Unit 3 : Macroeconomics

1
Simple Keynesian Model
Planned aggregate expenditure C I G NX 45
degree line all points where production (real
GDP) aggregate expenditure Equilibrium occurs
where planned aggregate expenditure equals
production
2
Equilibrium and Disequilibrium in theKeynesian
Model
3
Saving and Dissaving
4
Increase in Investment
Investment increases from I to I1. Output
increases from Y to Y1.
5
Investment Demand
Interest rate decreases from r to r1. Investment
increases from I to I1.
6
Different Elasticities of Investment Demand
Decrease of interest rates from r to r1. With IA,
investment increases from I to I2. With IB,
investment increases from I to I1. IA is more
elastic than IB.
7
Aggregate Demand
An increase in price from P to P1 results in a
decrease in real GDP from Y to Y1
8
Shifts in Aggregate Demand
A decrease in expected future income, in
government expenditures, in the money supply or
an increase in taxes will cause the AD to shift
from AD to AD1. An increase in expected future
income, in government expenditures or in the
money supply, or a decrease in taxes will cause
the AD to shift from AD to AD2.
9
Aggregate Supply
Y represents potential real GDP. It is
full-employment output. SRAS is the short-run
aggregate supply curve.
10
Aggregate Supply
1. Potential GDP increases from Y to Y1. The
LRAS shifts to LRAS1 and the short-run aggregate
supply curve shifts to SRAS1. 2. Decrease in
resource prices will shift the SRAS to SRAS1. A
decrease in the money wage rate does not change
the LRAS.
11
Aggregate Supply and Aggregate Demand
12
Change in Aggregate Demand
13
From the Short Run to the Long Run
Initially the economy is at Y, potential GDP and
P. Aggregate demand increases from AD to AD1 and
the economy moves to Y1 and P1. The final
equilibrium is Y and P2.
14
Long-Run Aggregate Supply and Production
Possibilities Curves