[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.57,0:00:02.90,Default,,0000,0000,0000,,In the last video we\Nhopefully got the intuition
Dialogue: 0,0:00:02.90,0:00:05.82,Default,,0000,0000,0000,,between how real interest rates
Dialogue: 0,0:00:05.82,0:00:08.00,Default,,0000,0000,0000,,might impact planned investment.
Dialogue: 0,0:00:08.00,0:00:11.23,Default,,0000,0000,0000,,We saw that if real\Ninterest rates went up,
Dialogue: 0,0:00:11.23,0:00:15.48,Default,,0000,0000,0000,,then planned investment went down.
Dialogue: 0,0:00:15.48,0:00:17.20,Default,,0000,0000,0000,,If real interest rates went down,
Dialogue: 0,0:00:17.20,0:00:21.15,Default,,0000,0000,0000,,then planned investment went up.
Dialogue: 0,0:00:21.15,0:00:22.94,Default,,0000,0000,0000,,What we want to do in this video is
Dialogue: 0,0:00:22.94,0:00:25.07,Default,,0000,0000,0000,,take this conclusion right over here,
Dialogue: 0,0:00:25.07,0:00:28.15,Default,,0000,0000,0000,,this hopefully fairly intuitive\Nconclusion right over here
Dialogue: 0,0:00:28.15,0:00:30.15,Default,,0000,0000,0000,,and apply it to our Keynesian Cross
Dialogue: 0,0:00:30.15,0:00:31.73,Default,,0000,0000,0000,,and think about how real interest rates
Dialogue: 0,0:00:31.73,0:00:34.27,Default,,0000,0000,0000,,would effect overall planned expenditure
Dialogue: 0,0:00:34.27,0:00:35.78,Default,,0000,0000,0000,,and what that would do in a model
Dialogue: 0,0:00:35.78,0:00:37.98,Default,,0000,0000,0000,,like the Keynesian Cross,
Dialogue: 0,0:00:37.98,0:00:42.93,Default,,0000,0000,0000,,what that would do to our\Nequilibrium real GDPs.
Dialogue: 0,0:00:42.93,0:00:44.60,Default,,0000,0000,0000,,Just as a reminder,
Dialogue: 0,0:00:44.60,0:00:46.85,Default,,0000,0000,0000,,let's just draw our Keynesian Cross first,
Dialogue: 0,0:00:46.85,0:00:48.43,Default,,0000,0000,0000,,or parts of it.
Dialogue: 0,0:00:48.43,0:00:49.93,Default,,0000,0000,0000,,On this axis right over here,
Dialogue: 0,0:00:49.93,0:00:52.12,Default,,0000,0000,0000,,we have expenditures.
Dialogue: 0,0:00:52.12,0:00:55.27,Default,,0000,0000,0000,,This axis right over here,
Dialogue: 0,0:00:55.27,0:00:57.38,Default,,0000,0000,0000,,we have income.
Dialogue: 0,0:00:57.38,0:00:59.52,Default,,0000,0000,0000,,We know, from many videos now,
Dialogue: 0,0:00:59.52,0:01:01.52,Default,,0000,0000,0000,,that an economy is a equilibrium
Dialogue: 0,0:01:01.52,0:01:03.18,Default,,0000,0000,0000,,when income is equal,
Dialogue: 0,0:01:03.18,0:01:05.65,Default,,0000,0000,0000,,when aggregate real income
Dialogue: 0,0:01:05.65,0:01:07.87,Default,,0000,0000,0000,,is equal to aggregate real expenditures.
Dialogue: 0,0:01:07.87,0:01:10.36,Default,,0000,0000,0000,,Circular flow of GDP.
Dialogue: 0,0:01:10.36,0:01:11.27,Default,,0000,0000,0000,,Let's draw …
Dialogue: 0,0:01:11.27,0:01:13.45,Default,,0000,0000,0000,,Let me make a line that's all the points
Dialogue: 0,0:01:13.45,0:01:16.61,Default,,0000,0000,0000,,where Y is equal to expenditures.
