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
http://apeconomics.ncee.net
Equilibrium and Disequilibrium in the
Keynesian Model
Unit 3 : Macroeconomics
National Council on Economic Education
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Saving and Dissaving
Unit 3 : Macroeconomics
National Council on Economic Education
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Increase in Investment
Investment increases from I to I1.
Output increases from Y to Y1.
Unit 3 : Macroeconomics
National Council on Economic Education
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Investment Demand
Interest rate decreases from r to r1.
Investment increases from I to I1.
Unit 3 : Macroeconomics
National Council on Economic Education
http://apeconomics.ncee.net
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
http://apeconomics.ncee.net
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
http://apeconomics.ncee.net
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
http://apeconomics.ncee.net
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
http://apeconomics.ncee.net
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
http://apeconomics.ncee.net
Aggregate Supply and Aggregate Demand
Unit 3 : Macroeconomics
National Council on Economic Education
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Change in Aggregate Demand
Unit 3 : Macroeconomics
National Council on Economic Education
http://apeconomics.ncee.net
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
http://apeconomics.ncee.net
Long-Run Aggregate Supply and Production Possibilities Curves
Unit 3 : Macroeconomics
National Council on Economic Education
http://apeconomics.ncee.net