slide 1 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

EL MERCADO DE BIENES Y SERVICIOS Y LA CURVA IS GASTO EFECTIVO Y GASTO PLANEADO GASTO PLANEADO DE ECONOMIA CERRADA E = C+ I + G C = C(Y-T) I = I G = G T = T COMBINANDO LAS ECUACIONES ANTERIORES E = C(Y – T) + I + G EQUILIBRIO: GASTO PLANEADO=GASTO EFECTIVO E = Y Stress that much of this model is very familiar to students: same consumption function as in previous chapters, same treatment of fiscal policy variables. Note: In equilibrium, there’s no unplanned inventory investment. Firms are selling everything they had intended wanted to sell.

GASTO PLANEADO Why slope of E line equals the MPC: With I and G exogenous, the only component of (C+I+G) that changes when income changes is consumption. A one-unit increase in income causes consumption---and therefore E---to increase by the MPC. Recall from Chapter 3: the marginal propensity to consume, MPC, equals the increase in consumption resulting from a one-unit increase in disposable income. Since T is exogenous here, a one-unit increase in Y causes a one-unit increase in disposable income. El gasto planeado depende del ingreso porque un ingreso mayor produce un consumo mayor, que forma parte del gasto planeado. La pendiente del gasto planeado es la propensión marginal a consumir, MPC. Slide 2 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

La economía se encuentra en equilibrio cuando Y = E La cruz Keneysiana muestra cómo se determina el nivel de ingresos, Y, dado los niveles de inversión planeada y la política fiscal, G y T. The equilibrium point is the value of income where the curves cross. Be sure your students understand why the equilibrium income appears on the horizontal and vertical axes. Answer: In equilibrium, E (which is measured on the vertical) = Y (which is measured on the horizontal). El gasto efectivo es el gasto que los hogares, las empresas y el estado gastan en bienes y servicios (PBI). El gasto planeado es el gasto que los hogares empresas y el estado desean gastar en bienes y servicios. La economía se encuentra en equilibrio cuando Y = E Slide 3 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

AJUSTE AL EQUILIBRIO Si las firmas están produciendo en Y1 entonces el gasto planeado E1 es menor a la producción por lo que las empresas acumulan inventarios. Esto tenderá a disminuir la producción de las empresas. Si las empresas están produciendo en Y2 entonces el gasto planeado E2 excede la producción y las empresas se encuentran reduciendo los inventarios. Esto incentiva a las empresas a producir más. En ambos casos, las decisiones de las empresas conducen a la economía hacia el equilibrio.

AUMENTO DE GASTO PUBLICO Un incremento en el gasto del gobierno incrementa el gasto planeado por ese monto para cada nivel de ingreso. El equilibrio se traslada de A hacia B y el ingreso incrementa de Y1 a Y2. Notar que el incremento en Y es mayor al incremento en el gasto del gobierno por lo que la política fiscal tiene un efecto multiplicador. Slide 5 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

POLITICA FISCAL Y EL MULTIPLICADOR The textbook defines the multiplier as the increase in income resulting from a $1 increase in G. However, G is a real variable (as is Y ). So, if you wish to be more precise, then you might consider defining the multiplier as “the increase in income resulting from a one-unit increase in G.” Students are better able to understand this if given a more concrete example. For instance, Suppose the government spends an additional $100 million on defense. Then, the revenues of defense firms increase by $100 million, all of which becomes income to somebody: some of it is paid to the workers and engineers and managers, the rest is profit paid as dividends to shareholders. Hence, income rises $100 million (Y = $100 million = G ). The people whose income just rose by $100 million are also consumers, and they will spend the fraction MPC of this extra income. Suppose MPC = 0.8, so C rises by $80 million. To be concrete, suppose they buy $80 million worth of Chevy Trailblazers. Then, General Motors sees its revenues increase by $80 million, all of which becomes income to somebody - either GM’s workers, or its shareholders (Y = $80 million). And what do these folks do with this extra income? They spend the fraction MPC (0.8) of it, causing C = $64 million (8/10 of $80 million). Suppose they spend all $64 million on Hershey’s chocolate bars, the ones with the bits of mint cookie inside. Then, Hershey Foods Corporation experiences a revenue increase of $64 million, which becomes income to somebody or other. (Y = $64 million). So far, the total impact on income is $100 million + $80 million + $64 million, which is much bigger than the government’s initial increase in spending. But this process continues, and the final impact on Y is $500 million (because the multiplier is 5).

REDUCCION DE IMPUESTOS Una disminución en los impuestos, incrementa el gasto planeado en TxMPC para cada nivel de ingreso. El equilibrio se mueve de A hacia B, y el ingreso se incrementa de Y1 a Y2. Nuevamenta la política fiscal tiene un efecto multiplicador. Multiplicador de impuestos Y/ T = -MPC/ (1- MPC) Slide 6 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

INVERSION Y TASA DE INTERES GASTO PLANEADO DE ECONOMIA CERRADA E = C+ I + G C = C(Y-T) I = I(r) G = G T = T COMBINANDO LAS ECUACIONES ANTERIORES E = C(Y – T) +I(r) + G E = Y COMO LA INVERSION DEPENDE NEGATIVAMENTE DE LA TASA DE INTERES, UNA DISMINUCION EN LA TASA DE INTERES AUMENTA LA INVERSION.

