Macroeconomics

1 1-4

Conclusion

The purpose of this chapter and the previous one has been to deepen our under-

standing of aggregate demand. We now have the tools to analyze the effects of

monetary and fiscal policy in the long run and in the short run. In the long run,

prices are flexible, and we use the classical analysis of Parts Two and Three of this

book. In the short run, prices are sticky, and we use the IS –LM model to exam-

ine how changes in policy influence the economy.

The model in this and the previous chapter provides the basic framework for

analyzing the economy in the short run, but it is not the whole story. Future

chapters will refine the theory. In Chapter 12 we examine how international

interactions affect the theory of aggregate demand. In Chapter 13 we examine

the theory behind short-run aggregate supply. In Chapter 14 we bring these var-

ious elements of aggregate demand and aggregate supply together to study more

precisely the dynamic response of the economy over time. In Chapter 15 we

consider how this theoretical framework should be applied to the making of sta-

bilization policy. In addition, in later chapters we examine in more detail the ele-

ments of the IS –LM model, thereby refining our understanding of aggregate

demand. In Chapter 17, for example, we study theories of consumption. Because

the consumption function is a crucial piece of the IS –LM model, a deeper analy-

sis of consumption may modify our view of the impact of monetary and fiscal

policy on the economy. The simple IS –LM model presented in this and the pre-

vious chapter provides the starting point for this further analysis.