Dialogue: 0,0:01:16.61,0:01:19.78,Default,,0000,0000,0000,,Along this 45 degree line right over here.
Dialogue: 0,0:01:19.78,0:01:21.36,Default,,0000,0000,0000,,This is our expenditures.
Dialogue: 0,0:01:21.36,0:01:22.61,Default,,0000,0000,0000,,At this point right over here,
Dialogue: 0,0:01:22.61,0:01:24.32,Default,,0000,0000,0000,,that should be the same value
Dialogue: 0,0:01:24.32,0:01:27.02,Default,,0000,0000,0000,,as what our aggregate income is.
Dialogue: 0,0:01:27.02,0:01:28.52,Default,,0000,0000,0000,,That's part of the Keynesian Cross.
Dialogue: 0,0:01:28.52,0:01:29.78,Default,,0000,0000,0000,,The other part is to actually
Dialogue: 0,0:01:29.78,0:01:32.61,Default,,0000,0000,0000,,plot planned expenditures relative to this
Dialogue: 0,0:01:32.61,0:01:33.94,Default,,0000,0000,0000,,and then see where they intersect.
Dialogue: 0,0:01:33.94,0:01:37.05,Default,,0000,0000,0000,,What the equilibrium for that\Nplanned expenditure line?
Dialogue: 0,0:01:37.05,0:01:38.85,Default,,0000,0000,0000,,I'll write it here as ...
Dialogue: 0,0:01:38.85,0:01:41.05,Default,,0000,0000,0000,,I've written it in the past as planned.
Dialogue: 0,0:01:41.05,0:01:42.38,Default,,0000,0000,0000,,I just wrote out the word.
Dialogue: 0,0:01:42.38,0:01:45.65,Default,,0000,0000,0000,,Planned expenditures.
Dialogue: 0,0:01:45.65,0:01:51.86,Default,,0000,0000,0000,,We could write it as\Nexpenditures planned, like that.
Dialogue: 0,0:01:51.86,0:01:55.78,Default,,0000,0000,0000,,It's equal to our aggregate consumption.
Dialogue: 0,0:01:55.78,0:01:57.12,Default,,0000,0000,0000,,Our aggregate consumption,
Dialogue: 0,0:01:57.12,0:02:01.12,Default,,0000,0000,0000,,we can write it as a function\Nof disposable income.
Dialogue: 0,0:02:01.12,0:02:02.98,Default,,0000,0000,0000,,Y - T is disposable income.
Dialogue: 0,0:02:02.98,0:02:05.58,Default,,0000,0000,0000,,Aggregat income minus aggregate taxes.
Dialogue: 0,0:02:05.58,0:02:07.12,Default,,0000,0000,0000,,I want to be very clear here.
Dialogue: 0,0:02:07.12,0:02:09.52,Default,,0000,0000,0000,,This is not saying C x Y - T.
Dialogue: 0,0:02:09.52,0:02:11.86,Default,,0000,0000,0000,,This is saying C is a function of Y - T.
Dialogue: 0,0:02:11.86,0:02:15.12,Default,,0000,0000,0000,,Give my a Y - T and I will give you a C.
Dialogue: 0,0:02:15.12,0:02:17.44,Default,,0000,0000,0000,,For the sake of our\NKeynesian Cross analysis,
Dialogue: 0,0:02:17.44,0:02:18.72,Default,,0000,0000,0000,,and this is kind of kind\Nof what you would see
Dialogue: 0,0:02:18.72,0:02:20.36,Default,,0000,0000,0000,,in a traditional intro class,
Dialogue: 0,0:02:20.36,0:02:23.65,Default,,0000,0000,0000,,we assume that we have a\Nlinear consumption function.
Dialogue: 0,0:02:23.65,0:02:25.72,Default,,0000,0000,0000,,We assume that our consumption functions.
Dialogue: 0,0:02:25.72,0:02:28.65,Default,,0000,0000,0000,,C as a function of disposable income.