Derivación de la Curva IS Slide 7 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

INTERPRETACION DE LA CURVA IS CON FONDOS PRESTABLES Y – C – G = I S = I Y – C(Y – T) – G = I(r) S = Y - C(Y – T) - G = I(r) The IS curve can also be derived from the (hopefully now familiar) loanable funds model from chapter 3. A decrease in income from Y1 to Y2 causes a fall in national saving. (Recall, S = Y-C-G) The fall in saving causes a reduction in the supply of loanable funds. The interest rate must rise to restore equilibrium to the loanable funds market. Now we can see where the IS curve gets its name: When the loanable funds market is in equilibrium, investment = saving. The IS curve shows all combinations of r and Y such that investment (I) equals saving (S). Hence, “IS curve.”

EL MERCADO DE FONDOS PRESTABLES Slide 9 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

Política Fiscal – Aumento del Gasto Público Para una tasa de interés dada, el desplazamiento hacia arriba del gasto planeado produce un incremento en el ingreso. De esta forma, en el panel b) la IS se desplaza hacia la derecha. Slide 8 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

MERCADO MONETARIO Y LA CURVA LM OFERTA : (M/P)S = M/P La oferta de balances reales es vertical porque no depende de la tasa de interés. We are assuming a fixed supply of real money balances because P is fixed by assumption (short-run), and M is an exogenous policy variable. Slide 10 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

MERCADO MONETARIO Y LA CURVA LM DEMANDA : (M/P)D = L(r) La tasa de interés es el costo de mantener dinero , por lo que una tasa de interés alta disminuye la cantidad de saldos reales demandados As we learned in chapter 4, the nominal interest rate is the opportunity cost of holding money (instead of bonds). Here, we are assuming the price level is fixed, so  = 0 and r = i. Slide 11 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

EQUILIBRIO EN MERCADO DE ACTIVOS. Slide 12 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

POLITICA MONETARIA: CONTRACCION DE OFERTA Slide 13 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

DERIVACION DE CURVA LM Slide 14 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

CONTRACCION MONETARIA DESPLAZA LM HACIA ARRIBA If you’re as analytical as I am, you might consider helping your students understand the analytical difference between looking at a shift as a horizontal shift and looking at it as a vertical shift. We can think of the LM curve shift as a vertical shift: When the Fed reduces M, the vertical distance of the shift tells us what happens to the equilibrium interest rate associated with a given value of income. Or, we can think of the LM curve shifting horizontally: When the Fed reduces M, the horizontal distance of the shift tells us what would have to happen to income to restore money market equilibrium at the initial interest rate. (The graphical analysis would be a little different than what’s depicted on this slide.) Slide 15 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

EQUILIBRIO DE CORTO PLAZO Y = C(Y – T) + I(r) + G IS (M/P) = L(r) LM

EQUILIBRIO IS-LM La intersección de la curva IS y LM representa el equilibrio simultáneo en el mercado de bienes y servicios y en el mercado de saldos monetarios para un nivel dado de gasto del gobierno, impuestos, oferta de dinero y nivel de precios. Slide 16 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

TEORIA DE FLUCTUACIONES DE CORTO PLAZO Slide 17 Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.

CASE STUDY Volcker’s Monetary Tightening A fines de 1970:  > 10% Oct 1979: Fed Chairman Paul Volcker anuncia que el objetivo de la política monetaria será la de reducir la inflación. Agosto 1979-Abril 1980: Inicialmente la política monetaria reduce la tasa de expansión monetaria más rápido que la inflación: y M/P cae 8.0% Enero 1983:  = 3.7% This and the next slide summarize the case study on pp.273-274. The data source is given on the next slide. At this point, students have now learned different theories about the effects of monetary policy on interest rates. This case study shows them that both theories are relevant, using a real-world example to remind students that the classical theory of chapter 4 applies in the long-run while the liquidity preference theory applies in the short run. ¿Cómo habrá afectado este cambio de política a la tasa de interés?

CASE STUDY Volcker’s Monetary Tightening predicción actual outcome Efectos de un ajuste monetario sobre la tasa nominal de interés precios modelo Largo plazo Corto plazo Liquidity Preference (Keynesian) Quantity Theory, Fisher Effect (Classical) sticky flexible Since prices are sticky in the short run, the Liquidity Preference Theory predicts that both the nominal and real interest rates will rise in the short run. And in fact, both did. (However, the inflation rate was not zero, and in fact it increased, so the real interest rate didn’t rise as much as the nominal interest rate did during the period shown.) In the long run, the Quantity Theory of Money says that the monetary tightening should reduce inflation. The Fisher Effect says that the fall in  should cause an equal fall in i. By January of 1983 (which is “the long run” from the viewpoint of 1979), inflation and nominal interest rates had fallen. (However, they did not fall by equal amounts. This doesn’t contradict the Fisher Effect, though, as other economic changes caused movements in the real interest rate.) About the data: i = 3-month rate on Commercial Paper (which seemed to be the closest match to the interest rate described in the case study: “on short-term commercial loans”, top of p.274). % change in M/P from previous slide: I computed M1/CPI (the measure used in the case study), then computed the percentage change in M1/CPI over the 8-month period beginning with the month in which Volcker became the Fed chairman, August 1979. Source: FRED database, Federal Reserve Bank of St. Louis. i > 0 i < 0 1/1983: i = 8.2% 8/1979: i = 10.4% 4/1980: i = 15.8%