[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.60,0:00:03.27,Default,,0000,0000,0000,,Let's think about what\Nhappens to an IS curve
Dialogue: 0,0:00:03.27,0:00:08.10,Default,,0000,0000,0000,,when government spending goes up.
Dialogue: 0,0:00:08.10,0:00:13.18,Default,,0000,0000,0000,,To think about that, let's\Nfirst draw our Keynesian cross.
Dialogue: 0,0:00:13.18,0:00:16.21,Default,,0000,0000,0000,,On the vertical axis over here,
Dialogue: 0,0:00:16.21,0:00:19.01,Default,,0000,0000,0000,,we have aggregate expenditures.
Dialogue: 0,0:00:19.01,0:00:20.84,Default,,0000,0000,0000,,In the horizontal axis right over here,
Dialogue: 0,0:00:20.84,0:00:22.38,Default,,0000,0000,0000,,wee have aggregate income.
Dialogue: 0,0:00:22.38,0:00:23.62,Default,,0000,0000,0000,,These are really just 2 ways
Dialogue: 0,0:00:23.62,0:00:25.72,Default,,0000,0000,0000,,of talking about GDP.
Dialogue: 0,0:00:25.72,0:00:27.79,Default,,0000,0000,0000,,We are thinking, we actually\Nwant all of the points
Dialogue: 0,0:00:27.79,0:00:29.39,Default,,0000,0000,0000,,where the economies and equilibrium
Dialogue: 0,0:00:29.39,0:00:31.60,Default,,0000,0000,0000,,where income is equal to expenditures.
Dialogue: 0,0:00:31.60,0:00:33.85,Default,,0000,0000,0000,,That's why we draw that line of slope 1,
Dialogue: 0,0:00:33.85,0:00:35.07,Default,,0000,0000,0000,,that's all of the points
Dialogue: 0,0:00:35.07,0:00:36.98,Default,,0000,0000,0000,,where income is equal expenditures.
Dialogue: 0,0:00:36.98,0:00:39.98,Default,,0000,0000,0000,,Where is economy is in\Nsome type of equilibrium
Dialogue: 0,0:00:39.98,0:00:41.48,Default,,0000,0000,0000,,or in equilibrium.
Dialogue: 0,0:00:41.48,0:00:43.39,Default,,0000,0000,0000,,Then we think about planned expenditures.
Dialogue: 0,0:00:43.39,0:00:47.65,Default,,0000,0000,0000,,Planned expenditures, we've\Ndone this multiple times,
Dialogue: 0,0:00:47.65,0:00:51.12,Default,,0000,0000,0000,,it's equal to aggregate consumer spending
Dialogue: 0,0:00:51.12,0:00:55.32,Default,,0000,0000,0000,,which is a function of income minus taxes.
Dialogue: 0,0:00:55.32,0:00:57.45,Default,,0000,0000,0000,,Or it's a function of disposable income.
Dialogue: 0,0:00:57.45,0:00:59.39,Default,,0000,0000,0000,,We're not seeing C x Y - T,
Dialogue: 0,0:00:59.39,0:01:02.23,Default,,0000,0000,0000,,we're seeing C is a function of Y - T.
Dialogue: 0,0:01:02.23,0:01:04.31,Default,,0000,0000,0000,,This is one way of talking\Nabout consumption function.
Dialogue: 0,0:01:04.31,0:01:06.81,Default,,0000,0000,0000,,We assume it's linear in\Nthis video and another
Dialogue: 0,0:01:06.81,0:01:07.92,Default,,0000,0000,0000,,but it's doesn't have to be,
Dialogue: 0,0:01:07.92,0:01:09.32,Default,,0000,0000,0000,,it could be a curve of some kind.
Dialogue: 0,0:01:09.32,0:01:12.25,Default,,0000,0000,0000,,Then we have our planned investment,
Dialogue: 0,0:01:12.25,0:01:14.48,Default,,0000,0000,0000,,plus planned investment
Dialogue: 0,0:01:14.48,0:01:18.44,Default,,0000,0000,0000,,which we're assuming that\Nwe're sitting at some,
Dialogue: 0,0:01:18.44,0:01:21.52,Default,,0000,0000,0000,,that our real interest\Nrates are fixed right now.
