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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. Equilibrium and Disequilibrium in the Keynesian Model.

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simple keynesian model
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

Unit 3 : Macroeconomics

National Council on Economic Education

equilibrium and disequilibrium in the keynesian model
Equilibrium and Disequilibrium in theKeynesian Model

Unit 3 : Macroeconomics

National Council on Economic Education

saving and dissaving
Saving and Dissaving

Unit 3 : Macroeconomics

National Council on Economic Education

increase in investment
Increase in Investment

Investment increases from I to I1.

Output increases from Y to Y1.

Unit 3 : Macroeconomics

National Council on Economic Education

investment demand
Investment Demand

Interest rate decreases from r to r1.

Investment increases from I to I1.

Unit 3 : Macroeconomics

National Council on Economic Education

different elasticities of investment demand
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.

Unit 3 : Macroeconomics

National Council on Economic Education

aggregate demand
Aggregate Demand

An increase in price from P to P1 results in

a decrease in real GDP from Y to Y1

Unit 3 : Macroeconomics

National Council on Economic Education

shifts in aggregate demand
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.

Unit 3 : Macroeconomics

National Council on Economic Education

aggregate supply
Aggregate Supply

Y* represents potential real GDP. It is full-employment output.

SRAS is the short-run aggregate supply curve.

Unit 3 : Macroeconomics

National Council on Economic Education

aggregate supply1
Aggregate Supply

1. Potential GDP increases from Y* to Y*1. 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.

Unit 3 : Macroeconomics

National Council on Economic Education

aggregate supply and aggregate demand
Aggregate Supply and Aggregate Demand

Unit 3 : Macroeconomics

National Council on Economic Education

change in aggregate demand
Change in Aggregate Demand

Unit 3 : Macroeconomics

National Council on Economic Education

slide13

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.

Unit 3 : Macroeconomics

National Council on Economic Education

slide14

Long-Run Aggregate Supply and Production Possibilities Curves

Unit 3 : Macroeconomics

National Council on Economic Education