N. Gregory Mankiw: Macroeconomics
N. Gregory Mankiw: Macroeconomics
N. Gregory Mankiw: Macroeconomics
MACROECONOMICS
N. Gregory Mankiw
PowerPoint Slides by Ron Cronovich
CHAPT
ER
Y C (Y T ) I (r ) G r
LM
M P L(r ,Y )
1
is smaller than G
1 MPC
CHAPTER 11 Aggregate Demand II 4
A tax cut
Consumers save r
(1MPC) of the tax cut, LM
so the initial boost in
spending is smaller for T
than for an equal G r
2.
r21
and the IS curve shifts by
MPC 1. IS2
1. T IS1
1 MPC
Y
Y1 Y2
2. so the effects on r
2.
and Y are smaller for T
than for an equal G.
CHAPTER 11 Aggregate Demand II 5
Monetary policy: An increase
in M
r
1. M > 0 shifts LM1
the LM curve down
(or to the right) LM2
r1
2. causing the
interest rate to fall r2
3. which increases IS
investment, causing Y
Y1 Y2
output & income to
rise.
Rise in G: r
the IS curve shifts right. LM
1
Rise in G, r
the IS curve shifts right. LM
1 LM
To keep r constant, 2
r2
RBI increases M r1
to shift LM curve right.
IS2
Results: IS1
Y Y3 Y1 Y
Y1 Y2 Y3
r 0
Rise in G, r LM
the IS curve shifts right. 2 LM
1
To keep Y constant, r3
r2
RBI reduces M r1
to shift LM curve left.
IS2
Results: IS1
Y 0 Y
Y1 Y2
r r3 r1
AD2
AD1
Y1 Y2 Y
AD1
AD2
Y Y
CHAPTER 11 Aggregate Demand II 18
The SR and LR effects of an IS shock
r LRAS LM(P )
1
In
In the
the new
new short-run
short-run
equilibrium, Y Y
equilibrium, IS1
IS2
Y Y
P LRAS
P1 SRAS1
AD1
AD2
Y Y
CHAPTER 11 Aggregate Demand II 19
The SR and LR effects of an IS shock
r LRAS LM(P )
1
In
In the
the new
new short-run
short-run
equilibrium, Y Y
equilibrium, IS1
IS2
Y Y
Over
Over time,
time, P P gradually
gradually
falls,
falls, causing
causing P LRAS
SRAS
SRAS to to move
move down
down P1 SRAS1
M/P
M/P toto increase,
increase,
which
which causes
causes LMLM AD1
to
to move
move down
down AD2
Y Y
CHAPTER 11 Aggregate Demand II 20
The SR and LR effects of an IS shock
r LRAS LM(P )
1
LM(P2)
IS1
IS2
Y Y
Over
Over time,
time, P P gradually
gradually
falls,
falls, causing
causing P LRAS
SRAS
SRAS to to move
move down
down P1 SRAS1
M/P
M/P toto increase,
increase, P2 SRAS2
which
which causes
causes LMLM AD1
to
to move
move down
down AD2
Y Y
CHAPTER 11 Aggregate Demand II 21
The SR and LR effects of an IS shock
r LRAS LM(P )
1
LM(P2)
This
This process
process continues
continues IS1
until
until economy
economy reaches
reaches aa IS2
long-run
long-run equilibrium
equilibrium with
with Y
Y
Y Y P LRAS
P1 SRAS1
P2 SRAS2
AD1
AD2
Y Y
CHAPTER 11 Aggregate Demand II 22
The Great Depression
240 30
Unemployment
220 (right scale) 25
billions of 1958 dollars
180 15
160 10
18% Nevada
Florida Illinois
16%
Michigan Ohio
% of all mortgages
New foreclosures,
14%
California Georgia
12%
Arizona Colorado
10%
Rhode Island
8% Texas
New Jersey
6%
Hawaii S. Dakota
4%
Oregon
Wyoming
2% Alaska
N. Dakota
0%
-35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15%
CHAPTER 1 Cumulative
The Science change in house price index
of Macroeconomics 35
U.S. bank failures by year, 2000-2009
70
60
Number of bank failures
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
60%
40%
20%
0%
-20%
-40%
-60%
-80%
8/13/2000 12/28/2001 5/14/2003 9/27/2004 2/11/2006 6/28/2007 11/11/2008
12/6/1999 4/21/2001 9/5/2002 1/20/2004 6/5/2005 10/20/2006 3/5/2008 7/20/2009
Durables
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Nominal Interest Rate, the Real Interest Rate,
and Expected Inflation
Figure
The Effects of Lower
Inflation on Output
When inflation decreases in
response to low output, there
are two effects: (1) The real
money stock increases,
leading the LM curve to shift
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Liquidity Trap
Figure
Money Demand, Money
Supply, and the Liquidity
Trap
When the nominal interest
rate is equal to zero, and once
people have enough money
for transaction purposes, they
become indifferent between
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Liquidity Trap
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Liquidity Trap
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Liquidity Trap
Figure For low levels of output, the LM curve is a flat segment, with a nominal
The Derivation of the LM interest rate equal to zero. For higher levels of output, it is upward
Curve in the Presence of sloping: An increase in income leads to an increase in the nominal
a Liquidity Trap interest rate.