Dialogue: 0,0:01:21.52,0:01:26.32,Default,,0000,0000,0000,,Planned investment plus\Ngovernment spending
Dialogue: 0,0:01:26.32,0:01:29.32,Default,,0000,0000,0000,,and then we could even\Nthrow net exports out there
Dialogue: 0,0:01:29.32,0:01:31.94,Default,,0000,0000,0000,,if we assume that we have\Nsome type of an open economy.
Dialogue: 0,0:01:31.94,0:01:34.10,Default,,0000,0000,0000,,This curve, our plan investment,
Dialogue: 0,0:01:34.10,0:01:36.60,Default,,0000,0000,0000,,this is all a review of\Nthe Keynesian cross videos,
Dialogue: 0,0:01:36.60,0:01:40.67,Default,,0000,0000,0000,,it might look something like this
Dialogue: 0,0:01:40.67,0:01:46.51,Default,,0000,0000,0000,,and we get to our\Nequilibrium level of GDP.
Dialogue: 0,0:01:46.51,0:01:48.78,Default,,0000,0000,0000,,We can also use this information
Dialogue: 0,0:01:48.78,0:01:51.32,Default,,0000,0000,0000,,given that we were sitting\Nhere at interest rate r1
Dialogue: 0,0:01:51.32,0:01:56.45,Default,,0000,0000,0000,,to start, to at least plot\None point on our IS curve.
Dialogue: 0,0:01:56.45,0:01:59.18,Default,,0000,0000,0000,,Let's draw at least point on our IS curve
Dialogue: 0,0:01:59.18,0:02:02.12,Default,,0000,0000,0000,,and hopefully you feel good\Nabout the general shape of it
Dialogue: 0,0:02:02.12,0:02:05.45,Default,,0000,0000,0000,,and then we could think about\Nhow the IS curve might shift.
Dialogue: 0,0:02:05.45,0:02:07.39,Default,,0000,0000,0000,,Here, we have real interest rates.
Dialogue: 0,0:02:07.39,0:02:09.01,Default,,0000,0000,0000,,We're trying to relate real interest rates
Dialogue: 0,0:02:09.01,0:02:11.27,Default,,0000,0000,0000,,to aggregate GDP.
Dialogue: 0,0:02:11.27,0:02:13.85,Default,,0000,0000,0000,,We just showed that\Nwhen real interest rates
Dialogue: 0,0:02:13.85,0:02:14.84,Default,,0000,0000,0000,,are sitting at r1,
Dialogue: 0,0:02:14.84,0:02:19.59,Default,,0000,0000,0000,,if this is r1 right over here.
Dialogue: 0,0:02:19.59,0:02:21.32,Default,,0000,0000,0000,,If real interest rates are sitting at r1,
Dialogue: 0,0:02:21.32,0:02:24.10,Default,,0000,0000,0000,,we know that the aggregate\Nlevel of output or income
Dialogue: 0,0:02:24.10,0:02:25.85,Default,,0000,0000,0000,,is that point right over there.
Dialogue: 0,0:02:25.85,0:02:27.38,Default,,0000,0000,0000,,We could just drop that down
Dialogue: 0,0:02:27.38,0:02:30.78,Default,,0000,0000,0000,,and so it is this level right over here.
Dialogue: 0,0:02:30.78,0:02:34.09,Default,,0000,0000,0000,,When real interest rates\Nare r1 this is our output.
Dialogue: 0,0:02:34.09,0:02:37.18,Default,,0000,0000,0000,,That is a point on our IS curve.
Dialogue: 0,0:02:37.18,0:02:39.78,Default,,0000,0000,0000,,We can draw the entire IS curve
Dialogue: 0,0:02:39.78,0:02:46.05,Default,,0000,0000,0000,,which might look something like that,
Dialogue: 0,0:02:46.05,0:02:47.51,Default,,0000,0000,0000,,that is our entire IS curve.
Dialogue: 0,0:02:47.51,0:02:49.04,Default,,0000,0000,0000,,If we kept changing this,
Dialogue: 0,0:02:49.04,0:02:52.11,Default,,0000,0000,0000,,if we kept trying this out for\Ndifferent real interest rates
Dialogue: 0,0:02:52.11,0:02:53.43,Default,,0000,0000,0000,,we could plot more and more
Dialogue: 0,0:02:53.43,0:02:56.18,Default,,0000,0000,0000,,of these points along the IS curve.