Dialogue: 0,0:02:28.65,0:02:31.78,Default,,0000,0000,0000,,It might be something like\Nour autonomous consumption
Dialogue: 0,0:02:31.78,0:02:33.94,Default,,0000,0000,0000,,plus our marginal propensity to consume
Dialogue: 0,0:02:33.94,0:02:37.78,Default,,0000,0000,0000,,times our aggregate income, minus taxes.
Dialogue: 0,0:02:37.78,0:02:39.92,Default,,0000,0000,0000,,This right over here\Nreally is multiplication.
Dialogue: 0,0:02:39.92,0:02:42.25,Default,,0000,0000,0000,,We could distribute this C 1.
Dialogue: 0,0:02:42.25,0:02:46.98,Default,,0000,0000,0000,,This is just saying C\Nas a function of Y - T.
Dialogue: 0,0:02:46.98,0:02:49.86,Default,,0000,0000,0000,,That's only one part of\Nplanned expenditures.
Dialogue: 0,0:02:49.86,0:02:51.05,Default,,0000,0000,0000,,Above and beyond that,
Dialogue: 0,0:02:51.05,0:02:53.69,Default,,0000,0000,0000,,we have planned investment.
Dialogue: 0,0:02:53.69,0:02:55.61,Default,,0000,0000,0000,,We're talking about the\Nplanned side of things.
Dialogue: 0,0:02:55.61,0:02:57.38,Default,,0000,0000,0000,,Now we know that planned investment ...
Dialogue: 0,0:02:57.38,0:03:00.45,Default,,0000,0000,0000,,In the past we viewed it as a constant,
Dialogue: 0,0:03:00.45,0:03:01.86,Default,,0000,0000,0000,,but now we know it can actually be
Dialogue: 0,0:03:01.86,0:03:05.38,Default,,0000,0000,0000,,a function of real interest rates.
Dialogue: 0,0:03:05.38,0:03:06.94,Default,,0000,0000,0000,,Above and beyond that,
Dialogue: 0,0:03:06.94,0:03:09.45,Default,,0000,0000,0000,,we have government expenditures
Dialogue: 0,0:03:09.45,0:03:11.52,Default,,0000,0000,0000,,and then net exports.
Dialogue: 0,0:03:11.52,0:03:14.12,Default,,0000,0000,0000,,For some given real interest rate,
Dialogue: 0,0:03:14.12,0:03:15.58,Default,,0000,0000,0000,,we can plot this line.
Dialogue: 0,0:03:15.58,0:03:17.19,Default,,0000,0000,0000,,The consumption function right over here
Dialogue: 0,0:03:17.19,0:03:20.98,Default,,0000,0000,0000,,is just a line with a\Npositive slope that intersects
Dialogue: 0,0:03:20.98,0:03:24.86,Default,,0000,0000,0000,,the vertical axis at some place up here.
Dialogue: 0,0:03:24.86,0:03:26.38,Default,,0000,0000,0000,,It has a positive intersect.
Dialogue: 0,0:03:26.38,0:03:28.32,Default,,0000,0000,0000,,All of these, for given interest rate,
Dialogue: 0,0:03:28.32,0:03:29.94,Default,,0000,0000,0000,,these are all going to be constant.
Dialogue: 0,0:03:29.94,0:03:34.05,Default,,0000,0000,0000,,Our planned expenditures would\Nlook something like this.
Dialogue: 0,0:03:34.05,0:03:37.32,Default,,0000,0000,0000,,It might look something like that.
Dialogue: 0,0:03:37.32,0:03:40.61,Default,,0000,0000,0000,,This is YP.
Dialogue: 0,0:03:40.61,0:03:43.18,Default,,0000,0000,0000,,Let's call this YP_1.
Dialogue: 0,0:03:43.18,0:03:46.25,Default,,0000,0000,0000,,This is the YP we get when we pick …
Dialogue: 0,0:03:46.25,0:03:47.45,Default,,0000,0000,0000,,I'll just write ...
Dialogue: 0,0:03:47.45,0:03:49.19,Default,,0000,0000,0000,,I'll just rewrite the\Nwhole thing over again.