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Liquidity Trap
The equilibrium is given by point A in Figure, with
nominal interest rate equal to zero.
The intersection between the money supply curve and
the money demand curve takes place on the horizontal
portion of the money demand curve. The equilibrium
remains at A, and the nominal interest rate remains
equal to zero.
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
The Liquidity Trap
Figure
The ISLM Model and
the Liquidity Trap
In the presence of a liquidity
trap, there is a limit to how
much monetary policy can
increase output. Monetary
policy may not be able to
increase output back to its
Chapter 22: Depressions and Slumps
natural level.
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
Putting Things Together: The Liquidity
Trap and Deflation
The value of the real interest rate corresponding to a zero
nominal interest rate depends on the rate of expected inflation.
For example, if expected inflation is 10%, then:
At a negative real interest rate of 10%, consumption and
investment are likely to be very high. The liquidity trap is unlikely to
be a problem when inflation is high.
r i e
0% 10% 10%
Chapter 22: Depressions and Slumps
r i e
0% (5% ) 5%
In this situation, there is nothing monetary policy can do to bring output
above the natural level of output.
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
Disinflation, Deflation,
and the Liquidity Trap
Putting Things Together: The Liquidity
Trap and Deflation
Figure
The Liquidity Trap and
Deflation
Suppose the economy is in a
liquidity trap, and there is
deflation. Output below the
natural level of output leads to
more deflation over time, which
leads to a further increase in the
Chapter 22: Depressions and Slumps
In words: The economy caught in a vicious cycle: Low output leads to more
deflation. More deflation leads to a higher real interest rate and even lower
output, and there is nothing monetary policy can do about it.
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
Figure
The Japanese Slump:
Output Growth since
1990 (percent)
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
Figure
Unemployment and
Inflation in Japan since
1990 (percent)
Low growth in output has
led to an increase in
unemployment. Inflation has
turned into deflation.
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
The Rise and Fall of the Nikkei
There are two reasons for the increase in a stock price:
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
The Rise and Fall of the Nikkei
Figure
Stock Prices and
Dividends in Japan
since 1980
The increase in stock prices
in the 1980s and the
subsequent decrease were
not associated with a
parallel movement in
Chapter 22: Depressions and Slumps
dividends.
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
22-3 The Japanese Slump
The Rise and Fall of the Nikkei
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
The Failure of Monetary and Fiscal Policy
Figure
The Nominal Interest
Rate and the Real
Interest Rate in Japan
since 1990
Japan has been in a liquidity
trap since the mid-1990s:
The nominal interest rate
has been close to zero, and
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
The Failure of Monetary and Fiscal Policy
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
The Failure of Monetary and Fiscal Policy
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
The Japanese Slump
The Failure of Monetary and Fiscal Policy
Figure
Government Spending
and Revenues (as a
percentage of GDP) in
Japan since 1990
Government spending
increased and government
revenues decreased
steadily throughout the
Chapter 22: Depressions and Slumps
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard