1. 3.3: Macroeconomic Models

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

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

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

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

6. r C& I AD shift

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

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

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

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

11. Keynesian Criticism of Neo-classical view

12. Inflationary Gap

13. Deflationary Gap

14. Business Cycle 4 Parts 4 Parts