Dialogue: 0,0:03:49.19,0:03:50.92,Default,,0000,0000,0000,,We have our consumption,
Dialogue: 0,0:03:50.92,0:03:53.72,Default,,0000,0000,0000,,which is a function of Y - T,
Dialogue: 0,0:03:53.72,0:03:56.86,Default,,0000,0000,0000,,plus the level of\Nplanned investment at ...
Dialogue: 0,0:03:56.86,0:04:00.05,Default,,0000,0000,0000,,Let's say interest rate R1,
Dialogue: 0,0:04:00.05,0:04:01.86,Default,,0000,0000,0000,,so at some given interest rate,
Dialogue: 0,0:04:01.86,0:04:03.86,Default,,0000,0000,0000,,plus government spending,
Dialogue: 0,0:04:03.86,0:04:07.52,Default,,0000,0000,0000,,plus net exports.
Dialogue: 0,0:04:07.52,0:04:08.65,Default,,0000,0000,0000,,We see ...
Dialogue: 0,0:04:08.65,0:04:10.05,Default,,0000,0000,0000,,We've done this Keynesian Cross analysis
Dialogue: 0,0:04:10.05,0:04:11.92,Default,,0000,0000,0000,,several times now, already.
Dialogue: 0,0:04:11.92,0:04:14.78,Default,,0000,0000,0000,,This is our equilibrium level of GDP.
Dialogue: 0,0:04:14.78,0:04:17.25,Default,,0000,0000,0000,,This is where along our\Nplanned expenditure line,
Dialogue: 0,0:04:17.25,0:04:20.78,Default,,0000,0000,0000,,where income is equal to expenditures,
Dialogue: 0,0:04:20.78,0:04:22.45,Default,,0000,0000,0000,,or output is equal to expenditures.
Dialogue: 0,0:04:22.45,0:04:25.19,Default,,0000,0000,0000,,We are equilibrium right over here.
Dialogue: 0,0:04:25.19,0:04:28.100,Default,,0000,0000,0000,,We're not eating into\Ninventories in an unplanned way
Dialogue: 0,0:04:28.100,0:04:31.40,Default,,0000,0000,0000,,and we're not building excessive inventory
Dialogue: 0,0:04:31.40,0:04:34.60,Default,,0000,0000,0000,,above and beyond what we had planned.
Dialogue: 0,0:04:34.60,0:04:35.100,Default,,0000,0000,0000,,Now, what I want to think about,
Dialogue: 0,0:04:35.100,0:04:43.73,Default,,0000,0000,0000,,what happens if interest\Nrates go from R1 to R2?
Dialogue: 0,0:04:43.73,0:04:47.32,Default,,0000,0000,0000,,What happens if interest\Nrates go from R1 to R2
Dialogue: 0,0:04:47.32,0:04:50.66,Default,,0000,0000,0000,,and in particular let's assume that R2?
Dialogue: 0,0:04:50.66,0:04:54.80,Default,,0000,0000,0000,,Now, we're going have\Nplanned investment at R2
Dialogue: 0,0:04:54.80,0:04:58.32,Default,,0000,0000,0000,,and we're going to assume\Nthat R2 is less than R1.
Dialogue: 0,0:04:58.32,0:04:59.26,Default,,0000,0000,0000,,We're essentially saying,
Dialogue: 0,0:04:59.26,0:05:01.73,Default,,0000,0000,0000,,what happens when interest rates go down.
Dialogue: 0,0:05:01.73,0:05:02.60,Default,,0000,0000,0000,,We already know.
Dialogue: 0,0:05:02.60,0:05:04.86,Default,,0000,0000,0000,,When interest rates go down,
Dialogue: 0,0:05:04.86,0:05:08.80,Default,,0000,0000,0000,,planned investment goes up.
Dialogue: 0,0:05:08.80,0:05:09.93,Default,,0000,0000,0000,,Everything else equal,
Dialogue: 0,0:05:09.93,0:05:11.93,Default,,0000,0000,0000,,if this thing shifts up,
Dialogue: 0,0:05:11.93,0:05:14.100,Default,,0000,0000,0000,,if this term right over\Nhere goes from R ...
