Reconciling the Keynesian Aggregate
Expenditure Model with the Aggregate
Demand & Aggregate Supply Model
AP Macroeconomics
Where we came from…
Short-run macroeconomic
equilibrium occurs
when real GDP
demanded equals real
GDP supplied.
When there’s an increase in
aggregate demand, then
the new equilibrium is at
a higher price level, and a
higher level of output.
Visual 3.11, Unit 3 Macroeconomics, National Council on
Economic Education, http://apeconomics.ncee.net
Where are we going?

In this lesson, we’ll
learn the similarities
and differences
between the two
models so that we
can reconcile them
with one another.
Refresher: The Simple Keynesian Model
Visual 3.1, Unit 3 Macroeconomics, National Council on
Economic Education, http://apeconomics.ncee.net
Remember?

The Keynesian Model is the simplest macro model,
and is the starting point from the national income
accounting identity (i.e. GDP):

GDP = C + I + G + X-M (or GDP = C + I + G + NX)

This model helps us to find the equilibrium income
and to understand the relationship among the
concepts of income, consumption, and spending

Consumption expenditures do not equal income

Why not? Even if people’s income is zero, they can beg
and borrow, and even steal. Another reason is savings.
And remember this?



The Keynesian Model is at the heart of the study of
Macroeconomics, helping us to understand the
consumption function (c=a+MPC*y, with y being
income) and something called the “multiplier
process”
This model holds the price level constant, which is
not a realistic representation of the economy
The aggregate demand and aggregate supply
model (which the price level and output are
determined) is the central model for macroeconomic
analysis.
Similarities between the two models…
Keynesian Model
AD & AS Model
A shift upward in aggregate
expenditure is the same as a shift
outward in aggregate demand
A shift outward in aggregate
demand Is the same as a shift
upward in aggregate
expenditure
A shift downward in aggregate
expenditure is the same as a shift
inward of aggregate demand
Aggregate expenditure on the
Keynesian model is aggregate
demand on the AD &AS model
Looks at relationships (although
income, consumption, and
spending)
A shift inward of aggregate
demand is the same as a shift
downward in aggregate
expenditure.
Aggregate demand on the AD
&AS model is aggregate
expenditure on the Keynesian
model
Looks at relationships
(although between price level
and AD &AS)
Differences between the models…
Keynesian Model
Fixed (constant) price model
Vertical Axis is aggregate
expenditure
The Keynesian model cannot
account for shifts in aggregate
supply
A shift in aggregate expenditures
results in full multiplier effect,
and the multiplier can be easily
calculated from the graph (how?
If we have the numbers, i.e. how
much change in consumption
and income, we can calculate the
MPC, and thus the multiplier)
AD & AS Model
AD & AS Model is a variable price
model
Vertical axis is price level
The AD & AS model can account for
shifts in aggregate supply
The multiplier is not in full strength
on the positively sloped and vertical
AS curve (i.e. the full ripple effect of
an autonomous change in spending
on GDP)
The increase in price level
diminishes the impact of the
multiplier (Why? Because it leaves
out consumption)
Compare and Contrast


Create a graphic
organizer that depicts
these similarities and
differences
Graph the similarities
and differences! (i.e.
those that you can
graph – you may need
to annotate your graphs
for others)
And now…

Some resources:
http://www.reffonomics.com/textbook2/macroec
onomics2/keynesianthought/keynesiancross.
swf
Works Cited




Economics of Seinfeld. Demand.
http://yadayadayadaecon.com/clip/46/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.