Dialogue: 0,0:02:56.18,0:02:58.85,Default,,0000,0000,0000,,This is really thinking in terms of,
Dialogue: 0,0:02:58.85,0:03:01.32,Default,,0000,0000,0000,,if real interest rates go up
Dialogue: 0,0:03:01.32,0:03:03.59,Default,,0000,0000,0000,,then this whole expression will go down
Dialogue: 0,0:03:03.59,0:03:05.43,Default,,0000,0000,0000,,then this thing will be shifted down
Dialogue: 0,0:03:05.43,0:03:08.10,Default,,0000,0000,0000,,and so we would have less GDP.
Dialogue: 0,0:03:08.10,0:03:10.10,Default,,0000,0000,0000,,If this gets shifted down
Dialogue: 0,0:03:10.10,0:03:12.31,Default,,0000,0000,0000,,your equilibrium GDP might go over here.
Dialogue: 0,0:03:12.31,0:03:14.05,Default,,0000,0000,0000,,At a higher real interest rate
Dialogue: 0,0:03:14.05,0:03:17.12,Default,,0000,0000,0000,,you would have lower aggregate income.
Dialogue: 0,0:03:17.12,0:03:19.43,Default,,0000,0000,0000,,That's how we actually thought\Nabout plotting our IS curve.
Dialogue: 0,0:03:19.43,0:03:22.26,Default,,0000,0000,0000,,Now, with all of that out of the way,
Dialogue: 0,0:03:22.26,0:03:23.85,Default,,0000,0000,0000,,let's think about what happens
Dialogue: 0,0:03:23.85,0:03:25.78,Default,,0000,0000,0000,,when government spending goes up.
Dialogue: 0,0:03:25.78,0:03:28.68,Default,,0000,0000,0000,,Well, if government spending goes up,
Dialogue: 0,0:03:28.68,0:03:30.80,Default,,0000,0000,0000,,if this piece right over here goes up,
Dialogue: 0,0:03:30.80,0:03:35.52,Default,,0000,0000,0000,,that will shift our planned\Nexpenditures up as well.
Dialogue: 0,0:03:35.52,0:03:39.15,Default,,0000,0000,0000,,So your change in government\Nspending, change in G,
Dialogue: 0,0:03:39.15,0:03:41.32,Default,,0000,0000,0000,,it would shift this curve up.
Dialogue: 0,0:03:41.32,0:03:43.73,Default,,0000,0000,0000,,Let me draw that a little bit neater.
Dialogue: 0,0:03:43.73,0:03:45.65,Default,,0000,0000,0000,,It would shift this curve up
Dialogue: 0,0:03:45.65,0:03:49.49,Default,,0000,0000,0000,,and you would get to a new level of income
Dialogue: 0,0:03:49.49,0:03:52.07,Default,,0000,0000,0000,,or equilibrium level of real GDP.
Dialogue: 0,0:03:52.07,0:03:55.18,Default,,0000,0000,0000,,That amount, this delta Y
Dialogue: 0,0:03:55.18,0:03:56.85,Default,,0000,0000,0000,,which is this amount right over here.
Dialogue: 0,0:03:56.85,0:03:58.65,Default,,0000,0000,0000,,It's actually going to be\Nequal to the multiplier
Dialogue: 0,0:03:58.65,0:04:01.52,Default,,0000,0000,0000,,which is 1 minus the marginal\Npropensity to consume
Dialogue: 0,0:04:01.52,0:04:05.98,Default,,0000,0000,0000,,times our change in government spending.
Dialogue: 0,0:04:05.98,0:04:07.18,Default,,0000,0000,0000,,You don't have to worry\Nabout this too much
Dialogue: 0,0:04:07.18,0:04:08.65,Default,,0000,0000,0000,,for the sake of this video,
Dialogue: 0,0:04:08.65,0:04:10.56,Default,,0000,0000,0000,,that's just a little bit of a review.
Dialogue: 0,0:04:10.56,0:04:12.58,Default,,0000,0000,0000,,The whole reason why I'm\Ngoing this is we're saying,
Dialogue: 0,0:04:12.58,0:04:14.86,Default,,0000,0000,0000,,"Look, assuming r1 didn't change
Dialogue: 0,0:04:14.86,0:04:18.77,Default,,0000,0000,0000,,"and when we increased government spending
Dialogue: 0,0:04:18.77,0:04:21.41,Default,,0000,0000,0000,,"it shifted GDP up by that amount."
Dialogue: 0,0:04:21.41,0:04:22.72,Default,,0000,0000,0000,,When you increase government spending,
Dialogue: 0,0:04:22.72,0:04:27.91,Default,,0000,0000,0000,,it shifted at r1, it\Nshifted it by that amount.