Dialogue: 0,0:05:14.100,0:05:18.15,Default,,0000,0000,0000,,if the input into it, if the\Nreal interest rate goes down,
Dialogue: 0,0:05:18.15,0:05:21.33,Default,,0000,0000,0000,,then this whole expression\Nis going to go up
Dialogue: 0,0:05:21.33,0:05:23.42,Default,,0000,0000,0000,,and so you're going to have an increase.
Dialogue: 0,0:05:23.42,0:05:25.08,Default,,0000,0000,0000,,You're going to have a shifting up
Dialogue: 0,0:05:25.08,0:05:26.46,Default,,0000,0000,0000,,of your planned expenditure
Dialogue: 0,0:05:26.46,0:05:28.100,Default,,0000,0000,0000,,for any level of income.
Dialogue: 0,0:05:28.100,0:05:31.20,Default,,0000,0000,0000,,It might look something like this.
Dialogue: 0,0:05:31.20,0:05:34.08,Default,,0000,0000,0000,,It would look something like this.
Dialogue: 0,0:05:34.08,0:05:37.20,Default,,0000,0000,0000,,This delta right over here, this ...
Dialogue: 0,0:05:37.20,0:05:38.66,Default,,0000,0000,0000,,Let me do it right over here.
Dialogue: 0,0:05:38.66,0:05:40.40,Default,,0000,0000,0000,,This distance right over here
Dialogue: 0,0:05:40.40,0:05:44.26,Default,,0000,0000,0000,,is going to be your change\Nin planned investment.
Dialogue: 0,0:05:44.26,0:05:46.100,Default,,0000,0000,0000,,It went up because\Ninterest rates went down.
Dialogue: 0,0:05:46.100,0:05:49.33,Default,,0000,0000,0000,,We saw that in the last video.
Dialogue: 0,0:05:49.33,0:05:51.93,Default,,0000,0000,0000,,We saw that we got to a new level,
Dialogue: 0,0:05:51.93,0:05:53.37,Default,,0000,0000,0000,,or we see now that
Dialogue: 0,0:05:53.37,0:05:54.74,Default,,0000,0000,0000,,when you shift that up,
Dialogue: 0,0:05:54.74,0:05:55.60,Default,,0000,0000,0000,,that investment goes up.
Dialogue: 0,0:05:55.60,0:05:57.20,Default,,0000,0000,0000,,Because real interest rate went down,
Dialogue: 0,0:05:57.20,0:05:59.68,Default,,0000,0000,0000,,you get to a new equilibrium point.
Dialogue: 0,0:05:59.68,0:06:02.77,Default,,0000,0000,0000,,That equilibrium point\Nis a higher level ...
Dialogue: 0,0:06:02.77,0:06:06.18,Default,,0000,0000,0000,,it's a higher level of GDP or income.
Dialogue: 0,0:06:06.18,0:06:08.10,Default,,0000,0000,0000,,We know from previous videos as well,
Dialogue: 0,0:06:08.10,0:06:10.13,Default,,0000,0000,0000,,that this distance right over here
Dialogue: 0,0:06:10.13,0:06:12.77,Default,,0000,0000,0000,,is the same as our multiplier
Dialogue: 0,0:06:12.77,0:06:15.60,Default,,0000,0000,0000,,times the amount that\Nthings got bumped up.
Dialogue: 0,0:06:15.60,0:06:17.41,Default,,0000,0000,0000,,The amount that things got bumped up
Dialogue: 0,0:06:17.41,0:06:20.10,Default,,0000,0000,0000,,was the change in planned investment.
Dialogue: 0,0:06:20.10,0:06:22.53,Default,,0000,0000,0000,,Then, we multiply that\Ntimes our multiplier.
Dialogue: 0,0:06:22.53,0:06:24.68,Default,,0000,0000,0000,,Our multiplier is 1 over
Dialogue: 0,0:06:24.68,0:06:27.02,Default,,0000,0000,0000,,the marginal propensity to save,
Dialogue: 0,0:06:27.02,0:06:31.13,Default,,0000,0000,0000,,or 1 over 1- the marginal\Npropensity to consume.
