Chapter 27 The Aggregate Demand Aggregate Supply Model

Chapter 27 The Aggregate Demand Aggregate Supply Model -...

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Classical economists believe labor unions and government policies held wages too high which caused the great depression. o They believed the elimination of such will cause unemployment to be eliminated. One popular explanation of depression was an oversupply of goods glutted in the market. Classical “have-faith” solution lost support Keynes provided simple model of how unemployment caused by too little spending could fall into a depression. Keynes distinguished the adjustment process for a single market from the adjustment process of the aggregate economy. Keynesians argued that in recessions, spending is a public good because it benefits everyone. Government’s attempt to control the aggregate level of spending in the economy is aggregate demand management . Keynes argued that a falling price level could have negative feedback on aggregate demand, reducing aggregate demand more than the lower price level increased the quantity of aggregate demand. – never ending vicious cycle. Equilibrium income level of income toward which the economy gravitates in the short run because of the cumulative cycles of declining or increasing in production. Potential income – level of income that the economy technically is capable of producing without generating accelerating inflation. Paradox of thrift – an increase in saving can lead to a decrease in expenditures, decreasing output and causing a recession. Multiplier model o Emphasized aggregate output fluctuations o Why output fluctuations not lead to wild fluctuations in output and lead to smaller outputs 1970 inflation showed that model was not too helpful. The AS/AD model of macroeconomics is fundamentally different from that of
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Chapter 27 The Aggregate Demand Aggregate Supply Model -...

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