Dialogue: 0,0:04:27.91,0:04:30.53,Default,,0000,0000,0000,,Well, that would be true at\Nany of the real interest rates
Dialogue: 0,0:04:30.53,0:04:32.06,Default,,0000,0000,0000,,along the IS curve.
Dialogue: 0,0:04:32.06,0:04:34.42,Default,,0000,0000,0000,,In general, if you increase\Ngovernment spending
Dialogue: 0,0:04:34.42,0:04:36.46,Default,,0000,0000,0000,,and you're not changing\Nany of this other stuff
Dialogue: 0,0:04:36.46,0:04:39.75,Default,,0000,0000,0000,,then the IS curve would\Nshift to the right.
Dialogue: 0,0:04:39.75,0:04:41.26,Default,,0000,0000,0000,,If you decreased government spending
Dialogue: 0,0:04:41.26,0:04:43.59,Default,,0000,0000,0000,,the IS curve would shift to the left.
Dialogue: 0,0:04:43.59,0:04:45.46,Default,,0000,0000,0000,,With that in our toolkit now,
Dialogue: 0,0:04:45.46,0:04:46.53,Default,,0000,0000,0000,,we can think about
Dialogue: 0,0:04:46.53,0:04:48.42,Default,,0000,0000,0000,,how a change in government spending
Dialogue: 0,0:04:48.42,0:04:52.42,Default,,0000,0000,0000,,might change our equilibrium\Npoint in our IS-LM model.
Dialogue: 0,0:04:52.42,0:04:54.13,Default,,0000,0000,0000,,Let's do that.
Dialogue: 0,0:04:54.13,0:04:56.99,Default,,0000,0000,0000,,Once again, real interest rates.
Dialogue: 0,0:04:56.99,0:05:02.67,Default,,0000,0000,0000,,Here we have aggregate income or real GDP
Dialogue: 0,0:05:02.67,0:05:05.20,Default,,0000,0000,0000,,and then we have our IS curve.
Dialogue: 0,0:05:05.20,0:05:08.42,Default,,0000,0000,0000,,Our IS curve looks something like that.
Dialogue: 0,0:05:08.42,0:05:12.50,Default,,0000,0000,0000,,Our LM curve, I will do it in magenta.
Dialogue: 0,0:05:12.50,0:05:16.86,Default,,0000,0000,0000,,Our LM curve might look\Nsomething like that.
Dialogue: 0,0:05:16.86,0:05:19.66,Default,,0000,0000,0000,,So, if we have a increase\Nin government spending,
Dialogue: 0,0:05:19.66,0:05:24.08,Default,,0000,0000,0000,,we already saw the IS\Ncurve shift to the right.
Dialogue: 0,0:05:24.08,0:05:25.41,Default,,0000,0000,0000,,I want to do that in the same color.
Dialogue: 0,0:05:25.41,0:05:26.47,Default,,0000,0000,0000,,It shift to the right
Dialogue: 0,0:05:26.47,0:05:29.00,Default,,0000,0000,0000,,and it might look something like that.
Dialogue: 0,0:05:29.00,0:05:33.46,Default,,0000,0000,0000,,If our old equilibrium real\Ninterest rate was sitting here
Dialogue: 0,0:05:33.46,0:05:35.66,Default,,0000,0000,0000,,and equilibrium income was sitting here,
Dialogue: 0,0:05:35.66,0:05:38.13,Default,,0000,0000,0000,,we saw that by increasing\Nthe government spending
Dialogue: 0,0:05:38.13,0:05:42.13,Default,,0000,0000,0000,,our new equilibrium GDP is higher
Dialogue: 0,0:05:42.13,0:05:45.60,Default,,0000,0000,0000,,and our new equilibrium\Ninterest rate is higher
Dialogue: 0,0:05:45.60,0:05:47.93,Default,,0000,0000,0000,,just by the shift to the IS curve.
Dialogue: 0,0:05:47.93,0:05:49.00,Default,,0000,0000,0000,,Now, you might be saying,
Dialogue: 0,0:05:49.00,0:05:50.73,Default,,0000,0000,0000,,"Okay Sally, you've been\Nfocusing on the IS curve
Dialogue: 0,0:05:50.73,0:05:52.80,Default,,0000,0000,0000,,"but does an increase\Nin government spending,
Dialogue: 0,0:05:52.80,0:05:55.13,Default,,0000,0000,0000,,"does it affect the LM curve?