Dialogue: 0,0:06:31.13,0:06:33.10,Default,,0000,0000,0000,,The marginal propensity to consume ...
Dialogue: 0,0:06:33.10,0:06:35.40,Default,,0000,0000,0000,,We assume it's going to be constant
Dialogue: 0,0:06:35.40,0:06:37.20,Default,,0000,0000,0000,,in order to even be able to do this map.
Dialogue: 0,0:06:37.20,0:06:39.27,Default,,0000,0000,0000,,That's this piece right over there.
Dialogue: 0,0:06:39.27,0:06:42.53,Default,,0000,0000,0000,,That is equal to our C1.
Dialogue: 0,0:06:42.53,0:06:44.27,Default,,0000,0000,0000,,The main theme here,
Dialogue: 0,0:06:44.27,0:06:48.02,Default,,0000,0000,0000,,the real big picture\Nhere as we go on our way
Dialogue: 0,0:06:48.02,0:06:50.53,Default,,0000,0000,0000,,to constructing our ISLM model,
Dialogue: 0,0:06:50.53,0:06:52.27,Default,,0000,0000,0000,,is really that all we're seeing ...
Dialogue: 0,0:06:52.27,0:06:54.66,Default,,0000,0000,0000,,when real interest rates go up,
Dialogue: 0,0:06:54.66,0:06:56.28,Default,,0000,0000,0000,,planned investment goes down.
Dialogue: 0,0:06:56.28,0:06:57.70,Default,,0000,0000,0000,,When interest rates go down ...
Dialogue: 0,0:06:57.70,0:07:00.13,Default,,0000,0000,0000,,which is what we saw in this\Nexample right over here.
Dialogue: 0,0:07:00.13,0:07:01.66,Default,,0000,0000,0000,,Actually, let me write this down.
Dialogue: 0,0:07:01.66,0:07:08.20,Default,,0000,0000,0000,,Y, planned expenditures 2 at\NC as a function of Y - D +.
Dialogue: 0,0:07:08.20,0:07:11.78,Default,,0000,0000,0000,,Our new planned investment,\Nat this lower interest rate,
Dialogue: 0,0:07:11.78,0:07:13.82,Default,,0000,0000,0000,,+ G + net exports.
Dialogue: 0,0:07:13.82,0:07:17.45,Default,,0000,0000,0000,,This is our Y2 right over\Nhere, our planned expenditures.
Dialogue: 0,0:07:17.45,0:07:18.79,Default,,0000,0000,0000,,We saw in this example,
Dialogue: 0,0:07:18.79,0:07:20.72,Default,,0000,0000,0000,,when real interest rates went down,
Dialogue: 0,0:07:20.72,0:07:23.19,Default,,0000,0000,0000,,planned expenditures ...
Dialogue: 0,0:07:23.19,0:07:24.69,Default,,0000,0000,0000,,When real interest rates went down,
Dialogue: 0,0:07:24.69,0:07:26.12,Default,,0000,0000,0000,,planned investment went up.
Dialogue: 0,0:07:26.12,0:07:29.39,Default,,0000,0000,0000,,That made total planned\Nexpenditures go up.
Dialogue: 0,0:07:29.39,0:07:31.98,Default,,0000,0000,0000,,That made total GDP go up.
Dialogue: 0,0:07:31.98,0:07:34.05,Default,,0000,0000,0000,,Now we can have another relationship,
Dialogue: 0,0:07:34.05,0:07:36.19,Default,,0000,0000,0000,,which is really very analogous to this.
Dialogue: 0,0:07:36.19,0:07:38.94,Default,,0000,0000,0000,,Really, by changing this,\Nwe're just shifting this curve.
Dialogue: 0,0:07:38.94,0:07:42.59,Default,,0000,0000,0000,,Then, you have the multiplier\Neffect on our equilibrium output.
