Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster1 of 37PowerPoint Lectures for Principles of Macroeconomics, 9eBy Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster2 of 3712PART III THE CORE OF MACROECONOMIC THEORY© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and OsterAggregate Demandin the Goods andMoney MarketsFernando & Yvonn QuijanoPrepared by:CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster4 of 3711Planned Investment and the Interest RateOther Determinants of Planned InvestmentPlanned Aggregate Expenditure and theInterest RateEquilibrium in Both the Goods and MoneyMarketsPolicy Effects in the Goods and MoneyMarketsExpansionary Policy EffectsContractionary Policy EffectsThe Macroeconomic Policy MixThe Aggregate Demand (AD) CurveThe Aggregate Demand Curve: A WarningOther Reasons for a Downward-Sloping Aggregate Demand CurveAggregate Expenditure and Aggregate DemandShifts of the Aggregate Demand CurveLooking Ahead: Determining the Price LevelAppendix: The IS-LM DiagramCHAPTER OUTLINEAggregate Demandin the Goods andMoney Markets12PART III THE CORE OF MACROECONOMIC THEORYCHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster5 of 37Aggregate Demand in the Goods and Money Marketsgoods market The market in which goods and services are exchanged and in which the equilibrium level of aggregate output is determined.money market The market in which financial instruments are exchanged and in which the equilibrium level of the interest rate is determined.CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster6 of 37Planned Investment and the Interest RatePlanned investment spending is a negative function of the interest rate. An increase in the interest rate from 3 percent to 6 percent reduces planned investment from I0 to I1. FIGURE 12.1 Planned Investment ScheduleCHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster7 of 37Planned Investment and the Interest RateOther Determinants of Planned InvestmentThe assumption that planned investment depends only on the interest rate is obviously a simplification, just as is the assumption that consumption depends only on income. In practice, the decision of a firm on how much to invest depends on, among other things, its expectation of future sales.The optimism or pessimism of entrepreneurs about the future course of the economy can have an important effect on current planned investment. Keynes used the phrase animal spirits to describe the feelings of entrepreneurs, and he argued that these feelings affect investment decisions.CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster8 of 37Planned Investment and the Interest RateOther Determinants of Planned InvestmentInterest Rates and Investment SpendingA recent study by Simon Gilchrist, Fabio Natalucci, and Egon Zakrajsek finds that interest rates have a powerful effect on the behavior of firms.CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster9 of 37Planned Investment and the Interest RatePlanned Aggregate Expenditure and the Interest RateWe can use the fact that planned investment depends on the interest rate to consider how planned aggregate expenditure (AE) depends on the interest rate. Recall that planned aggregate expenditure is the sum of consumption, planned investment, and government purchases.AE ≡ C + I + GCHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster10 of 37Planned Investment and the Interest RatePlanned Aggregate Expenditure and the Interest RateAn increase in the interest rate from 3 percent to 6 percent lowers planned aggregate expenditure and thus reduces equilibrium income from Y0 to Y1.  FIGURE 12.2 The Effect of an Interest Rate Increase on Planned Aggregate ExpenditureCHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster11 of 37Planned Investment and the Interest RatePlanned Aggregate Expenditure and the Interest RateThe effects of a change in the interest rate include:A high interest rate (r) discourages planned investment (I).Planned investment is a part of planned aggregate expenditure (AE).Thus, when the interest rate rises, planned aggregate expenditure (AE) at every level of income falls.Finally, a decrease in planned aggregate expenditure lowers equilibrium output (income) (Y) by a multiple of the initial decrease in planned investment.CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster12 of 37Planned Investment and the Interest RatePlanned Aggregate Expenditure and the Interest RateUsing a convenient shorthand:r I AE Y�� �� �� �r I AE Y�� �� �� �CHAPTER 12 Aggregate Demand in the Goods and Money Markets© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster13 of 37Equilibrium in Both the Goods and Money