Aggregate Demand and Supply

Scarth Chapter 2

Makroekonomi 2, S1, FEUI, 2009 – Arianto A. Patunru

Structural equations

• IS relationshipY = C + I + G (1)

C = C(Y) 0 < CY < 1 (2)

I = I(Y,r) IY > 0, Ir < 0 (3)

• LM relationshipM/P = L(Y,i) LY > 0, Li < 0 (4)

• EA Phillips curveP˜/P = H(Y - Ŷ)/Ŷ] + π H’ > 0 (5)

LR adjustment

Marginal analysis

Rewriting the system

• dY = CYdY + IYdY + Irdr + dG (6)

• LYdY + Lidr = (1/P)dM - (M/P2)dP(7)

• (1/P˜)dP – (P ˜/P2)dP = (H’/Ŷ)dY(8)

Short-run analysis

dP

dM

dG

PMPdr

dY

LL

IIC

iY

rYY

2

0

10

011 (9)

YrYYi

i

LIICL

L

dG

dY

)1((10)

Stability analysis

YrYYi

r

YrYYi

r

LIICLYP

MHI

dP

Pd

LIICL

PMI

dP

dY

)1(

1'

)1(

2

(11)

(12)

Stability requirement

Convergence: AD and AS

Convergence: IS and LM

Full equilibrium

dM

dG

Pdr

dP

LPM

I

i

r

10

0102 (13)

Alt govt policies

dr

dP

dG

LPM

I

dM

dY

PL

IC

i

r

Y

YY2

0

0

1

1

01(14)

Pegging i and Ms