As/Ad Model

Macroeconomics – Chapter 10: The Aggregate Demand/Aggregate Supply Model * Keynesian Economics – Economists who focused on the short run * John Maynard Keynes - their leading advocate * the originator of macroeconomics as a separate discipline from micro * Classical Economists – economists who focused on long-run issues such as growth * Aggregate Demand Management – government’s attempt to control the aggregate level of spending in the economy * Equilibrium Income – the level of income toward which the economy gravitates in the short run because of the cumulative cycles of declining or increasing production * Potential Income – the level of income that the economy is technically capable of producing without generating accelerating inflation * Paradox of Thrift – and increase in savings can lead to a decrease in expenditures, decreasing output and causing a recession * Multiplier Model – the model that was meant to capture Keynesian economics * This model emphasized aggregate output fluctuations * Explored why those output fluctuations generally would not lead to wild fluctuations in output – depressions * Instead lead to smaller fluctuations – recessions * The AS/AD Model – aggregate supply/aggregate demand * Is a pedagogical model – designed to give a framework to organize thinking about macro economy * Does not focus on problems that occur because of interactions between individuals * Consists of 3 curves * Short-run aggregate supply (SAS) curve * Aggregate demand (AD) curve * Long-run aggregate supply (LAS) curve – highest sustainable level of output * The price level of all goods is on the vertical axis and the aggregate output is on the horizontal axis * It is a historical model – starts at one point in time and says what will likely happen when changes affect the economy * Aggregate expenditures (demand) – the sum of