TAILIEUCHUNG - Lecture Economics (9/e): Chapter 26 - David C. Colander

Chapter 26 - The short-run Keynesian policy model: Demand-side policies. After reading this chapter, you should be able to: Discuss the key insight of the AS/AD model and list both its assumptions and its components, describe the shape of the aggregate demand curve and what factors shift the curve, explain the shape of the short-run and long-run aggregate supply curves and what factors shift the curves. | The Theory of Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions. . Keynes The Short-Run Keynesian Policy Model: Demand-Side Policies Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Discuss the key insight of the AS/AD model and list both its assumptions and its components Describe the shape of the aggregate demand curve and what factors shift the curve Explain the shape of the short-run and long-run aggregate supply curves and what factors shift the curves Show the effects of shifts of the aggregate demand and aggregate supply curves on the price level and output in both the short run and long run Discuss the limitations of the macro policy model 2 Key Insight of the Keynesian AS/AD Model Short-run equilibrium output may differ from long-run potential output assuming a fixed price level Equilibrium output is the level of output toward which the economy gravitates in the short run because of the cumulative cycles of declining or increasing production Potential output is the highest amount of output an economy can sustainably produce using existing production processes and resources Market forces may not be strong enough to correct deviations from potential output 3 Key Insight of the Keynesian AS/AD Model Paradox of thrift In the long run, saving leads to investment and growth In the short run, saving may lead to a decrease in spending, output, and employment Aggregate demand management, which is government’s attempt to control the aggregate level of spending, may be necessary Keynesian economists advocated an activist demand management policy 4 The Components of the AS/AD Model Aggregate Demand Curve (AD) Is a curve that shows how a change in the price level will change aggregate expenditures on all goods and services in an economy Short-Run Aggregate Supply Curve (SAS) Is a curve that specifies how a shift

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