Dialogue: 0,0:05:55.13,0:05:56.72,Default,,0000,0000,0000,,"A change in physical policy,
Dialogue: 0,0:05:56.72,0:05:58.42,Default,,0000,0000,0000,,"does that affect the LM curve?"
Dialogue: 0,0:05:58.42,0:05:59.75,Default,,0000,0000,0000,,We're not talking about\Nprinting more money,
Dialogue: 0,0:05:59.75,0:06:01.79,Default,,0000,0000,0000,,we're talking about the\Ngovernment spending more,
Dialogue: 0,0:06:01.79,0:06:03.50,Default,,0000,0000,0000,,increasing its budget.
Dialogue: 0,0:06:03.50,0:06:04.66,Default,,0000,0000,0000,,Remember, the LM curve,
Dialogue: 0,0:06:04.66,0:06:08.06,Default,,0000,0000,0000,,it's driven by people's\Nliquidity preferences.
Dialogue: 0,0:06:08.06,0:06:09.93,Default,,0000,0000,0000,,At different levels of GDP,
Dialogue: 0,0:06:09.93,0:06:11.67,Default,,0000,0000,0000,,how much do they want to hold money
Dialogue: 0,0:06:11.67,0:06:13.67,Default,,0000,0000,0000,,and how much would you\Nhave to pay for them
Dialogue: 0,0:06:13.67,0:06:15.93,Default,,0000,0000,0000,,in terms of interest for\Nthem to depart with it?
Dialogue: 0,0:06:15.93,0:06:17.66,Default,,0000,0000,0000,,How much interest are they willing to pay
Dialogue: 0,0:06:17.66,0:06:19.67,Default,,0000,0000,0000,,to get access to money at\Ndifferent levels of GDP?
Dialogue: 0,0:06:19.67,0:06:21.83,Default,,0000,0000,0000,,That's not really impacted\Nby government spending,
Dialogue: 0,0:06:21.83,0:06:24.100,Default,,0000,0000,0000,,and it's also impacted\Nby the money supply,
Dialogue: 0,0:06:24.100,0:06:26.67,Default,,0000,0000,0000,,by the amount of money that are out there
Dialogue: 0,0:06:26.67,0:06:28.93,Default,,0000,0000,0000,,and just general levels of prices.
Dialogue: 0,0:06:28.93,0:06:30.40,Default,,0000,0000,0000,,You could start to think about,
Dialogue: 0,0:06:30.40,0:06:31.47,Default,,0000,0000,0000,,"Oh, doesn't government spending
Dialogue: 0,0:06:31.47,0:06:32.76,Default,,0000,0000,0000,,"affect the prices in the long run?"
Dialogue: 0,0:06:32.76,0:06:34.72,Default,,0000,0000,0000,,But if we just hold a lot\Nof those things constant
Dialogue: 0,0:06:34.72,0:06:35.93,Default,,0000,0000,0000,,especially in the short-term,
Dialogue: 0,0:06:35.93,0:06:38.13,Default,,0000,0000,0000,,especially if you hold prices constant,
Dialogue: 0,0:06:38.13,0:06:41.20,Default,,0000,0000,0000,,fiscal policy is not going\Nto change the LM curve.
Dialogue: 0,0:06:41.20,0:06:44.26,Default,,0000,0000,0000,,Monetary policy, the money\Nsupply part, that could
Dialogue: 0,0:06:44.26,0:06:46.60,Default,,0000,0000,0000,,or people's liquidity preferences could.
Dialogue: 0,0:06:46.60,0:06:48.39,Default,,0000,0000,0000,,But just government policy by itself,
Dialogue: 0,0:06:48.39,0:06:51.00,Default,,0000,0000,0000,,fiscal policy by itself won't change it.
Dialogue: 0,0:06:51.00,0:06:55.47,Default,,0000,0000,0000,,In this model, just not trying\Nto get too over-complicated.
Dialogue: 0,0:06:55.47,0:06:59.53,Default,,0000,0000,0000,,When government spending\Ngoes up, when G goes up,
Dialogue: 0,0:06:59.53,0:07:01.33,Default,,0000,0000,0000,,it would shift the IS curve to the right.
Dialogue: 0,0:07:01.33,0:07:03.08,Default,,0000,0000,0000,,Increase in real interest rates,
Dialogue: 0,0:07:03.08,0:07:07.08,Default,,0000,0000,0000,,increase in real GDP\Naccording to this model.