1. 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

2. Equilibrium and Disequilibrium in the Keynesian Model
Unit 3 : Macroeconomics
National Council on Economic Education

3. Saving and Dissaving Unit 3 : Macroeconomics
National Council on Economic Education

4. Increase in Investment
Investment increases from I to I1.
Output increases from Y to Y1.
Unit 3 : Macroeconomics
National Council on Economic Education

5. Investment Demand Interest rate decreases from r to r1.
Investment increases from I to I1.
Unit 3 : Macroeconomics
National Council on Economic Education

6. 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

7. 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

8. 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

9. 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

10. 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

11. Aggregate Supply and Aggregate Demand
Unit 3 : Macroeconomics
National Council on Economic Education

12. Change in Aggregate Demand
Unit 3 : Macroeconomics
National Council on Economic Education

13. 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

14. Long-Run Aggregate Supply and Production Possibilities Curves
Unit 3 : Macroeconomics
National Council on Economic Education