Dialogue: 0,0:07:42.59,0:07:43.72,Default,,0000,0000,0000,,The big takeaway from here is,
Dialogue: 0,0:07:43.72,0:07:46.02,Default,,0000,0000,0000,,if real interest rates go up,
Dialogue: 0,0:07:46.02,0:07:49.12,Default,,0000,0000,0000,,not only does planned investment go down,
Dialogue: 0,0:07:49.12,0:07:51.69,Default,,0000,0000,0000,,that would shift this entire curve down.
Dialogue: 0,0:07:51.69,0:07:53.52,Default,,0000,0000,0000,,Then, that would also cause
Dialogue: 0,0:07:53.52,0:07:57.19,Default,,0000,0000,0000,,our equilibrium real GDP to go down.
Dialogue: 0,0:07:57.19,0:07:59.08,Default,,0000,0000,0000,,It would go down by some multiplier,
Dialogue: 0,0:07:59.08,0:08:01.50,Default,,0000,0000,0000,,by the multiplier of\Nhow much this goes down.
Dialogue: 0,0:08:01.50,0:08:03.50,Default,,0000,0000,0000,,If real interest rates go down,
Dialogue: 0,0:08:03.50,0:08:04.100,Default,,0000,0000,0000,,then planned investment,
Dialogue: 0,0:08:04.100,0:08:06.39,Default,,0000,0000,0000,,because of what we saw in the last video,
Dialogue: 0,0:08:06.39,0:08:07.42,Default,,0000,0000,0000,,goes up.
Dialogue: 0,0:08:07.42,0:08:09.00,Default,,0000,0000,0000,,Then, that would cause ...
Dialogue: 0,0:08:09.00,0:08:09.99,Default,,0000,0000,0000,,That would cause this whole ...
Dialogue: 0,0:08:09.99,0:08:11.12,Default,,0000,0000,0000,,That's what we did in this video.
Dialogue: 0,0:08:11.12,0:08:12.72,Default,,0000,0000,0000,,This curve would shift up.
Dialogue: 0,0:08:12.72,0:08:13.92,Default,,0000,0000,0000,,If this curve shifts up,
Dialogue: 0,0:08:13.92,0:08:16.52,Default,,0000,0000,0000,,our equilibrium GDP is going to be
Dialogue: 0,0:08:16.52,0:08:20.08,Default,,0000,0000,0000,,however much this shifted,\Ntimes the multiplier,
Dialogue: 0,0:08:20.08,0:08:23.92,Default,,0000,0000,0000,,so your equilibrium GDP is going to go up.
Dialogue: 0,0:08:23.92,0:08:26.63,Default,,0000,0000,0000,,You really have a very\Nsimilar relationship
Dialogue: 0,0:08:26.63,0:08:28.92,Default,,0000,0000,0000,,in terms of just how things move.
Dialogue: 0,0:08:28.92,0:08:31.08,Default,,0000,0000,0000,,We can plot this.
Dialogue: 0,0:08:31.08,0:08:33.12,Default,,0000,0000,0000,,Economist are famous for
Dialogue: 0,0:08:33.12,0:08:35.71,Default,,0000,0000,0000,,not always plotting the\Nindependent variable
Dialogue: 0,0:08:35.71,0:08:37.50,Default,,0000,0000,0000,,the way you would want to.
Dialogue: 0,0:08:37.50,0:08:38.79,Default,,0000,0000,0000,,As we construct our ...
Dialogue: 0,0:08:38.79,0:08:40.22,Default,,0000,0000,0000,,What we're going to see is our IS curve.
Dialogue: 0,0:08:40.22,0:08:42.47,Default,,0000,0000,0000,,It stands for investment savings.
Dialogue: 0,0:08:42.47,0:08:43.30,Default,,0000,0000,0000,,What we're going to do
Dialogue: 0,0:08:43.30,0:08:44.72,Default,,0000,0000,0000,,and we'll talk more\Nabout that in the future.
