1 / 14

Understanding Aggregate Demand: Components, Slope, and Economic Theories

This guide explores the components of Aggregate Demand (AD), including consumption (C), investment (I), government spending (G), and net exports (X - M), defined by the equation AD = C + I + G + (X - M). It examines how the AD curve differs from a simple demand curve, explaining its downward slope due to effects such as real income, real balance, and international substitution. Additionally, it discusses the connection between price levels and interest rates, Keynesian economics, and the criticism of neo-classical approaches. Understanding these concepts is crucial for analyzing macroeconomic policies and business cycles.

tremain
Download Presentation

Understanding Aggregate Demand: Components, Slope, and Economic Theories

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 3.3: Macroeconomic Models

  2. Aggregate Demand Components • AD=C+I+G+X-M • How does the AD curve (and diagram labels) differ from a simple demand curve?

  3. P = GDP deflator (‘95=100) • Q = GDP real

  4. Why Does Aggregate Demand Slope Downward • Real Income Effect • P Yreal C&I Q(AD) • Real Balance Effect • P S present C&I Q(AD) • International Substitution Effect • P(domestic) relative P(M) Q(M) Q(AD) • Imports become more expensive relative to domestic goods (substitution effect)

  5. Price Level and Interest Rates • Price Level (inflation) and Interest Rates • Positive correlation • Banks want to maintain real value of loans when inflation is increasing. • CAREFUL • Price Level Change= Interest Rate Change = Movement Along AD curve • Interest Rate Change (not because of Price Level Change) = Shift in AD curve

  6. r C& I AD shift

  7. Price Level and Real GDP Depression Region Bottlenecks Diminishing Returns Supply Constraints Scarcity of Factors Physical Limit Aggregate Supply- Short Run

  8. John Maynard Keynes The General Theory of Employment, Interest, and Money- 1936 Father of Macroeconomics Keynesian vs. Neo-classical Approach (Long Run)

  9. Neo-classical view • Microeconomic focus • Faith in markets to reach “equilibrium” in LR • Labor like any other commodity • Laissez-faire

  10. Keynesian Approach • Response to conditions seen during Great Depression • Sometimes markets don’t reach equilibrium. • Solution: Increase income and create demand • Demand-side policies • Government intervention/spending • Job creation

  11. Keynesian Criticism of Neo-classical view

  12. Inflationary Gap

  13. Deflationary Gap

  14. Business Cycle 4 Parts

More Related