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Lecture 3: Basic Aggregate Demand Model Goal: Determine equilibrium output Short-run A bit more complex than standard micro demand and supply – Feedback Shortcuts (isolate one effect)

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First Model: The Goods Market ProductionIncome Demand

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Demand Determined Output Aggregate demand (Z): – Z = C + I + G + (X-Q) Aggregate supply: – fixed P – as much as needed to satisfy demand Model: –behavioral equations –equilibrium conditions

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Behavioral Equations X-Q = 0 (for now) G and I: constant C = c0 + c1*YD; c0>0 ; 0

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Equilibrium Z(Y) = Y $ Y 45 c0+I+G-c1*T c1 Y* Y* = (1/ (1-c1)) * (c0-c1*T+I+G) multiplier autonomous spending

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Comparative Statics $ Y 45 c0+I+G-c1*T c1 Y* Y* = (1/ (1-c1)) * (c0-c1*T+I+G) Fiscal contraction; consumption boom (stock market)

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Consumer Confidence $ Y0 45 c0’+I+G-c1*T Y1 Y(t+1) = Z(t) => (inventories) c0+I+G-c1*T Other: C(t) = c0+0.5*c1* (Y(t)+Y(t-1)) Macroeconomic policy is tricky… lags and leads c0’

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1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil.

1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil.

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