Transcript Chapter 12
Chapter 12 Macroeconomic Models and Analysis © 2001 South-Western College Publishing Aggregate Demand (AD) and Aggregate Supply (AS) Aggregate Demand – AD curve – real output Aggregate Supply – AS curve 2 AS and AD Curves P AS P1 AD 0 Y1 Y 3 Classical Analysis Say’s law Production, which creates supply, also creates and equivalent amount of monetary purchasing power, or demand 4 Keynesian Analysis Also known as income-expenditure analysis Aggregate Expenditure (AE) – the total planned spending for goods and services by consumers, businesses government, and foreign buyers 5 Two-Sector Economy Consumption – consumption function: any table, equation, or graph showing the relationship between DI and the amount consumers plan or desire to spend on currently produced final output – marginal propensity to consume (MPC): ratio of the change in consumption spending to the change in DI; the slope of the consumption function 6 Two-Sector Economy (cont.) – saving function: the relationship between the amount of DI consumers receive and the amount they save – marginal propensity to save (MPS): ratio of the change in planned saving to the change in DI; the slope of the saving function Investment – planned investment demand 7 Expenditure Consumption and Savings Functions C Saving C2 C1 45 o 0 Saving Y1 Y2 Real Income S S2 0 Saving Y1 Y2 Real Income 8 Equilibrium Output when Planned I = Planned S Expenditure C+1 C 0 45 o Saving and Investment Y1 Y2 Y3 Y4 Real Income S I 0 I Y1 Y2 Y3 Y4 Real Income 9 A Four-Sector Economy Government spending and taxes Net exports AE = C + I + G + (X – IM) Equilibrium 10 Equilibrium with Unemployment Increased consumption and net exports Increased investment Increased government spending 11 Discretionary Government Spending Used to Increase Income and Output Expenditure C + I + G2 + (X - IM) C + I + G1 + (X - IM) C 45 o Y1 Y* Real Income 12 Equilibrium with Inflation To combat inflation – decrease government spending – raise interest rates • discourage investment – increase taxes • lessen consumption 13 AE and the Multiplier The multiplier: relationship between a change in aggregate expenditure and the resulting larger change in the national output or income Relationship to consumption and saving Calculating the value of the multiplier: – MPC is used to calculate the multiplier k 1 1 k = 1MPC MPS 14 Deriving an Aggregate Demand Curve from Aggregate Expenditure Curves Expenditure AE3 AE2 AE1 (a) 45 o 0 P Y1 Y2 Y3 Real Income P1 (b) P2 P3 0 AD Y1 Y2 Y3 Real Income 15 Classical and Keynesian Views of Aggregate Supply P AS P P0 AS AD2 AD2 AD1 AD1 0 Y* (a) Y 0 Y (b) 16 Aggregate Demand and Composite Aggregate Supply P AS AD5 AD4 AD3 AD2 AD1 0 Y1 Y2 Y* Y 17 Monetarist School Economy automatically tends toward full employment equilibrium; it is essentially stable Money is the most important variable in determining aggregate demand Government intervention worsens the effects of the business cycle 18 New Classical School Economy is essentially stable and self- correcting Active monetary policy has no place in the economy Government intervention is ineffective due to rational expectations – people learn from past experiences and with economic information available 19 can correctly foresee the future