Dialogue: 0,0:08:44.72,0:08:46.32,Default,,0000,0000,0000,,We plot the convention is to put
Dialogue: 0,0:08:46.32,0:08:48.99,Default,,0000,0000,0000,,real interest rates on the vertical axis
Dialogue: 0,0:08:48.99,0:08:53.22,Default,,0000,0000,0000,,and to put real GDP right over here.
Dialogue: 0,0:08:53.22,0:08:54.72,Default,,0000,0000,0000,,If you want to look at this relationship,
Dialogue: 0,0:08:54.72,0:08:56.92,Default,,0000,0000,0000,,when we have a high real interest rate,
Dialogue: 0,0:08:56.92,0:09:00.25,Default,,0000,0000,0000,,we're going to have a low real GDP.
Dialogue: 0,0:09:00.25,0:09:02.88,Default,,0000,0000,0000,,When we have a low real interest rate,
Dialogue: 0,0:09:02.88,0:09:04.25,Default,,0000,0000,0000,,we're going to have a high GDP.
Dialogue: 0,0:09:04.25,0:09:06.25,Default,,0000,0000,0000,,It's going to make spending go up.
Dialogue: 0,0:09:06.25,0:09:07.05,Default,,0000,0000,0000,,If spending goes up,
Dialogue: 0,0:09:07.05,0:09:08.16,Default,,0000,0000,0000,,you have a multiplier effect.
Dialogue: 0,0:09:08.16,0:09:10.13,Default,,0000,0000,0000,,It makes our equilibrium output go up.
Dialogue: 0,0:09:10.13,0:09:12.46,Default,,0000,0000,0000,,Low interest rate, high real GDP,
Dialogue: 0,0:09:12.46,0:09:15.12,Default,,0000,0000,0000,,so you have a curve that relates.
Dialogue: 0,0:09:15.12,0:09:18.03,Default,,0000,0000,0000,,If you want to relate real\NGDP to real interest rates
Dialogue: 0,0:09:18.03,0:09:19.73,Default,,0000,0000,0000,,you get a curve like this,
Dialogue: 0,0:09:19.73,0:09:21.70,Default,,0000,0000,0000,,and it's called the IS curve.
Dialogue: 0,0:09:21.70,0:09:24.53,Default,,0000,0000,0000,,IS comes for investment savings.
Dialogue: 0,0:09:24.53,0:09:26.53,Default,,0000,0000,0000,,We're really more focused\Non the I part of it,
Dialogue: 0,0:09:26.53,0:09:27.93,Default,,0000,0000,0000,,the way we analyzed here.
Dialogue: 0,0:09:27.93,0:09:30.36,Default,,0000,0000,0000,,The whole reason, based\Non the logic in this video
Dialogue: 0,0:09:30.36,0:09:31.86,Default,,0000,0000,0000,,and the last one as well,
Dialogue: 0,0:09:31.86,0:09:33.99,Default,,0000,0000,0000,,the whole reason why we\Nhave this relationship
Dialogue: 0,0:09:33.99,0:09:37.79,Default,,0000,0000,0000,,is due to real interest\Nrates impact on investment.
Dialogue: 0,0:09:37.79,0:09:39.33,Default,,0000,0000,0000,,When you have high real interest rates,
Dialogue: 0,0:09:39.33,0:09:41.03,Default,,0000,0000,0000,,you don't have much investment.
Dialogue: 0,0:09:41.03,0:09:45.53,Default,,0000,0000,0000,,Also, you'll be sapping out of GDP.
Dialogue: 0,0:09:45.53,0:09:47.12,Default,,0000,0000,0000,,If you lower interest rates,
Dialogue: 0,0:09:47.12,0:09:50.26,Default,,0000,0000,0000,,then that makes you end up\Nhaving a lot more investment,
Dialogue: 0,0:09:50.26,0:09:51.26,Default,,0000,0000,0000,,like we saw in the last video.
Dialogue: 0,0:09:51.26,0:09:53.79,Default,,0000,0000,0000,,That will expand GDP by the multiplier
Dialogue: 0,0:09:53.79,0:09:57.00,Default,,0000,0000,0000,,that we see right over there.